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Adviser Fund Index

At the last rebalancing of the Adviser Fund Indices in May this year, 37 new funds were added to the three portfolios. Of the 23 that can be compared with their peer groups, 13 underperformed and 10 outperformed their sectors over the volatility of the last three months. In the short term, this suggests more of these funds were caught out by the market turmoil than were not.

The main issues with the markets stem from political stagnation in the developed world, particularly with respect to Europe’s sovereign debt crisis, says James Calder, research director at City Asset Management.

“If Greece were to leave the euro, there would be carnage in markets,” he says. “We do have exposure to Europe but mainly Germany and the Nordics.”

Calder added a number of new funds to his AFI portfolios in May, including Investec global energy and global gold, providing a traditional hedge against difficulties with major currencies such as the euro. “Global gold has done very well. We are still very positive on the gold price but felt it had started disconnecting from gold equities. It has been a good play for us. There is still upside potential there. Global energy has not worked out so well. The oil price came back and there is not as much upside potential. That is likely to be a shorter-term play.”

Morgan Stanley global brands is another safe haven equity fund, described by Calder as a product that invests in branded staples such as food, cigarettes and alcohol. His holding in Liontrust special situations also exploits companies with a strong global competitive position. “The Morgan Stanley fund has done well. We have no weighting to Japan but it has a Japanese stock in there.”

Calder accepts the fund is likely to do less well in relative terms if the markets take off. On the riskier end, he has added the Aegon high yield and CF Canlife Far East funds.

“For the majority of fixed-income exposure we tend to buy strategic funds and let the manager take a view. But our view on high yield was so strong we dropped the Aegon fund in. One problem is that high yield tends to have a high correlation with equities, so we are not happy with the absolute performance but we are versus its peer group,” he says.

By contrast, Juliet Schooling Latter, head of research at Chelsea Financial Services, says it has become impossible to form a market view during the recent turbulence. “Valuations are reasonable on a long-term basis but you have to ignore short-term volatility. Nobody knows how things will play out. If the European issues are resolved there should be a reasonably strong relief rally, so you should buy for the long term. We are buying funds with good stockpicking fund managers who can find companies that outperform despite a low-growth, dismal environment.”

BlackRock continental European was a new entrant to the indices in May and one of four funds added by Chelsea Financial Services to its AFI portfolios at the time. Schooling Latter says the performance of the funds during the last three months has been mixed. “It has been such a turbulent time with so many extraneous factors on the macroeconomic side that it is just a question of being patient. The obvious call with hindsight was you wanted a manager who was positioned very defensively. We hope that when the European situation is sorted out these are funds that will do better on the upside.”

By Neal Underwood

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