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Top and tail

A gainst the backdrop of the last 18 months, top-down macro calls of which asset class to invest in have become increasingly important and helped shape a significant element of overall returns.

The strength of a chain depends on its weakest link and in many portfolios that link can be poor stock or fund selection.

The UK growth sector shows the importance of correct fund selection. The sector is now home to almost 1,200 funds. Over the last year, the best-performing fund in the sector has returned almost 16 per cent while the worst-performing lost almost 59 per cent – a difference of 75 per cent. Removing the extreme of the top and bottom reveals that funds in the fifth percentile lost almost 17 per cent while those in the 95th percentile were down by 38 per cent, a swing of 10 per cent either side of the FTSE which fell by 28 per cent. The poor performance came from big, well known houses and not esoteric firms, as one may have suspected.

The equity to bond call has been well reported but a look at the global fixed-income sector from the broad universe reveals an even wider disparity in returns, with the best and worst funds returning 68 per cent and -49 per cent respectively, a difference of 117 per cent.

One of the topical areas of the market has been the new absolute return sector. The numbers tell a similar story. The best- performing fund returned over 44 per cent, with the worst down by 39 per cent.

Investors often buy funds based on past performance and IMA statistics demonstrate a history of buying the most appropriate funds a year too late. They need to understand fully the funds they are investing in.

Looking at a factsheet may reveal the fund’s top 10 holdings but those stocks often only represent 30 to 40 per cent of a portfolio, what of the remainder? It is often in this unseen tail that the dangers can lie in active money positions.

The right fund choice requires a disciplined investment process that looks to the future, taking account the asset class and investment process applying to a particular fund and the fund manager’s portfolio construction style and experience.

Aidan Kearney is co-head of multi-manager services at Credit Suisse Asset Management

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