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Adviser Fund Index

As macro-economic news seems to move from bad to worse, investors’ confidence in the value of their investments has been tested, resulting in widespread sell-offs. The shortening of investment horizons that this implies is a cause for concern for AFI panellists.

The three Adviser Fund Index benchmark indices have seen dramatic falls over the past year, almost wiping out gains made since inception. The Aggressive index is down by 30.03 per cent over the past 12 months, with the Balanced index down by 24.82 per cent and the Cautious index falling by 20.44 per cent.

The widespread asset sell-off has helped drive down global markets. The FTSE 100 fell last week to its lowest level since 2003, with fears that it could fall further. The problem with this strategy is that it crystallises losses incurred during a cyclical downturn that, historically speaking, should give way to a recovery in the medium term.

Killik director of fund research Mick Gilligan says: “In theory, you should extend your time horizons but in practice, the opposite tends to happen. In a way, it makes sense as they have seen their capital eroded and that has had implications for their psychology.”

James Davies, an investment research manager at Chartwell and fellow AFI panellist, says he noticed a sharp swing in investor time horizons even before the current crisis really began to take hold. He says: “I think investor time horizons have been shortened dramatically over the past few years. This has been due to Governments, the media and, of course, our own industry. If you look at the way people piled into property, something was obviously rotten in the system.”

With a seemingly endless stream of negative news across most sectors, however, it is difficult to lure investors out of cash, despite some markets trading at historically low levels. This could prove a wise strategy in the short term as it avoids any further falls but staying out of equities could mean that investors risk missing a recovery.

Davies says: “You cannot persuade someone to reinvest when they have suffered a financial bereavement. You must ensure that you have positioned them well to start with and are not switching round their portfolios all the time.”

In current markets, it has been extremely difficult to find managers who have been able to protect capital, let alone provide capital growth. In many ways, this is because markets appear to be reacting more strongly to macro-economic themes rather than company fundamentals.

Gilligan says: “I think bottom-up stockpicking counts for very little in these markets in a six to 12-month view although it will be important in a three to five-year perspective. Most people are looking for capital growth and if you cannot stomach the los- ses, you probably should not be in 99 per cent of equity funds at the moment.”

Gilligan says the crisis has thrown the spotlight on to star managers such as Invesco’s Neil Woodford who have managed to protect investors’ capital much more successfully than their competitors.

Davies says: “I would not be surprised if the total number of funds in the AFI shrinks as successful managers shine through.”

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