US and far eastern funds based in local markets outperform rivals
Returns from US and Far Eastern funds domiciled in their local markets are often far superior to UK-based portfolios investing overseas, according to a survey in the January issue of Investment Strategies.
To provide a meaningful comparison ' if not like-for-like alternative ' to UK-domiciled mutual funds, the survey looked at portfolios based in the Far East, Japan and US.
Looking at the North America sector for example, only two out of 76 UK-domiciled funds in that region produced positive absolute returns over three years to 2 December 2002.
These were Gordon Grender's GAM North America Growth and Fidelity American, run by Fergus Shiel, who took over the fund from John Muresianu last year, out of Boston.
Looking at the performance of US-domiciled US equity funds, the difference is stark. The best fund, small-cap blend portfolio Schroder Ultra, has returned a massive 490.23% bid to bid over three years to 18 November.
While this is not a fair like-for-like comparison, as many of the best US-domiciled portfolios are specialist vehicles investing in niche areas of the market, the returns still speak for themselves.
A fairer straight comparison can be obtained by looking at sector averages. For example, US-domiciled US funds have an average return of -16.39% over three years to 18 November 2002 bid to bid, compared to -34.19% from UK-based US funds, offer to bid, to 2 December.
Over three years to 2 December 2002, UK-based Japanese funds were uniformly poor with no funds registering a positive absolute return (Schroder Tokyo was the best with a return of -34.39% offer to bid).
Only one UK-domiciled Far Eastern fund managed a positive return over the period in question: Angus Tulloch's First State Asia Pacific portfolio achieved growth of 7%.
Tulloch's performance is around 2% worse than the best Far East-based Asia fund over three years: Baring Asia Manufacturing with a return of 9.84% bid to bid.
The average performance of UK-based Asian funds is better than Asian-domiciled portfolios, although this can perhaps be explained by the fact there are a number of renowned Far Eastern experts running UK-domiciled funds out of Asia, including Aberdeen's Hugh Young, Fidelity's KC Lee and Franklin Templeton's Mark Mobius.
In an attempt to capitalise on this local knowledge, many UK fund management houses are beginning to outsource management of funds to regional experts, especially in the US market.
Investec's North American equity portfolio, launched last September, is run by US-based asset manager Thornburg as a mirror of the latter's $1.6bn Value fund, for example.
Another recent example is the Artemis ABN Amro North American Growth fund, launched in November 2001, which is managed by Atlanta-based fund management house Montag & Caldwell.
Although many groups remain unconvinced by the local knowledge argument, in the US sector at least, it is hard to argue against the success of funds such as Fidelity American and Schroder US Smaller Companies, run out of New York by Ira Unschuld until he left the group at the end of last year.
There are obviously US funds run out of the UK with similarly strong long-term track records, such as GAM North America Growth.
However, with less than half of all UK-domiciled US funds outperforming a weak index in bear market conditions over one, three and five year periods, the growing outsourcing trend could well begin to escalate.
Investment Strategies, formerly known as Fund Strategies, is a sister publication of Investment Week. For a free subscription call Lorna Clancy on 0207 432 6909, fax 020 7439 3060 or email [email protected]
Three examples of compensation rule issues
Buying in baskets
Scam victims lost average £91,000
Stepped down following MBO
Helped by rising oil price