Advisers warned on research as crisis falls into blind spot

Investors could get caught out by a blind spot in their research as some of the riskiest funds are made to look like the best long-term bets due to a data anomaly.

This week marks the five-year anniversary of the giant bull market that first began in March 2009, when credit crunch despair turned into hope that central bank intervention would repair the global economy.

But fund manager and data provider standard figures tend to focus on 12-month, three-year and five-year performance figures – with five years seen as a prudent timeframe to assess managers’ long-term abilities.

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That means those trying to be prudent in using five-year data could be inadvertently building up a selection of the most pro-risk funds available, some that previously failed to protect investors’ capital in the market falls of 2007/08. Gavin Haynes, managing director of Whitechurch Securities, said there was now “a clear danger when looking at the five-year numbers”.

He warned it was “important not to base your fund selection by looking at the best performers in the recovery phase”.

From the start of March 2009 to last Friday (February 28) the FTSE 100 rose by 94 per cent as even a series of sovereign debt shocks in the western world and signs of Chinese economic woes failed to dent a liquidity-fuelled market boom. The S&P 500 index of US equities rose by an even more spectacular 165 per cent in the past five years.

Ian Aylward, head of multi- manager research at Aviva Investors, said many fund buyers could mistakenly see five years as a full market cycle. He recommended looking as far back as possible when analysing performance numbers.

Harwood fund selector Richard Philbin suggested looking at seven-year numbers, which in-clude the crisis of 2007/08 – a fearsome test of managers’ downside protection skills.

While markets in general have recovered in the past five years, the rally was even more pronounced in smaller companies, particularly in the UK.

Of the top-20 best-performing IMA-listed funds in the past five years, 16 are explicitly UK smaller companies funds while the other four have a significant small-cap weighting. Mr Aylward said a number of UK equity managers may have been “flattered” by simply owning smaller companies.

He said: “Managers may have just benefited by being in that run rather than through skill.”

The problem is similar in multi-asset funds, according to Mr Aylward, because the funds that currently look the best on a five-year view will be those which loaded up on risky equities and high yield bonds.

On the other hand, less risky managers that provided protection in the crisis will now look less attractive on a five-year view.

Paul Surguy, head of managed funds at Sanlam Private Investments, said the firm’s recent study of UK equity income funds, the Income Study, had highlighted the drastic change in the best performing funds as figures from the crisis dropped out.

It showed a number of funds that had done poorly during the financial crisis, such as George Luckraft’s Axa Framlington Monthly Income fund, surge up the table as that underperformance was wiped out while less risky funds that did well during the crisis, such as Artemis Income and Troy Trojan Income, slipped back.