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Caveat EM-ptor

A belated happy New Year to everyone and especially to the three of you who bought my book in 2010. I’m writing this on my way back from Birmingham after chairing the fourth leg of this year’s Unique Boutiques roadshow, which has covered its usual broad spread of investment issues.

Two – global equity income and China, courtesy respectively of Pictet and Insynergy – were among the hotter topics of 2010 and look set to be so again this year. We have also had SVM and Cavendish on UK equities, which must still be one of the better-value asset classes around, aside perhaps from their continental European counterparts – and I do not imagine too many Europe fund managers are lined up to speak at the 400 or so adviser roadshows criss-crossing the country in the coming months.

I’m sure you will take my word for it that each and every presentation has been a finely crafted thing of beauty but the one I plan to focus on here was by David Coombs, manager of Rathbones’ strategic growth and total return portfolios, on asset allocation and the importance of knowing exactly where one is investing.

Nowhere is this more important this year than with emerging markets, which is redolent of the turn of the century, when investors found themselves exposed to technology not just through dedicated funds but also most other equity funds investing in tech, high yield bonds lending to tech companies and so on – and that did not end happily.

This time, says Coombs, potential emerging markets exposure comes not only through dedicated funds, plus most other equities, plus high yield bonds but also through oil and other commodities, property Reits, private equity and you get the picture. “Outsourcing investment is already a big leap – even more so if you don’t know what you’re getting,” said Coombs.

A still more graphic illustration of the importance of ’buyer beware’ came with a scatter graph of IMA balanced managed sector funds positioned by performance and volatility over three years. In this time, a handful of funds made positive returns at around the volatility of gilts but a large proportion – some in positive territory, some not – had the risk of a 100 per cent UK equity strategy, which does seem butch.

Worse still, Coombs said he had snuck in three cautious managed funds – all in negative territory and one having dropped 10 per cent with the volatility of the MSCI Emerging Markets index. This is probably not what the fund’s investors were looking for from a cautious fund – and somebody really ought to buy the manager a dictionary.

“’Cautious’ is a dangerous label if you don’t mean what you say,” Coombs noted – and of course that is the crux of the matter. Adjectives such as ’cautious’ and ’balanced’ mean different things to different people, just as risk is a subjective and variable beast.

“Which is currently riskier?” asked Coombs. “UK equities or gilts?” For the record, not a single adviser in Manchester or Birmingham – the two places I remembered to look – chose UK equities. So what gilt levels are your firm’s asset allocation models telling you to hold?

Maybe one day such models will be more flexible, just as maybe one day the IMA will consider if there might be more helpful names and definitions for its managed sectors. The trouble is, said Coombs, any cautious managed fund manager who currently wants to stand out must have 30 per cent or so in equities – and that’s no way to run a portfolio.

Few clients instruct their adviser their principal financial goal is to outperform the IMA cautious managed sector over three years. “People benchmark against loss, not other competitors,” said Coombs. “What they want is to enhance and protect capital and income, understand what sort of ride they are in for, receive value for money from fees and have confidence in their manager.

“Groups must stop designing products for performance tables and start designing them for clients. As an industry we have not done a brilliant job of that so far.” True – although next week I will suggest one area where, whisper it quietly, the industry could just be getting it right.

Julian Marr is editorial director of and and co-author of Investing in Emerging Markets – The Bric Economies and Beyond


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