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Selection process


While people bemoan the losses and weak returns 10 years on from the bursting of the tech boom, the lessons are apt for the more recent crisis. The fervent rally of 2009 has buoyed sentiment but most investors are still a long
way from being out of the woods just yet. Already, the opening two months of the year have shown that while recovery may be under way, sentiment can turn at the drop of a hat.

Despite the strong market rally worldwide in 2009, most of the losses of 2008 have yet to be recouped. With talk of double and even triple digit gains made over the past year, it is easy to forgive consumers for feeling that the worst is behind them.

In this environment, advisers have a tough job balancing expectations while encouraging investors back into the market.

Fund selection as always remains key but educating consumers on what they should be looking at in times of market buoyancy can often be more difficult than during a bear market.

Speaking at the recent Unique Boutiques roadshow in London, managers from Liontrust, SVM, Cavendish, Pictet and Baillie Gifford pointed out that investors should not look at either 2008 or 2009 in isolation when comparing fund performance. SVM opportunities manager Neil Veitch says it is imperative to take the two years in aggregate when looking at how funds have fared.

From the depressing market lows in 2008, stockmarkets began their upwards surge a year ago this month – and the rally has been impressive. Many funds report growth exceeding 100 per cent over the year.

Within the IMA sectors, a £1,000 lump sum invested in the average fund in any single sector, bar three, would have produced positive returns last year, even after charges, according to stats from Financial Express. The three exceptions are the IMA’s gilt, Japan and Japanese smaller
companies sectors.

The best average return in any sector over the 2009 calendar year was global emerging markets. A £1,000 investment at the start of 2009 would have ended the year worth £1,505.

Even the worst-performing fund in this peer group posted doubledigit returns, up more than 30 per cent over the course of the year.

However hefty these returns may look, it still has not negated the damage of the previous year. A £1,000 investment in the average global emerging markets fund at the start of 2008 was worth £953.25 by the end of 2009.

That is not to say there are not exceptions. On a sector basis, the average fund in the absolute return, Asia Pacific including Japan, global bonds, sterling high yield, strategic bond, gilts and ironically tech and telecoms sectors made small gains over the two-year period. And individually, even within some of the worst-performing areas of the market, there are fund managers who have eked out a positive cumulative return over the volatile two-year timeframe.

A £1,000 investment in the popular UK all companies sector at the start of 2008 was reduced by almost half by the end of that year and despite the solace that the rally brought, that original amount is still worth just £853.70 after two years.

Yet on an individual basis, there are 33 funds out of the more than 300 constituents in the sector in positive territory over the combined two year period – predominantly special situations, alpha and mid-cap portfolios.

While many advisers prefer a fund that fell less in 2008 to one that rose the highest in 2009, it is not always that black and white.

A £1,000 lump sum invested with the worst performer over the dire 2008 period, Veitch’s SVM UK opportunities fund, left investors with just £425.73 but the subsequent recovery in the following year, almost doubling a £1,000 lump sum, has left a less-than-average decline over the cumulative period.

Another standout in this sector is L&G UK alpha. Over the two-year period, the fund has gained more than 15 per cent, having fallen by more than 38 per cent in 2008 followed by a gain of just under 80 per cent.

The discrete performance did not make the fund the worst loser nor the best gainer in either year. However, its cumulative returns over the two years ranks the fund third in the sector overall.

M&G head of equities David Jane, says: “Returns are only relevant over three to five years – drawdown is relevant over one year. It is the outcome that matters to investors. The industry needs to focus more on outcome-based investing. It is about delivering what clients want not about trying to be more clever.”

While it is no sudden realisation that capital preservation is critical to investors, the past couple of years has hammered this message home. Jane says that when funds fall sharply in value, it is hard to retain clients and if they switch to cash at those times, they miss out on the chance for recovery.

Advisers may have their hands full tempering knee-jerk investor sentiment through both bull and bear market conditions but attention to educating their clients could help.

Jane says people often forget that a manager who loses less in the difficult time periods does not have to rise as much as others during the rally. While rational, it is often overlooked and little understood that a fund that gains 100 per cent is not necessarily a better opportunity than one which has gained just 50 per cent.

With sentiment changing rapidly and investors still nervous about the recovery, fund selection remains vital. It has been proven repeatedly
that the momentum returns that attract investors are not always sustainable.

Once again, investors need to be reinforced with the message of looking for consistency rather than those that shoot the lights out. The 10-year anniversary of the TMT crash should have taught us that much.


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