Threadneedle global select growth fund produces top quartile performance over three years to end of february with returns of 10.18%
Investors favouring UK All Companies funds have missed out on the superior performance of the IMA Global Growth sector.
On average, global growth funds have outperformed their UK All Companies counterparts by 4.28% over the three years to 15 March.
As with most IMA equity sectors, the past two years have been difficult, with funds on average posting growth of -16.08% and -8.42% over 2001 and 2000 respectively. The sector's three-year numbers continue to be sufficiently buoyed by the technology boom of 1999 to remain positive, averaging 5.09%, over the three years to 15 March. By next year, three-year figures for the sector will have lost the 1999 uplift, providing marketeers with a challenge.
Of the 167 funds in the global growth sector, 127 have a three-year track record. Of these funds, some 57% have attained negative returns over three years, while the performance gap between the top and bottom performing funds in the sector stands at 102.12%.
As a caveat, some 23% of funds with a three-year track record have posted double-digit growth over the 36 months in question and, by coincidence, the same number has posted double-digit losses in that time.
Threadneedle Global Select Growth has been a top quartile performer over the three years to the end of February, up 10.18%, compared with the sector average of 1.43%.
The fund is managed by Threadneedle's chief investment officer, Sarah Arkle, but run with a distinct team approach.
Dominic Rossi, fund manager at Threadneedle, said Arkle heads the team of regional fund managers which produces the firm's preferred stock lists.
Rossi said the fund's risk controls come in the form of the different layers of analysis that precede stock selection.
He explained: 'The reason for the strong performance has been largely due to stock selection and the success of the regional preferred stock lists and global sector overlay. We have had a global sector overlay since 1996, which recommends sector overweights, neutrals and underweights.'
The global sector overlay provides the macro perspective into which the group's regional stock picks are fitted. Individual stocks are screened so as to provide regional universes from which these preferred stock lists can be formed, providing a multi-layered screening process.
Rossi noted: 'It is not solely top down or bottom up. We try and add value through stock, sector and geographic selection.'
He said each of the group's regional desks proffers 20-30 stock ideas and the end portfolio will usually comprise 100-120 stocks. It is currently residing toward the upper end of that scale.
While the fund has outperformed over three years, discrete performance analysis reveals the returns have not always been smooth, which is in part reflected by the fund's beta score of 1.12%, somewhat above the sector average of 1%.
Threadneedle Global Select Growth was a strong performer between March 1999 through February 2000, posting growth of 50.27% versus a sector average of 31.2%, as the fund gained from heavy exposure to the technology boom driving global markets.
Rossi said: 'We were very bullish going into technology, media and telecoms in 1999. Over 2000 we looked at the valuations and saw the acute polarisation between valuations of old and new economy stocks and saw it was time to sell out of the sector.'
While Arkle and the group were able to benefit from the technology boom in 1999, they were not able to avoid all of the fallout of 2000 and through March 2000 to February 2001 underperformed on the back of continued excess exposure to the, by then, out of favour sector. Consequently, the fund gave back some of the previous year's outperformance, dipping 15.33% compared with a sector average contraction of 8.42%.
Rossi acknowledged much of this underperformance was a consequence of continued technology exposure, but noted that the wholesale changes needed to re-focus the portfolio along more defensive lines was the main reason for the disruption in performance.
The 12 months to the end of February 2002 saw the fund outperform again, down 13.41% versus a sector average loss of 16.08%. Rossi said the fund's positioning in defensive sectors helped ensure above average capital preservation.
Rossi said: 'We had a difficult period in the second quarter when the market rallied in March and April, particularly technology, media and telecoms, but we held on to our defensive positioning.
'We are still defensive. We don't have the value disparities that we had in 1999, nor do we have the conspicuous sector bets of the past three years. We have bias toward more staple areas of the market. The cyclical areas, such as autos, materials have performed pretty well and the non-cyclical areas of the market are now starting to outperform.'
The M&G Fund of Investment Trusts reflects the diversity of the global growth sector, investing solely, as the name implies, in closed-ended vehicles rather than direct equities in a bid to offer a broadly and internationally diversified portfolio to its unit holders.
Management of the fund is more top-down driven than most of M&G funds, with the macro overview being used alongside the screening and evaluation of individual managers, their methodology, discipline and performance track records.
John Hatherly, head of research at M&G, said the fund has core holdings in the robust generalist of the Foreign & Colonial and Alliance Trust ilk, with satellite positions in more rarefied areas.
The fund, managed by Richard Hughes, has posted growth of 1.86%, compared with the sector average of 1.43%. The three-year numbers again hide the interesting story told by analysis of discrete period returns.
Hatherly said the fund was able to strongly outperform by 12.58% during the technology boom, rising 43.78% between March 1999 and February 2000, on the back of strong exposure to the rocketing technology, media and telecoms sectors.
Hatherly said: 'During the technology boom we had exposure to venture capital trusts, which enabled us to access unquoted companies. We were very much exposed to technology at one stage and what we have done since then is seek to broaden the balance and give more quality, defensive exposure to both growth and value styles.'
The fund's move out of technology into more defensive areas such as equity income funds have enabled it to outperform through March 2000-February 2001, falling 6.53% compared with the sector average of 8.42%.
The malaise of the investment trust universe over the 12 months to the end of February 2002 has slain the fund's previous two years performance, acknowledged Hatherly. The fund fell by 24.21% over that period, with underperformance of 8.13%. Hatherly said the fund's exposure to the beleaguered split-cap sector was minimal as the asset classes' current malaise was anticipated, but negative sentiment has dragged investment trusts down en masse.
He explained: 'The fund's three-month figures look alright because they reflect the market rally, but the six-month figures are not so hot. Inevitably, what happens with investment trusts is that they exaggerate the market.'
Hatherly said the fund has been buying into further income and other conventional trusts trading at an attractive discount and has moved overweight the US, Europe and the UK, while remaining underweight Japan.
Regression analysis: Regression statistics can be used to compare the relationships between funds, markets or a specific benchmark index. They do not make the assumption that the variables (funds) are related as cause and effect, but permit them to be influenced by other variables (markets).
Alpha: The Alpha describes the theoretical reward obtained by one investment when the second investment has a zero return. To calculate the Alpha, the returns of each are taken and compared together to identify their relationship. This reveals relationships between investments in both bull and bear markets. When applied to portfolios, it can be considered to be the return over and above (or below) the market through portfolio strategy. Good managers have a positive Alpha.
Beta: The Beta is the amount the first fund moves when the other moves by one unit. Beta is a measure of relative volatility (absolute volatility is calculated by standard deviation).
If one fund always goes up and down by 1.5 times of the performance of the index, its Beta will be 1.5. This implies that if the return of the index is positive, then 1.5 times this positive return can be expected of the fund. If the index goes up (or down) 10%, the fund goes up (or down) 15%. Beta represents the volatility of the first investment versus the second. It is only an estimate and to be accurate there has to be a perfect correlation between the two investments.
Source: Standard & Poor's
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