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The time is right

Kira Nickerson Investment Matters

Multi-managed funds have been garnering more assets during the uncertain investing climate and the performance of many is cementing the argument in favour of outsourcing fund selection. As all asset classes have correlated, finding those fund managers who can add value was key to preserving returns last year and to achieving some of the highs of this year.

According to IMA statistics, total net retail sales of funds of funds rose to £1.2bn at the end of the second quarter, compared to £424m during the first quarter and £304m over the final quarter of 2008.

Cofunds figures also show increased strength in fund of funds sales in the third quarter, with several such portfolios featuring in its list of top 20 best sellers. Over the three months ending September 30, Henderson’s Income and Growth, managed by Bill McQuaker, was the second most popular fund, while Gary Potter and Rob Burdett’s Thames River Distribution offering ranked fifth. Swip MM Diversity came sixth, followed by another of Burdett and Potter’s funds, Cautious Managed. Jupiter’s Merlin Income, headed by John Chatfeild-Roberts, placed 11th.

Performance of the vehicles has certainly helped their recent popularity. Over the volatile year to October 22, the average cautious managed fund is up 17.6 per cent and in the balanced sector, funds have risen an average of 24.1 per cent. The average gain in the active sector has been 24.8 per cent.

Burdett points out that multi-manager performance has been consistent throughout various market cycles. In looking at his and Potter’s quarterly track record going back to 2002 when they managed the fund of funds at Credit Suisse, through to their Thames River portfolios, 90 per cent of the performance has been above average, he says.

In the past, funds of funds have been criticised both for high charges and the use of niche funds as a marketing gimmick to prove they can access managers the average IFA can not. The latter argument has waned over the past year as it has been some of these specialist holdings that have added value during a difficult investment period.

Burdett notes that one of the holdings in Thames River’s Distribution fund is a portfolio investing exclusively in caravan parks, Darwin Property. The offering, open only to institutional investors, invests in property. But unlike conventional bricks-and-mortar portfolios or even listed real-estate securities, it has featured a steady yield throughout the past year and seen capital values rise.

Burdett and Potter also hold another specialist property fund, Medix. Like Darwin, Medix yields in excess of 6 per cent but invests entirely in primary healthcare facilities. Burdett explains that while many broad UK property funds contend with properties with 10-year leases, Medix deals with 25-plus leases and more than 90 per cent of the rent is paid for by the Government.

Although hedge funds by and large attracted a bad name for themselves last year, not all showed themselves to be high risk. Fund of funds managers seem to have appreciated that difference and there are several such portfolios among the holdings in cautious and balanced managed retail funds. For instance, McQuaker holds the listed fund of hedge funds, BlueCrest Allblue, while Cazenove’s fund managers Marcus Brookes and Robin McDonald have a position in Odey OEI Mac.

John Husselbee, CEO of multi-manager group North, has also been exposed to some listed hedge funds, taking advantage of the recent large discounts on some of these vehicles. He says more products are being specifically targeted at the professional fund buyer, giving multi-managers access to an even wider choice.

He points out that Blackrock recently launched a listed hedge fund run by Richard Plackett, which effectively opened and closed on the same day. Products such as these require timely investment and will not sit around for long with groups out marketing to try and draw assets from retail investors.

Husselbee agrees that while in the past fund of funds managers were restricted in the kind of investments they could make, today there is a wide and colourful palette helping to smooth and enhance performance.

One of the specialist or alternative moves he made in the past year was through a bespoke structured product. Husselbee says he had the three-year vehicle, which offers the potential for 54 per cent capital growth, created towards the end of last October.

The manager took the view that the UK market would trade within a range for some time and the product enables uplift based on every day it ranges between plus or minus 20 per cent from a specified level of the FTSE. In year two the product will widen out to plus or minus 30 per cent and in its third year moves to a 40 per cent range. So far the product has earned Husselbee’s funds 26p for every pound.

Burdett does not regard holdings such as Darwin as too niche or as a gimmicky justification of the diversity a multi-manager can bring, but calls them common sense investments. These types of funds, including those considered more mainstream, helped provide some stability through the ups and downs of the past year. Burdett says Thames River funds held 14 portfolios that increased in value last year.

Nick Greenwood, manager of the Miton Select Assets fund which invests in investment trusts, says specialist funds can add a lot of value and enhance performance, but so too can the boring, liquid investments. He believes asset allocating between the two is part of the skill.

While Greenwood says he has fared well of late after taking advantage of distressed share prices among some investment trusts, he feels now is the right time to be moving towards what some could consider, big, boring and liquid.

Husselbee agrees that multi-manager has moved more towards asset allocation and timing and away from the old-school focus on simply finding the best fund managers. “We are still looking for the best managers in each asset class. In the past year, however, choice of asset class has played a dominant role. In the ’80s and ’90s it was all about the best manager and now it is more about the right asset class at the right time.”

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