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Special Report

Mid-Year Monitor - May 2012

Published by Investment Adviser | May 21, 2012

Based on the old adage instructing investors to ‘go away in May and come back on St Leger’s day’, Investment Adviser’s Mid-Year Monitor, now in its third year, forewarns financial advisers of the key issues likely to affect their clients’ portfolios as we enter and exit the traditional summer slowdown.

In the past two years, this report has identified global asset managers on the acquisition trail, successfully predicted the closing or merging of 28 funds and uncovered as many as 38 potential ‘closet trackers’ – or supposedly actively managed funds which overlap to an unexpected degree with their benchmark indices.

This year is no different. The list of funds in danger of closing has surged by 40.6 per cent and those funds identified as being very highly correlated to their respective indices has not only increased in the IMA UK All Companies sector, but has also reached the IMA Global Emerging Markets sector for the first time.

Using a set metric to analyse Morningstar data, Investment Adviser found 32 potential ‘closet trackers’, an increase of 6.08 per cent, some delivering sub-par returns but overcharging investors by as much as 1.51 percentage points.

In 2011’s report, we extended the parameters of the ‘closet tracker’ investigation to cover the IMA North America, Europe excluding UK and Global Emerging Markets fund sectors. At that point, only two funds in the North America sector were highlighted as funds that were hugging the benchmark.

Merged away

Applying that same method this year, however, revealed nine potential ‘closet trackers’ in the IMA Global Emerging Markets sector, while those previously identified in the North America sector had improved their active management. The question for many advisers on reading this is no doubt whether or not they have clients invested in the funds that have been named in the report.

Meanwhile, Nyree Stewart has found that since the launch of the Mid-Year Monitor in 2010, the number of funds in danger of being closed or merged increased by 27.26 per cent in the first year and by more than 38.86 per cent in the past 12 months. The funds are all less than £10m in size – very low by the standards of retail funds – in spite of being run by popular investment houses such as Architas, HSBC, Jupiter, Marlborough, Premier and Scottish Widows Investment Partnership (Swip).

However, investment groups have been slow to close funds or merge them away, even those we highlighted as clearly sub-scale in our survey. A fifth of funds we named in 2010’s study were closed or merged away, followed by a tenth of cases in 2011, although two Franklin Templeton funds highlighted in 2012’s investigation have already been earmarked for closure or merger.

Moreover, regular Investment Adviser columnist John Lappin recently suggested that, in spite of fund launches slowing in both the UK and Europe, the industry could see a spate of new funds following the RDR. The latest Fundwatch survey from the multi-manager team at Thames River Capital shows a 72 per cent increase in the number of new fund launches in the last quarter of 2011.

According to the quarterly analysis of the retail funds landscape, 32 funds were launched in the fourth quarter of 2011, against nine launched in the previous quarter. The funds were spread across IMA sectors, with four launched in both the re-named IMA Mixed Investment 20-60 per cent Shares sector and the IMA Mixed Investment 40-85 per cent Shares sector, with only one fund, Fidelity Multi-Asset Allocator Defensive, joining the newly formed Mixed Investment 0-35 per cent Shares sector.

Of those launched in the fourth quarter of 2011, the Artemis European Opportunities fund recorded the highest overall absolute return in the first quarter of 2012 and was also top quartile in the IMA Europe excluding UK sector. The Acuim UK Multi-Cap Income fund was the highest in terms of peer group ranking in the IMA UK Equity Income sector over the first quarter of this year, and came third in absolute terms of those launched in the fourth quarter of 2011.

However, Gary Potter, co-head of the Thames River multi-manager team, warns: “UK investors are spoilt for choice when it comes to investment products, with over 2,000 to choose from, so the increase in the number of funds launched is of some concern – particularly when you consider the challenging market conditions investors are faced with. Less is sometimes more, and over time we expect to see a period of consolidation of funds, with underperforming or small funds being closed or merged.”

The problem of closet trackers and smaller funds remains particularly acute when considered within the context of a wider lack of consistency in the industry. Based on the Thames River team’s ‘consistency ratio’ findings, which measures the proportion of funds in the main 12 IMA sectors that have ranked above the middle of their sector in each of the last three 12-month periods, 175 out of a possible 1,223 funds – or 14.3 per cent – delivered above median returns. Although this compares with just 11.1 per cent of funds in the previous quarter, the overall number remains low.

Rob Burdett, co-head of the Thames River Multi Capital team, adds: “Given the three years surveyed has seen stockmarkets recovering from their lows of early March 2009, the increase in the number of funds consistently generating above peer group returns comes as no surprise. We hope this trend will continue into the next quarter, but with challenging market conditions likely to remain the need for a well diversified portfolio remains.”

Jenny Lowe is features editor at Investment Adviser

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  2. On the edge of closure

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