despite being able to switch out of equities, only london york select fund has managed a positive total return over the past three years
Being able to hold significant weightings in fixed interest has not prevented the balanced managed sector seeing large drops in value over the past three years.
From the start of June 2000 to the end of May 2003, the average return for funds was -22.58% on a bid-to-bid basis. The largest dip in value was seen by the Aegon Balanced Portfolio, which saw its value fall by 36.55% over the period. As its position at the bottom right of chart A shows, this fund also exhibited a high level of volatility.
Only one fund, London York Select, saw an increase, going up 0.39% over the three years. This fund also showed very low volatility, placing it at the top left of chart A.
The Tilney Income & Growth Portfolio saw steady, if unspectacular, peer group outperformance in each of the three years of the period under examination. Manager Grahame Exton put this down to stock selection and the fact that the fund has held a relatively high non-equity component ' at around 30%.
For the year to the end of May 2001, the fund returned -1.57% against the mean fall of 3.65%. For this year, as with the others, Exton said UK equity stock selection has driven the fund's performance. The portfolio also benefited from a decision to steer clear of the higher beta tech stocks that crashed towards the end of the period.
Exton said: 'We do not buy highly-rated companies with business plans we don't understand, we tend to focus on reliable steady growth companies where returns are relatively secure.'
Avoiding the worst excesses of the tech bubble also aided the Framlington Exempt Balanced Fund, according to manager Richard Peirson.
He said: 'The tech boom led to companies having totally unsustainable valuations by early 2000, so we took money out of that area and put it into more defensive areas like financials.'
The Tilney fund also saw slight outperformance for the year to the end of May 2002, returning -6.29% against the average drop of 7.74%.
The fund was aided by Exton's decision to run down exposure in US and European markets and increase fixed interest exposure. His fixed interest exposure is confined to gilts. He said: 'We don't want to take stock specific or currency risk on this portion of the fund as it is the low risk portion that aims to give consistent returns.
For the year to the end of May 2003, a 2%-3% outperformance of the index aided the Tilney fund to a -11.3% return, 1.34% better than the sector average.
Exton points to defensive asset allocation, leading to a modest, if respectable, alpha of 1.26 achieved with a beta of 0.94. The conservative nature of the fund is demonstrated by the R-squared, which is 0.98, showing very little deviation from the mean.
With an R-squared of 0.97, the Framlington fund also deviates little from the peer group despite the fact that its benchmark is the Caps index rather than the balanced managed peer group.
Like the Tilney fund, it has seen marginal outperformance in each of the three years returning -19.11% against the sector average of -22.58%.
These portfolios are run very differently to the Miton Strategic Growth Fund. This fund of funds portfolio has an R-squared of just 0.72, making it the fund that differs most from the sector.
This willingness to run the fund independently of its peer group has enabled the fund to post the second-best performance for the three-year period. It saw a return of -2.12% against the average 22.58% fall over the three-year period.
Co-manager Tom McGrath puts the strength of the fund, which has an alpha of 3.63, down to the flexibility of its mandate. He said: 'We are not benchmark constrained, which allows us to steer clear of a market altogether if we don't like it. We take a contrarian approach that has helped us to get into undervalued markets.'
The fund has taken a defensive position over the three-year period according to McGrath. He reported that the fund held a relatively large proportion in gilts, corporate fixed interest and cash over that time period.
Framlington's Peirson took an overweight position in Euroland assets. He bought euro bonds as he believed the euro was undervalued against the pound and the dollar, and that spreads would come down, a position, he said, which has paid dividends. He noted the fund has had a position of around 20% in cash and bonds, as high as it has ever been. While the fund went up as high as 8% cash, it now hovers around the 3% level.
The fund has a beta of 1.1, which Peirson said was in part due to a more positive view on the market this year. He said: 'I am now more optimistic on the market and have a pro cyclical slant. This hurt us in the first quarter but more recently it has really paid off. This will have increased the level of volatility in the fund.'
McGrath said: 'We have a core-satellite approach so that our fairly defensive approach to the bulk of the fund can be complemented by aggressive bets. For example, we are holding 10% in emerging Europe as we see the region as having strong growth potential.'
Despite the contrarian approach and the fund's disparity from its peer group, it has maintained very low volatility. With a beta of 0.54, it is substantially less volatile than any other fund in the balanced managed sector.
McGrath said: 'We were able to track the index fairly closely when it rose and avoid sharp drops. We may buy funds that are in the fourth quartile. If we think Japan is due for a rally, we will look at those managers with a high beta that have done well in previous market upturns and buy them even if their performance has not been good in bearish conditions.'
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