defensive areas such as food producers, MINIng stocks and housebuilders that did well in 2002 are still likely to help UK outperformance in 2003
Standard & Poor's bid-to-bid figures demonstrate UK All Companies portfolios lost 50% more in the year to the end of November 2002 than they did for the previous year.
The average fund in the market's largest sector dropped 12.31% in 2001 and 18.24% in 2002.
Positive returns have been difficult to achieve in recent years. The average return of the 311 funds in the All Companies sector was 0.8% in the 12 months to November 2000.
Three-year figures are little better, with just five funds in positive territory over three years to the end of November 2002.
The best performer by far was the Rathbone Special Situations fund with a 36.19% return over the three-year period. The fund, which was managed by Patrick Evershed and is now run by Carl Stick, had a below average annualised beta of 0.83 compared to the sector average of one. The managers also produced a high alpha over the three years, at 20.7% compared to the average score of 0.43%.
Another top performer over three years to the end of November was GAM UK Diversified. The fund, managed by Andrew Green, rose 32.4% over the time period. While it fell 13.84% over the year to the end of November 2002, the portfolio gained 13.12% over the 12 months to November 2001 and rose 35.85% over the year to November 2000. Green managed the rises without a corresponding hike in volatility, achieving an annualised beta score of 0.73.
No other fund in the All Companies sector managed positive returns of more than 20% over three years. When contrasted with the 10 funds that lost more than 40% of their value over the period, the extent of the dispersion of returns becomes evident.
However, some managers are now cautiously optimistic things are finally turning around. Andy Brough, manager of the Schroders UK Mid 250 fund, is moving away from a defensive position as he sees a gradual increase in the flow of corporate good news.
The defensive position he has held for the past two years has served him well. The fund returned -4.78% for the year to the end of November 2002 against an average fall of 18.24%.
He also strongly outperformed for the year to 2001 and for the three years to the end of November 2002 his fund returned 4% against an average return of -28.09%, ranking it fourth over three years.
Brough points to the Schroder fund's underweight position in technology and overweight position in defensive stocks over the three-year period as helping to put him among the top performing funds. However, some of the fund's success must be put down to strong relative performance of the sector in which it invests.
The FTSE 250 has fallen 17.92% for the three years to the end of November 2002 while the FTSE All-Share fell by 28.93%.
The low weighting in technology stocks helped to keep the volatility of Schroders UK Mid 250 slightly below average with a beta reading of 0.94 despite its strong performance and deviation from the FTSE All-Share index.
Saracen Growth was the third best portfolio over the three-year period, with returns of 19.98%. It also benefited from a strong deviation from the FTSE All-Share.
This has generally been very positive for the portfolio. In the year to the end of November 2000 the fund returned 48.50% against a sector average of 0.8%. It also significantly outperformed the following year but fell back to average returns for the year to the end of November 2002.
Jim Fisher, managing director of Saracen, attributed the relatively poor run in 2002 to the weak performance of smaller companies in which the fund is overweight. He said for the year to the end of November 2002 the FTSE Small Cap Index was down 27.8% while the FTSE All-Share fell 22.7%.
Much of the performance in the fund was driven by takeovers, reported Fisher. He said: 'We benefited from being in companies such as Arcadia, which Philip Green took over, and we had a big position in Highland Distillers, which was taken private in 2000.' A generally defensive position has also benefited the portfolio, he said, pointing to an overweight position in tobacco.
The Rathbone Income & Growth fund, managed by Julian Chillingworth since last summer, has also outperformed in two of the three years since 1999. Strong figures in 2000 and 2002 led to returns of -13.36% for the three-year period against a sector average of -28.09%. The performance has been achieved with average volatility, as seen in the beta of one. Chillingworth said volatility was kept low by keeping turnover to a minimum.
Chillingworth attributed the fund's reward and risk characteristics to large individual stockpicking decisions. He said: 'We favoured house builders heavily last year and held 8% or 9% of the fund in them at one stage. This is far higher than their weighting in the index which is negligible.'
The fund has a macro-economic overlay under which individual stockpicking decisions are made. The fund shifted away from its more growth-oriented bias in 1999 to a greater focus on supplying income over the last two years.
The shift involved moving to more defensive stocks such as food producers, mining stocks and house builders and away from leisure, entertainment and media companies, said Chillingworth. The Jupiter Growth & Income fund has outperformed the index in a less spectacular way. It returned -22.77% for the three years to the end of November 2003 against an average of -28.09%.
The most significant outperformance of the portfolio was for the year to the end of November 2002 where the fund posted a return of -11.24% against the sector average of -18.24%.
Paul Sheehan, manager of the portfolio, attributed the good progress of the fund to a more defensive approach last year. He said: 'There was a greater emphasis on safety last year which paid off. There was more of a theme of a focus on defensive stocks.'
This was reflected in overweight positions in house builders and tobacco and underweights in cyclical companies such as manufacturing and media stocks.
Sheehan has been negative on property through 2002 and continues to be bearish about the market. He said indicators point to falling prices, particularly in the commercial rental market. He is more positive on specialist financial groups such as hedge fund operator Man Group and Intermediate Capital.
He said current market conditions suit companies selling alternative investment products. Other favoured companies include port companies and oil. The latter is an attractive proposition as a hedge against a hike in the oil price following possible military action in the Middle East, he added.
DWP: ‘We must still be pragmatic.’
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