By Pascal Dowling Increasing volatility in the UK market has made it difficult for some of the top p...
By Pascal Dowling
Increasing volatility in the UK market has made it difficult for some of the top performing funds in the UK All Companies sector to find a balance of risk and return.
Volatility in the UK is rising as a result of the increasing influence of hedge funds, according to Michael Rimmer, fund manager at Investec's GF UK Opportunities fund.
Rimmer said this is compounded by the presence of index trackers and an increasing number of day traders. He said: "Hedge funds create additional pressures on the market by buying short and nipping in and out of stocks on a much shorter timescale than a unit trust could attempt.
"Automatic buying and selling by index trackers immediately as a stock enters or leaves an index have exaggerated movements in the market which has also had its effect on volatility."
Rimmer's fund has a beta of 1.16 against the sector average of 1 for the three years to 22 December 2000, and the added volatility has not aided the fund's performance, he said.
Investec GF UK Opportunities has posted returns of 29.2% against a sector average of 33 for the three year period to 13 December 2000. However, Rimmer said the fund has seen major changes in its organisation over the past year, including his own appointment as lead manager. These changes have had a positive affect on the fund's one year performance, he said.
The fund has offer to bid returns of 12.4% for this period against the sector average of -3.3%, which brings it from its three year ranking of 111 out of 233 funds, to the better position of 12 out of 290 funds.
Rimmer said: "When I was appointed to the fund a year ago it was run along fairly similar lines to the Investec Blue Chip Portfolio, which made it somewhat a duplication of resources. We were given a clean slate and asked to completely reform the way the portfolio was run."
This meant reducing the number of stocks, which stood at 60 at the time, and placing less emphasis on getting a broad exposure to various markets.
He said: "We reduced our holdings to between 25 and 30, keeping only three or four of the original crop and were given free rein to run the portfolio in a more aggressive fashion."
Nigel Thomas manages ABN Amro's UK Growth Fund, ranked second out of 233 funds for the three years to 13 December 2000. Since March, Thomas has been reducing his exposure to high risk stocks in the telecom, media and technology markets. The fund has a beta level of 1.09 against a sector average of 1 for the three years to 22 December 2000. Standard & Poor's has given the fund a standard deviation score, based on offer to offer total returns over the 36 months to 13 December, of 7% compared to the sector average of 4.7%.
This higher risk approach to investment is balanced with above average returns of 140.1% compared to the sector mean of 33% for the three years to 13 December 2000.
Thomas said: "There has been a lot of positive cashflow into the fund from the IFA market in the past three years. We outperformed in 1999 and continued in 2000, despite being in a falling market."
Since mid 2000 Thomas has reduced the fund's exposure to more risky stocks, selling out of leading technology company Baltimore completely in March. Like Rimmer, he believes the presence of hedge and tracker funds has made the overall market more volatile. He said: "Along with changes in trading systems in the UK, hedge funds have had a noticeable effect on volatility, the short term nature of their approach is making stock prices fluctuate dramatically."
Jon Thornton, head of UK equities at Aberdeen Asset Management, believes hedge funds are creating volatility on a global scale. He said: "Hedge funds are run to a very aggressive hypothesis. While we take a view of 12-18 months, hedge fund managers could look at an investment in terms of weeks.
"This creates price squeezes both upwards and downwards and pushes volatility higher."
Aberdeen UK Growth, managed by Thornton, takes a strict approach to controlling the risk this volatility entails. Holdings in FTSE 100 stock are held to a plus or minus 3% weighting of the index, with those in the mid 250 held closer to a 2% limit. The top 10 holdings for the fund are given a 70-130% range against the index. This means, for example, if Stock X made up 10% of the FTSE All Share, the portfolio could have a weighting of between 7% and 13% of that stock, Thornton said.
Aberdeen UK Growth has a beta of 0.99%, below the sector average of 1% for the three years to 22 December 2000. Standard & Poor's gives it a standard deviation score of 4.3% compared to the average 4.7%.
The fund's performance, however, has also been below the sector average. It is ranked 145 out of 233 for the three years to 13 December, with offer to bid returns for the three years to 22 December 2000 of 25.8% against a sector average of 33% But Thornton believes the nature of the sector itself puts these figures in a questionable light. He said: "The Aberdeen UK Growth fund is a core holding, with more than 90 holdings and a size in excess of £720m.
"Investec's GF UK Opportunities fund is closer to a size of £10m with around 30 holdings, to compare the two seems somewhat ineffective."
He said a number of factors caused the fund to perform badly over the past few years. "During 1999 investor attention fell to value and cyclical stocks, as the year progressed this swung onto small cap technology, media and telecommunications stock."
Thornton believes the value rally which occurred following the fall of technology in March will continue for the time being, and he is positive long term.
"Inflation is under control and the prospects for the UK look good, we think the slowdown in the US is healthy as interest rates are set to fall which should avert a hard landing."
Thornton said that while condition
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