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Adviser Fund Index

Adviser Fund Index

With the November rebalancing only a week away, Adviser Fund Index believes it is a good time to reflect on how the portfolios have fared.

In the six months between the November rebalancing last year and May this year, the divergence between the returns of the aggressive and cautious indices was 5.5 per cent. This reflected the sustained rally in equity markets that benefited the traditionally equity heavy aggressive index, while causing the more defensive cautious index to lag.

From May 1 to October 19, however, this spread between the indices shrunk to 0.44 per cent. The balanced index sits almost perfectly between the two, returning 0.22 per cent less than the aggressive portfolio and 0.22 per cent above the cautious. What has been driving this correlation of returns?

Chartwell Investment Management head of fund research and AFI panellist James Davies says there could be a number of explanations for the figures. He says: “We have noticed a similar trend in our own portfolios in recent months. It is partly the product of fluke when you pick arbitrary valuation points. When you are in a market that rewards different asset classes at different times there are bound to be points of crossover.”

The performance graphs suggest this is a factor in what has been happening. Until July this year the aggressive index looked to be struggling, falling by over 8 per cent from May, while the cautious index had fallen less than 5 per cent over the same period. This spread, however, began shrinking from this point, suggesting that equity markets had started to outperform. If this were a complete explanation, the aggressive index should have continued its speedy recovery and easily outpaced the balanced and cautious portfolios but once it caught up lost ground in early September it has simply kept pace.

Whitechurch Securities head of research Ben Willis says another possible factor is the growing caution present at the last rebalancing that meant some panellists chose to move wholesale down the risk spectrum.

By adding defensive positions to a traditionally riskier portfolio, panellists reflected their concerns over the resilience of the rally. Funds like absolute return products can help to dampen some of the downside but they can also serve to limit the upside gains, helping perhaps to explain some of the recent performance.

This is not to say that signs of an equity market recovery will drive the panellists back up the risk scale in November’s rebalancing. There are still uncertainties over the global economic recovery stalling and the possible effects of another round of quantitative easing.

Despite these worries, AFI panellists can be pleased that all the indices beat their Investment Management Association sector benchmarks since the last rebalancing. The AFI aggressive index returned 4.23 per cent against an IMA active managed sector average of 1.84 per cent, the AFI balanced index beat the IMA balanced managed sector average by 1.06 per cent and the AFI cautious outperformed its benchmark by 1.14 per cent.


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