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Adviser Fund Index: Aggression goes out of style

The Adviser Fund Index aggressive index has fallen out of fashion as investors have been punished rather than paid for taking on risk. Over 12 months to March 30, the index dropped by 22.74 per cent, against a fall in the MSCI World index of 20.66 per cent.

Despite this, some positive signs have started to emerge, suggesting pulling risk off the table completely could be an ill-advised move. Since a trough on October 27 last year, the aggressive index has bounced back, rising 13.33 per cent against a modest 4.76 per cent from MSCI World.

Tim Cockerill, the head of research at Rowan and an AFI panellist, says he is not surprised. “I think, inevitably, when you get sharp sell-offs, if things start to look a little better, you tend to get an equally sharp snap-back,” he says. “I suspect that is what you are seeing with the aggressive index.”

While the bounce may only represent earlier indiscriminate selling in markets considered more risky, any indication that investors are becoming more aware of opportunities will be good news for equity markets.

The upturn in emerging markets has been particularly notable as they were some of the worst hit regions last year. Interestingly, the MSCI emerging markets index dropped to its lowest mark on the same day as the aggressive index on October 27, 2008, illustrating its significance in panellists’ aggressive allocations. Since its recent bottom, it has rallied 35.73 per cent, although over 12 months the index has still fallen by 27.44 per cent to March 30.

Cockerill says the strength of some emerging market economies is now being appreciated by investors. “Emerging market funds have performed well over the last three months compared with most other markets,” he says. “Asian markets are in a generally better shape than Western markets.”

Chelsea Financial Services managing director Darius McDermott, who is also an AFI panellist, says November’s rebalancing could also have played a key role in the resurgence of the Aggressive index. McDermott says, despite the apparent trend towards caution among the advisory community, he took the decision not to remove risk from the portfolio.

“We took the view that the carnage was mostly done, so we did not de-risk the portfolio,” he says. “If we believe in a global recovery at some point, there’s no reason to take risk off the table. We only have a 20 per cent allocation to the UK but the key thing we did was maintain a 15 per cent weighting to the US because we think they will see a recovery first.”

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