Edinburgh fund of funds tops the balanced managed sector over three years to january 2002 by dropping growth bias for value approach
The decision to switch out of growth funds and into value in February 2000 has paid off for the Edinburgh Fund of Funds, which is the clear leader in terms of performance in the balanced managed sector
Over three years, Edinburgh Fund of Funds returned 31.83%, compared to a sector average of 3.57%. Even the next closest performer, AS International Growth, was some 15% behind Edinburgh Fund of Funds, by returning 16.64% over that period.
The portfolio also outperformed in each of the discreet three-year periods. In the 12 months to January 2000, the fund returned 33.42%, compared to the sector average of 16.33%.
In the following year, ending January 2001, Edinburgh Fund of Funds returned 9.89%, higher than the sector average of 3.9%. Although it lost money in absolute terms in the year to January 2002 by falling 10.09%, Edinburgh still outperformed the sector average loss of -13.71%. The strong performance was achieved with a slightly higher than average level of volatility.
The annualised standard deviation (ASD) of the fund was 15.16%, compared to the sector average of 13.42%. The annualised alpha was 8.52, compared to a sector average of -0.15, and the beta was -1.09, compared to the sector average of 1.01.
Edinburgh Fund of Funds is managed by an investment committee, which is led by ex-Portfolio managing director Paul Talbot, who joined Edinburgh, following the purchase of Portfolio late last year.
Talbot said 15% of the portfolio is in fixed interest and 85% in equity. The real key over the past three years has been the style rotation within the equity component of the fund.
'Three years ago, leading up to the technology boom, there was a very strong bias within the portfolio toward growth managers and the fund benefited from that,' he said.
'Then, of course, at the start of 2000, the whole market environment changed, the technology bubble burst and traditional value-biased fund managers like Neil Woodford at Perpetual (now called Invesco Perpetual) and Bill Mott at Credit Suisse, came into their own and started to outperform.
'We made the shift from having a very strong growth bias and moved toward the value managers in February 2000, about three weeks before the technology bubble burst in mid March that year.'
Talbot said as a fund of funds manager operating within the balanced managed sector he always looks to balance different styles of management, essentially growth and value.
Following the boom in technology-oriented funds at the end of 1999 and start of 2000, Talbot said his committee found itself in a position where the growth style was completely dominating the group's portfolios.
It was at that point that Talbot's committee took the decision to rebalance.
The committee took some profits following strong performance of the growth funds and started to move money toward the value end of the barbell. At the time Talbot sold out of funds, including Henderson Technology, Aberdeen Technology and Invesco European Growth. He said: 'They all came out at that stage and were replaced by Perpetual Income, Credit Suisse Income and BWD Rensburg Income ' in other words the traditional recovery type funds. These were the managers who were buying companies that were providing real value. That was key at this stage of the cycle.'
Edinburgh Fund of Funds still retains that value bias, which benefited the portfolio in the most recent discreet year period.
Talbot said that the value bias had partially been brought about through traditional growth managers drifting into value stocks, by focusing on companies paying real dividends.
Largest holdings in the fund include HSBC Growth & Income, Invesco Perpetual Income and Fidelity Special Situations. Deutsche UK Blue Chip is a recent addition to the portfolio.
'Our view at the moment is that as we go through these extremely difficult market conditions, institutional investors will dominate and thus are likely to be buying large rather than smaller companies so we have reduced small caps and increased exposure to large caps, hence the recent addition of the Deutsche UK Blue Chip fund,' Talbot said.
Among fixed interest holdings, Henderson Preference & Bond is the dominant holding, followed by Aberdeen Fixed Interest.
In terms of geographical asset allocation, Edinburgh Fund of Funds is slightly overweight in the US. According to Talbot, the US will benefit immediately from a recovery, whereas the knock-on effects will take some time to reach Europe.
The fund is now 10% invested in North America, which is historically quite high. Elsewhere, 57% is invested in the UK, 8% Europe, 2% Japan, 3.5% Asia and 15% bonds.
Edinburgh Funds of Funds is run slightly more aggressively than another fund of funds product, managed by the same group within the same sector ' Edinburgh Managed Growth.
Edinburgh Managed Growth returned 5.57% over the three-year period, compared to the sector average of 3.57%. That result follows a year of strong outperformance in the 12 months to January 2000, where the fund returned 24.65% compared to the sector average of 16.33% over that period.
That was followed by two subsequent years of underperformance. In the year to January 2001, the fund made a negative return of -0.93%, against the sector average of 3.9%. In the year to January 2002, the fund lost 14.51%, while the sector lost 13.71%.
Edinburgh Managed Growth also had a higher than average level of volatility, with an ASD of 15.11, compared to the sector average of 13.42.
Talbot said Edinburgh Funds of Funds tended to take bigger positions and was the more concentrated of the two with 25 holdings.
Edinburgh Managed Growth, which was managed by Edinburgh Fund Managers before the merger with Portfolio, is more diversified, with 30 holdings. The former is aiming to maintain a position in the first quartile of the balanced managed sector, while the lower risk Edinburgh Managed Growth fund aims to fit consistently within the second quartile of the performance league tables. Talbot said at this stage there are no plans to merge the two portfolios.
Another fund of funds, Premier Selector Growth returned 6.55%, compared to the sector average of 3.57%, over the past three years, following a strong outperformance in the 12 months to January 2000.
In that first year to January 2000 the fund returned 27.54%, compared to the sector average of 16.33%. However, it underperformed its sector average in each of the following two years. In the year to January 2001, the fund made a positive return of just 1.06%, compared to the sector average of 3.9%. In the last 12-month period, to January 2002, Premier Selector Growth lost 17.33%, while the sector median lost a smaller 13.71%.
Premier Selector Growth was one of the more volatile funds in the sector, with an ASD of 16.75%, compared to the sector average of 13.42%. The fund had an annualised alpha over the period of 0.86, compared to the sector average of minus 0.15 and a beta of 1.3%, compared to the sector average of 1.01%.
David Hambidge, manager of Premier Selector Growth, said the fund is aggressively managed with a strong growth bias. As the figures show, the fund therefore is likely to outperform in strong years and underperform in years of falling markets. Another factor that contributed to underperformance in the past two discrete year periods is the fund tends to hold very little cash, which has been detrimental at a time when equities have underperformed cash. While most funds in the sector run around 5%-6% cash, Hambidge maintains the defensive position by holding closer to 1%.
There is still a strong growth bias within the fund, however there is also some exposure to value stocks. Hambidge said he has recently broadened the number of funds within the portfolio from around 30 at the end of last year to 39 now.
The reasoning behind the increased number of underlying holdings is the bid to incorporate a number of management styles into the portfolio. In terms of asset allocation the fund is bias toward small companies. Meanwhile, it is holding a maximum overweight position in the Far East of 5%.
Geographically the fund is 58.5% invested in the UK, 5.1% in US, 2.8% Japan, 11.9% Europe, 5.1% Far East, 1% emerging markets, 12.8% UK bonds, 2.4% overseas bonds and 0.3% in cash.
Top holdings in Premier Selector Growth include Baillie Gifford British 350, BGI UK Growth, Liontrust UK Growth and Thornhill Capital. The biggest play on Europe is Gartmore European Select Opportunities and in US Govett US Opportunities. In Asia, Premier Selector Growth's main holding is First State Asia Pacific and in Japan JPMF Japan.
Key bond holdings are Henderson Preference and M&G High Yield.
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