Any investor or adviser who thinks that the recently experienced levels of volatility are a temporary phenomenon in the equity markets needs to take a very careful look at where they are invested.
The short-term gyrations in valuations reflect rapidly changing global markets and are in my view here to stay and must be taken into account when planning and reviewing fund selection for a portfolio. This may sound to many as an obvious statement but I believe it to be a very timely reminder that it is becoming increasingly more challenging to determine quality investment opportunities in the retail collective space.
It has become clear that many investors have been doing just this - but in the process they may well have been jumping out of the frying pan and into the fire by chasing after multi-manager fund performance or taking a completely different tack and moving away from actively managed funds and hoping to weather the storm by seeking shelter in passive funds. It is not that long ago that we saw another wave of investor movements when many people were moving to cash - and in the process missing out on sharp flex points of recovery and rebounds in the markets.
The first challenge for an adviser and/or investor is to get to grips with multi-manager funds (including fund of funds and manager of manager) and evaluate if they really are offering and delivering returns above and beyond those being delivered by active single manager funds. Much is made about layers of charges within the cost structure of a retail multi-manager fund and to be fair, if a fund can outperform the competition and produce returns above the line, then there may indeed be a case to justify higher ongoing charges. I have never subscribed to the view that charges are the be-all and end-all but rather that they should simply be taken into account with all other factors when researching a fund for a client portfolio.
So what has happened in the multi-manager space during the period of continuing volatility in the markets?
Looking for a moment at the 0 per cent to 20 per cent shares sector, not surprisingly top of the shop over one year up to 14 May 2012 is Kames inflation-linked fund up 21.2 per cent - heavily exposed to UK gilts. This may indeed look pretty good compared with the other string sectors over one year property up 12.3 per cent and absolute return 11.0 per cent but with no longer track record for the fund then this is simply short-term return and little or nothing can be drawn from this in terms of truly evaluating the fund, other than it is very much in line with the UK inflation gilt sector over the period. While it is of course reassuring for those clients invested in the fund to see these numbers, the rationale for investing in funds with track records shorter than five years is for me unconvincing.
Over the last year - in the mixed investment 20 per cent to 60 per cent shares sector (formerly labelled cautious managed) for the year ending up to 11 May 2012, the most respectable growth has come from Sovereign Teachers Cautious Investment fund - posting a 5.8 per cent positive return in stark contrast to the sector coming in at -1.7 per cent. So you might be thinking that in the light of the market movements, this demonstrates that the multi-manager approach is weathering the storm and makes a strong case for investor attention? Given that the fund has an initial charge of 3 per cent and an AMC of 1.25 per cent, on the face of it the charging structure should not be a drag on performance. When compared with other single manager funds, the assumed diversification from the multi-manager structure in a period of significant volatility appears to have served the investor well. The problem here is once again that this is reflecting a very short-term investment viewpoint and with that come all the problems of spikes in performance of funds that are seldom repeated consistently. Only time will tell on the future of Cautious Managed - a bit of an oxymoron in my book as I seriously question why any investor who is indeed cautious would be investing in the markets in the first place.
Moving up the “risk” scale, the mixed investment 40 per cent to 85 per cent shares sector CF Crystal produced 6.3 per cent against a -4.1 – producing a significant out-performance against the other MM funds in the sector. On closer scrutiny this can be fairly attributed to two key factors:
• Higher equity exposure.
• More volatility across the asset mix.
So far so good and only to be expected but when we start to move the timelines out for longer periods the attractiveness of multi-manager falls away. Threadneedle Navigator Cautious Managed posting the best return over five years of 28.3 per cent in its sector, but this pales into insignificance against for example GLG Corporate Bond, posting a very healthy 87.7 per cent growth.
Some recent research produced by FE Analytics highlights the relative underperformance of multi-manager funds when compared with an active single manager fund. The numbers make interesting reading because:
• They cover longer time frames than simply the last 12 months.
• They include years where the markets suffered severe downturns, like 2008 and 2011.
• The years highlighted do include periods of storing volatility rather than just all plain sailing in the markets.
An additional concern for any investor is not just how much upside their fund is achieving but how is it managing the downside in volatile times, to try and preserve capital values. From the table we can clearly see that in both the particularly difficult years - 2008 and 2011 - the multi-manger funds lost 5.28 per cent and 3.76 per cent more than the active single manager fund. If the multi-manager approach was indeed achieving wider diversification then the numbers should surely look better than they do.
Storms
So who has managed to weather the storm so far over the past year and further back over three and five years? Some significant performance has been achieved by MFM Slater Growth; Cazenove UK smaller Companies; Liontrust Special situations; Fidelity Moneybuilder Dividend; Invesco Perpetual High Income; Standard Life GARS and Schroder Income Maximiser to name but a few quality funds.
In the past, advisers and investors have been wrestling with this choice between active funds or passive funds rather than multi-manager but interestingly enough this time around over the first quarter of 2012 saw a shift in behaviour. The tried and tested pattern of running for cover in cash is no longer a sensible option for significant parts of any portfolio holdings due to the continuing poor deposit rates, inflationary threats and limited opportunities for tax-free deposit holdings. Similarly, the school of thought that has favoured passive holdings in index trackers does not look compelling right now as indexes round the world continue their gyrations and predominantly downward direction.
One of the main areas of investment interest has been into “income” producing funds with M&G Optimal Income attracting some £915m, closely followed by Standard Life Investments Global Absolute Return pulling in over £820m of investor money. This demonstrates a significant shift of investor focus and suggests to me that it is the continuing attraction of equity income that is of prime importance for retail investment clients.
This should be viewed as a very positive sign and may be evidence that slowly but surely, the penny is starting to drop about how important diversification of asset allocation really is to the success of any portfolio. Combine this with the skills and track record of the fund manager - for example Richard Woolnough at the helm of the Optimal Income fund will also be a huge contributor to the attractiveness of the fund in difficult market conditions.
Investors should be mindful that in very difficult market conditions, quality funds should be number one on the shopping list. Part and parcel of these funds should be a significant contribution made by dividend stream being generated by the underlying assets and contributing significantly to the returns for the investor. On the face of it one would think that multi-manager funds would be in tune with this contribution and benefiting by incorporating it into their fund strategy as are the active single manager funds - if they are, then the comparative performance does not evidence a strong case for multi-manager as opposed to single fund selection when creating a portfolio.
Nick McBreen is an IFA of Worldwide Financial Planning
