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Swing out sectors

With one quarter left to go, 2010 has proved a tricky year for fund managers of all asset classes. Gary Potter, co-head of multi-manager at Thames River Capital, says he has never known such a time of uncertainty among fund managers. “Stockpickers have never found it so tough,” he says, adding that in such an environment it is important they remain true to their beliefs. The same could be said of investors.

As markets have swung wildly from month to month making managers’ jobs difficult, it has also been a struggle for advisers to communicate to clients that their investment choices were the right ones. Fund performance has been all over the place this year, with little consistency being shown in any part of the market – let alone any individual portfolio.

Returns have been generally quite negative across all the IMA sectors. The best month this year saw gains from just 13 out of 33 fund sectors and in three of the eight months, not a single sector made a positive return, according to data from Financial Express.

In examining average offer-to-bid returns from all the IMA sectors month by month since January, only three categories were the best performers more than once and never consecutively. The North American smaller companies sector was outperformed in both February and April, UK All Companies topped all other fund areas in March and July while index-linked gilts managed a similar feat in June and again in August. On the other hand, the worst-performing sectors have been different each and every month.

To further cloud the picture, cumulative returns tell a different story. Over the year to September 1, 2010, only nine of the IMA’s 33 sectors made a positive return – six of which were bond funds. Despite only once being the top-performing area of the market and in several months showing negative returns after charges, gilt funds fared the best over the cumulative period, returning investors 6.42 per cent after charges, according to Financial Express data.

All the rest of the IMA’s bond sectors are the next five top-performing areas before we see any strong equity fund returns. Global emerging markets gained 1.73 per cent, UK smaller companies rose 1.08 per cent and Asia ex-Japan returned 0.45 per cent. Despite this strong fixed-interest performance on a cumulative basis, the best-performing individual portfolio out of 2,635 funds was an equity mandate – MFM Slater growth.

These statistics highlight the lack of any dominant trend in the market today. In previous years, investors have almost become accustomed to an overriding theme driving decisions and dominating press coverage.
In 2009, of the top 15 funds, 12 were invested in emerging markets. In 2008, 12 of the top 15 were bond portfolios and in 2007, 13 of the top 15 portfolios were invested in either China or India. This compares to so far in 2010 where the top 15 are a varied mix.

Among the top funds this year to date, there are four UK equity portfolios, two of which are dedicated to smaller companies, two gold funds, one Indian portfolio and a broader Asian portfolio. The remainder are bond vehicles.

Even that does not highlight a clear theme as the bond funds are a mixed bag of those dedicated to investment grade corporates as well as funds invested in gilts, treasuries and Asian bonds.

North multi-manager CEO John Husselbee says fund managers have been bashed around this year. Pointing out that at times such as these investors need to remain patient, he says he has maintained a preference for stockpickers over traders, who may have tried to move with all the market changes.

He says: “My own view at the beginning of the year was that this would be a tricky market but that it was still possible to make money.

“It has indeed been tricky and the risk on, risk off market has continued throughout the year – unsurprisingly given the environment of continual political, economic and market volatility we have experienced. When risk is removed the US dollar rises as equities and commodities fall, and vice versa.

”To combat this he has moved his portfolios to a balance between risk and defensive assets, although he prefers gold and absolute return funds as an alternative to bond funds.

He says: “We also invest in UK equity income funds as I find it difficult to believe that low-yielding gilts can continue to deliver better returns than high quality UK companies offering a competitive yield and with a track record of dividend growth.”

Potter agrees that while the short term may be difficult to ignore, it is important to keep an eye on the long-term horizon. “Where are valuations, where is yield? That should help set your strategy for the long term,” he says. With this in mind, while bonds may be a good option in the short term, he questions the longer-term picture for the asset class.

Despite the battering experienced by stockpickers, Husselbee and Potter both still favour such managers. Potter says exposure to macro-managers has recently been reduced in the Thames River funds in favour of stockpickers but, like Husselbee, he caveats that with his preference for quality managers with solid processes.

Potter cites Mark Costar, Clive Beagles, the team at Findlay Park and the managers of Janus All Cap as good examples of this, while Husselbee points to managers such as Nigel Thomas of Axa Framlington UK select opportunities.

The surprise will be if anything happens that finally provides some direction in market movements in the remaining months of 2010. With debate continuing between the inflation and deflation camps and talk of further US stimulus in the offing, one thing is sure, the short-term noise is unlikely to be over any time soon.

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