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Tales of the unexpected

Every new year fund managers predict which asset classes will do best. Groups rev up their marketing machines for the Isa season and try to anticipate the popular choice for investors. But what is always interesting is to look at what happened over the past year, whether the new year forecasts were correct and how the most popular sectors fared sales-wise. The answers are fairly simple – they were not and investors and providers alike avoided the best-performing areas of the market, preferring to buy and launch into the worst-performing sectors.

In January 2010, many providers were extolling the virtues of income, with bright outlooks for equity income and bond vehicles. Sales reflected the latter and the IMA reported a bond sector as the leading retail seller in five out of the first 10 months of the year.

However, bond perform-ance was fairly mediocre. The best-performing fixed interest peer group over the year was the smallest, sterling high yield, ranking 19 out of the 33 IMA sectors, according to Financial Express statistics. The next best was global bonds, at 26.

Equity income funds fared slightly better than bonds in performance terms but not in sales. The sector returned an average 14.58 per cent, placing it 15 out of 33 in the IMA universe. Yet total net sales in the sector show it was in outflow territory five out of the 10 months the IMA has reported so far.

In 2010, there were more than 100 open-ended fund launches, fewer than in previous years. According to Financial Express data as of January 5, 2011, there are 113 funds without a one-year track record across the main 31 IMA sectors (excluding unclassified and pensions). The four sectors with double-digit additions to their numbers in 2010 were as expected. One was absolute return with 10, two were in the managed peer group, balanced with 11 and cautious with 17, while the specialist sector added 13 portfolios to its ranks. The latter was a mixed bag of funds from environmental and agriculture to multi-asset, Middle East and North Africa and Africa portfolios.

It is surprising just which sector did not have big inflows – fixed interest. Although the bond sector saw huge inflows in 2010, it has mostly gone to a handful of funds, leading many providers to steer clear of launches in this area. The gilt, index-linked gilt, global, sterling corporate, high yield and strategic sectors only added 15 new portfolios to the fixed interest peer group – combined.

Of the remaining sectors, nine peer groups did not add a single new fund. Not surprisingly, most of these were in the smaller company sectors – Japan, North America and Europe. Also not showing any growth over the year was the now obscure technology and telecoms sector. Yet it was these very areas that fared the best in performance terms. Financial Express data shows that on a total return bid-to-bid basis over the 12 months to December 31, 2010, the five best returns came from North American smaller companies, UK smaller companies, European smaller companies, global emerging markets and Asia ex-Japan. Tech and telecoms was the sixth best.

Absolute return was the third worst performer of the bunch, although that is not unexpected considering these portfolios tend to lag a rising market. It is worth noting that at least the average fund in this arena did achieve the goal of providing an absolute return, with a mean return over the year of 4.32 per cent.

While it may have been a dull year launch-wise for unit trusts/Oeics, it was a bumper one for investment trusts. There were more than a dozen new launches – compared with just four in 2009 – raising £1.7bn collectively. Also, unlike their open-ended counterparts, there was great diversity in the sectors these targeted. The 14 launches were spread across 10 different sectors, although there was a focus on emerging markets and specialist areas. Last year also saw heightened activity in the VCT industry, with seven companies launching versus just two the previous year. The 2009-10 VCT fund-raising season was also the fifth-biggest since the vehicles were launched in 1995.

What are we likely to see in the way of new products this year? Last year, it was fairly easy to predict there would be more absolute return and equity income vehicles but what will be the trend this time?

The managed and absolute return sectors are already heavily criticised for housing a wide range of very different portfolios, making like-for-like comparisons difficult. The managed sectors now feature 461 portfolios, ranging from old-school managed to mixed asset and fund of funds. Meanwhile, the young absolute sector already has more than 50 constituents, from bond to equity mandates. It will not be long before the IMA has to take action in these sectors.

In terms of market outlooks, it is difficult to identify a trend that will lead to new offerings. Most managers are extolling why their respective regions and asset classes are well suited for the year ahead – the reality of such predictions remains to be seen.

While it is hard to find anyone saying which asset class to avoid, most do highlight the same risks as in 2010 – currency, inflation, volatility and debt.
Ignis Asset Management chief economist Stuart Thomson believes the phrase for 2011 should be “expect the unexpected”.

He says: “It will undoubtedly bring more stress and distressed debt for the European peripheral economies. US Fed stimulus from its second quantitative easing programme will help global growth during the first half of the year but this will encourage developing economies to tighten policy, particularly China.

“We do not believe the major industrialised economies have achieved escape velocity and the summer will bring a marked slowdown in growth, forcing the Fed to provide a third substantial programme of quantitative easing purchases of government bonds.”

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