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Academic arguments

The importace of assest alloctation has been widely overstated by the academics and time is better spent choosing the best quality fund managers to run your money. But after a problematic 12 months for many managers, who are the names to follow in 2007?

In my last column, I wrote a review of 2006. For my first column of 2007, I thought I would try and look forward. As ever, all predictions should be taken with a pinch of salt. There are simply too many variables in economics and stockmarkets to make predictions that accurate.

For example, over the last two or three years, Toby Thompson of New Star has by and large been quite bullish on the economy while Invesco Perpetual’s Neil Woodford has remained sceptical and somewhat bearish on the UK and global economies. However, while economies have surprised on the upside over that time, Woodford’s portfolio, which is considerably more defensive, has done far better than Thompson’s.

In fact, during 2006, utilities have been one of the very best sectors to have money invested in. The sector has risen by some 30 per cent – some going for a defensive investment.

I remain sceptical generally about asset allocation. It is important when advising clients to ensure they have sufficient money in other investments, such as cash, but making geographic stockmarket forecasts is fraught with difficulty. Yes, I know the academic studies tell me that 90 per cent of the return comes from asset allocation. This is only true if you get it right. The fact is that most people get it wrong and take a huge amount of value away.

Even John Chatfeild-Roberts of Jupiter, one of the better asset-allocators in my view, came unstuck during 2006 with a big weighting in the Japanese markets. The result of this was that his worldwide fund was one of the poorest performers in a year when global markets made double-digit returns. Asset-allocation decisions, if they come off, will pay you dividends but when it goes wrong, the opportunity cost can be just as enormous. It seems to me it is swings and roundabouts.

I would rather spend more time selecting the best quality fund managers to run my money than deliberating on which stockmarket will do better. I know I have made a prediction for the Daily Telegraph for the FTSE 100 of 7,000 for the end of 2007 but I have been doing this for years. I always make a caveat on this prediction by saying it can be 1,000 points either side.

But who are the fund managers to look out for in 2007? One I have already mentioned is Woodford. Will he stick with his big utility and tobacco weightings or will he start to reduce these? He now runs in excess of 11bn and is himself an increasing influence on the market.

Woodford has been extremely successful once again but other managers had a much harder 2006. However, I believe that quality fund managers do not suddenly become bad managers overnight. I am surprised at how often they can be written off after a period of underperformance. Investors have forgotten that even the legendary Anthony Bolton went through some particularly poor periods. In fact, during the late 1980s and early 1990s, they lasted for almost four or five years, yet he repaid patience by the bucketload.

Patrick Evershed of New Star is going through just that experience at the moment with 15 months of underperformance. His stocks look ever cheaper and I believe at some stage that he will have a real renaissance. Investors are writing him off at their cost far too soon.

Another manager to look out for in 2007 is Ben Whitmore, who has taken over the Jupiter special situations fund. The fund has had mixed fortunes with different managers. I hope for Whitmore’s sake that it is not a Jonah of a fund. I believe that in Whitmore’s experienced hands, Jupiter is likely to have yet another winner.

The fortunes of Robin Geffen and Neptune are linked together. The group has a number of very specialised funds and more general funds and nearly all are doing extremely well. Geffen and Neptune are undoubtedly to be watched in 2007 and may challenge the more mature boutiques of Artemis and even Jupiter, dare I say.

At the end of 2006, one new boutique, River and Mercantile, was launched. It will be interesting to see how its new funds get on. I have already tipped the UK smaller companies fund in this column and I have high hopes of Hugh Sargent’s fund too.

I continue to remain surprised by how many IFAs insist on waiting for a three-year performance record on funds. It is not the funds you should be looking at but the managers and managers such as Dan Hanbury have more than a three-year record. Why wait another three years?

Finally, global markets have had a very strong run. Whether this will continue I have no idea but I do think if you back experienced fund managers they will normally see you through the worst of markets, too. A combination of styles and management processes gives you the best arrangement for any portfolio.

The fashionable argument for diversification is a commonsense one but I believe it is dangerously exposed at present. Over the last 10 years, a diversified portfolio would have got you through the worst of a bear market. However, that was also based on many of those assets being cheap at the time. Today, it seems to me that bonds and commercial property are fairly fully valued. A more truly diversified portfolio now should be far more one of cash and equities.

Academic studies may point the way for diversification but there is no point in buying expensive assets for academia’s sake. This is just a road to disaster.

Mark Dampier is head of research at Hargreaves Lansdown.


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