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Adviser Fund Index- A note of caution

Since its launch in November 2004, the Adviser Fund Index series has experienced some extraordinary market conditions.

The aggressive and balanced indices have weathered the turbulence well. Despite spells of underperformance, both comfortably outpaced their equivalent Investment Management Association and Association of Private Client Investment Managers and Stockbrokers’ benchmarks over the past five years.

AFI cautious, meanwhile, matched the more aggressive indices in beating its IMA counterpart over the same timeframe but lagged Apcims income.

According to Financial Express, the AFI index returned 21.8 per cent during the five years ending February 22, 2010, about five percentage points less than the Apcims portfolio.

Examining the performance of AFI cautious in discrete calendar years, the index appears more aggressively positioned than IMA cautious managed or Apcims income. In 2008, as global stockmarkets tumbled, the AFI benchmark declined 17.3 per cent – compared with falls of 15.8 per cent and 12.9 per cent for the IMA sector and Apcims portfolio respectively.

Conversely, the AFI index fared better than its peers in 2009 as markets rallied. During the course of last year, AFI cautious posted a gain of 16.7 per cent while IMA cautious managed saw a 15.9 per cent return and Apcims income generated a rise of 14.2 per cent. Taking 2008 and 2009 together, AFI cautious registered the biggest loss (3.5 per cent).

Last year, you could have gone long on bonds or equities and you would have made money’

The figures call into question whether AFI cautious is fulfilling its objective. The index is designed to represent an appropriate portfolio for people in their late-50s expecting to retire at the age of 65. Such investors are likely to prioritise low volatility over capital growth as they approach retirement age – swings of 17 per cent in consecutive years would be considered undesirable.

City Asset Management chief investment officer Hilary Coghill says her AFI portfolio was positioned less aggressively than the aggregated cautious index, falling less in 2008 and gaining less in 2009. She has exposure to CF Miton special situations and CF Ruffer total return, and says the funds were able to limit volatility in 2008 by moving into cash (Miton) or betting on currencies (Ruffer).

“In 2008, all asset classes were correlated and you had to do something special with currencies, gilts or cash not to fall,” says Coghill. “Last year, in contrast, you could have gone long on bonds or equities and you would have made money.” This year, Coghill forecasts a better environment for stockpickers and asset allocation funds.

Despite its relatively aggressive nature, the equity allocation in AFI cautious has fallen in recent years – from 49 per cent in November 2007 to 40 per cent in November 2009.

Exposure to British stocks fell by 15 percentage points during the period but the decline was partially offset by higher weightings to other regions.

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