Fund managers appear more interested in benchmarking and beating their peers than providing absolute...
Fund managers appear more interested in benchmarking and beating their peers than providing absolute returns, according to James Tew of Standard & Poor's.
In discussing various methods to combat the bear market, Tew pointed out that finding managers who actively seek to make positive returns is a rarity.
One manager that does actively try to produce positive returns is Gordon Grender of GAM North America, Tew said, noting Grender is a low turnover manager who rarely goes above 10% per year.
At the moment the manager has 55% of his fund in cash and fixed interest rather than equities, down from his 78% weighting back in October 2002, Tew said.
'The key for this manager is the willingness to have high levels of liquidity. It is the attitude of mind that advisers need to understand when selecting fund managers. Few managers are willing to make such decisions,' he said.
Tew cites the tendency of managers to follow one another in their allocations, including their weightings in cash and equities. In looking at the offshore Asset Allocation Global Funds sector, which allows allocation to any asset class in any proportion, there is a range of liquidity between 34% and 48%, Tew noted. 'To me, this is little more than a congregation around a common number, or benchmarking,' he said.
The onshore Active Managed sector is little different, despite the fact that funds have a wide remit in allocation between cash, equities and bonds. Of the 15 funds covered by S&P, none had more than 17% in cash and bonds as of October 2002. A few were fully invested in equities and the average weighting in cash and bonds was 4% and 3% respectively.
Tew said: 'I find it impossible to believe that all these managers were that optimistic about markets at that time. The reality is that these funds were more interested in their benchmarks and peers than they were in providing absolute returns.'
This is why, Tew said, it is vital for advisers to understand not just what a fund can do in theory, but what in practice the manager actually does.
If finding absolute return managers is difficult, advisers can stick with the classic defensive options of money market or bond funds.
While many assume money market funds are completely safe, Tew cautioned advisers to be aware of how they are being managed. He added: 'Also, be aware there is little upside potential and if inflation is higher than the rate of return then the real value of the investment is falling.'
High-yield bond funds have been popular recently, having performed well, but Tew warned that intermediaries must make sure they understand the dynamics of these funds before making a recommendation to clients. He said: 'Advisers need to look at how the fund will react in different market conditions and whether it actually remains suitable to clients ' I don't want to see the next mis-selling scandal to be corporate bond funds.'
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