sector outperformed ftse all-share over three years to end of july despite returning an average loss of 18.62% to investors before charges
The active managed sector has beaten the FTSE All-Share over three years to the end of July but still returned an average loss to investors of 18.62% before charges.
Over the same period, the All-Share has delivered a total return of -23.69%, with 15 funds in the sector underperforming this, on a bid-to-bid basis.
Of the three managed sectors, active has proven the worst strategy for capital preservation. Only two funds in the sector have posted positive returns over the three years to the end of July, Edinburgh Performance Portfolio, up 3.35% and Exeter Managed Growth, up 1.64%, bid to bid. The popularity of the sector continues to grow, however, as exemplified by the fact that of the 77 funds in the sector, 29 do not yet have three-year track records and eight of those were launched within the past 12 months.
As with the cautious and balanced managed sectors, the active managed universe contains a fairly disparate range of investment strategies. Besides unfettered fund of funds, the sector also incorporates a number of direct equity and fettered funds of funds. The £198.6m AA-rated Threadneedle Adventurous Managed Growth fund, managed by Sarah Arkle, is run as a fettered fund of funds.
Arkle said her dual role at Threadneedle as chief investment officer and head of the group's asset allocation committee grants her a strong insight into world markets and the positioning of the group's fund range. Over three years to the end of July, the fund has outperformed the sector average, down 14.03% compared to a sector average return of -18.62%.
This breaks down to outperformance in each of the past three 12-month periods. Over the 12 months to the end of July, Threadneedle Adventurous Managed Growth fell by 18.27% versus a sector average of return of -19.8%. Between August 2000 and July 2001, the fund is down 12.35% compared to a 13.46% fall for the sector average, while between August 1999 and July 2000, the fund returned 19.99% versus a 17.89% sector average gain.
Arkle said much of this outperformance in 1999 and 2000 could be put down to sectoral positioning and the group's investment process.
She said: 'One of the main contributors to the outperformance of the fund has been our global sector overlay. The flexible dynamic style identifies factors important in driving the market and we feel our sector underweights and overweights have been key to the outperformance in recent years.'
Throughout 1999 and into March 2000, the fund benefited from a house overweight position in technology, media and telecoms and had largely moved out of the sector by the time share prices began to give up most of their gains.
Arkle said: 'We were selling down our technology, media and telecoms positions throughout 2000 and concentrating more on companies exercising capital discipline with strong cash flows and balance sheets, while avoiding geared companies.
'We went overweight healthcare, oils and consumer staples and pretty much kept that stance until the fourth quarter last year, when we reduced our defensive sector weightings. The convergence of multiples we are now seeing means the global sector overlay is less pronounced than in the past.'
Threadneedle Adventurous Managed Growth also broadened the range of the group's funds in which it invests. Arkle said prior to the bursting of the technology bubble, the fund gained its regional equity exposure through Threadneedle's Select Growth fund range. This mandate was broadened, enabling her to invest in the group's core fund range as markets became more difficult.
This risk averse approach is reflected in the fund's below average beta score of 0.95, compared to a sector average of one, while the asset allocation process has resulted in an above average annualised alpha score of 1.28, versus a -0.01 peer group average. Arkle added that over the course of 2002, the fund has been underweight the US on a valuation basis and overweight the UK, Europe and Asia.
Credit Suisse Multi-Manager UK Strategic Growth, managed by Rob Burdett and Gary Potter, has passed its first birthday, posting a negative return of 18.84% over the 12 months to the end of July, which equates to a 1.06% outperformance of the sector average.
Potter and Burdett's fund selection process was devised by the pair while they were still at Rothschild Asset Management but was slightly modified in the interim.
The duo's proprietary 16 factor scoring process and fund manager questionnaires were retained, although tweaked slightly.
These are used to rate the characteristics of a fund and its management, the financial importance of a fund to the product provider and the strength of the team behind it, enabling detailed fund analysis and comparisons to be carried out. Although quantitative screens are involved in the process, Potter and Burdett only use them as a guide so as not to rule out situations such as turnaround stories or launches.
The fund selection process is effectively divided up between the pair, with Potter covering the US, Asia, emerging markets, UK equity income and global bonds. Burdett manages Europe, Japan, UK growth and the various other fixed income areas.
Burdett said the UK Strategic Growth Portfolio, one of a suite of multi-manager products he manages jointly with Potter, is one of their more aggressive mandates. As such, the fund has had no fixed interest exposure over the past 12 months and remains virtually fully invested, which has hit performance.
By comparison, the average fund in the sector holds 2.2% in UK bonds, 1.7% in overseas fixed interest and 4.7% in cash, according to Lipper. Despite this, the managers' fund selection has still enabled the UK Strategic Growth Portfolio to outperform.
Burdett said: 'There have been quite a few fund changes over the year. We have had 16 new funds coming into the portfolio and we have sold out of 10 funds. This increase in diversification is a sign of the times and how volatile the market has been.
'Of the 10 managers that have left the fund, half of those are due to fund managers leaving and the others were from a desire to introduce different types of funds to the portfolio.'
The new additions include Odey European and Polar Capital Japan, which have both fared well in their respective markets.
In the current climate, Burdett is looking to add value through fund selection rather than top-down asset allocation. The fund is broadly positioned in line with the sector average. As of the end of July, it is 2.7% underweight the UK versus its peers, 4% overweight the US, neutral Japan, 2.5% overweight Europe and zero-weight bonds and cash.
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