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Horse sense

Imagine Johnny Vegas on a donkey in the Grand National. Now imagine him winning. And that is where it all breaks down. Simply picturing a donkey strong enough to heave the 18-stone comedian around the four-and- a-half mile course was as far as it was fair to ask any imagination to stretch.

But there is a rather obvious investment moral to this ludicrous exercise – it is to remind you that you need “horses for courses”. To help you illustrate this to clients more appropriately, the following T Bailey research may prove useful.

We have just looked at how many investment managers in the IMA UK All Companies sector have managed top-quartile performance through bull and bear markets.

We defined the first bear market as from December 31, 1999 to March 31, 2003, the bull market from March 31, 2003 to June 2007 and the current bear market as far as possible from June 30, 2007 to date.

There were 178 funds with a long enough track record to cover all three periods. Of these, just four managed top- quartile performance in each. They were, by the way, Fidelity special situations, M&G recovery, Marlborough UK leading companies and Schroder recovery. It is clear from this that the chances of you picking a fund that can perform consistently relative to its peers over the longer term through differing markets are relatively low.

The practical consequence of this is that investors need to review portfolios regularly – or their advisers do (especially, thanks to TCF) if they are taking ongoing trail commission.

That is tough for many advisers to do. Monitoring the performance of legacy portfolios, knowing who is invested where, alerting clients to the fact that they need to change, selecting the right funds for the right market conditions and moving clients into them makes heavy demands on an adviser firms’ administration systems and adviser time.

Happily there is a solution – funds of funds. Research in the IMA global growth sector, where there are a statistically valid number of funds of funds, shows that over an investment period of five years (to 30 September 2008) or more your chances of picking a top quartile fund are substantially greater if you pick a fund of funds than a single manager fund. And that is after all costs are taken into account.

We believe that one of the reasons for that is manager turnover. A fund of funds manager delivers the active management you need and cost-effectively too. By picking managers whose style and remit suits the current market conditions, constantly replacing tiring managers with those that have the wind behind them, we can make a big difference to returns.

To return to the horse analogy, we pick the right horses and jockeys for the given conditions. I don’t know where that leaves Johnny Vegas and his donkey – I really cannot imagine conditions in which they would succeed. But then that is like fund management too – it seems like some managers and their funds are doomed to failure whatever the markets are doing.

Elliot Farley is a manager at T Bailey

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