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Striking a balance

Adviser Fund Index

Keeping with the popular theme of lessons learned during the crisis, this week’s Adviser Fund Index looks at how the balanced sector has fared over recent years.

Chelsea Financial Services managing director and AFI panellist Darius McDermott says the AFI portfolios went into the crisis having never had to prove themselves against difficult conditions.

“When they launched I was very confident the portfolios would beat their benchmarks during good markets. My real question was how they would do in a negative market.”

The major problem facing all three benchmark AFI portfolios was that events at the start of 2008 were moving so quickly that anybody attempting to invest reactively to market shifts found it almost impossible. This was exacerbated for AFI panellists as they are only able to rebalance their portfolios twice a year and so were forced to watch as markets across asset classes appeared to go into freefall.

The situation was best summed up by Warren Buffett, the renowned American investor, quoted as saying “it is only when the tide goes out that you learn who’s been swimming naked”. This could have proved true of the AFI portfolios once chaos hit.

In the event, while the performance of the balanced portfolio may have been unpleasant for panellists, it was far from disastrous. Over five years to February 12, the balanced index has returned 27.44 per cent against the IMA balanced managed sector average return of 21.05 per cent.

Beckett Financial Services portfolio manager Sam Sibley says the performance is indicative of the fact panellists were seeking long-term quality over short-term returns.

“The outperformance shows the quality of the people involved in the AFI,” she says. “What the crisis highlighted was the importance of identifying quality and not just chasing the next three months’ performance.”

Volatility and uncertainty in markets incentivised investors to repatriate their money, where possible, into perceived havens such as cash and Government bonds. This was little evidenced in the panellists’ picks for the balanced portfolio.

Two months after the collapse of Lehman Brothers, the most selected fund at the rebalancing in November 2008 was First State Asia Pacific leaders, chosen by seven panellists. Next was M&G global basics, picked by five.

That is not to say panellists were unaware or unwary of the challenges. The third and fourth most popular choices were the BlackRock UK absolute alpha and Cazenove UK absolute target funds, both absolute return-themed products aiming for steady, consistent performance in all market conditions.

McDermott says by the end of 2008 many investors had lost faith in the market even though, on a historical basis, there appeared to be plenty of cheap opportunities.

Belief in a recovery was fuelled predominantly by the perception that extreme pessimism in markets was suggesting a binary equation – that either everything was going to go bust or things would recover. Given there would be nowhere the hide if the former occurred, it seems panellists decided not to throw out their exposure to risk.

“Panellists do get access to some of the best managers in the industry and they should be able to outperform over the long-term,” says McDermott. “I am pleased the quality of the selections held up in extremely challenging conditions.”


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