Andrew Green's Gam International Growth and St James's Place Recovery funds are first and second best performers over the past three years
A steep contrast between the new and old ways of running money can be seen in an analysis of the Global Growth sector over the past three years.
The two best performing funds in the three years to the end of June 2003, St James's Place Recovery and GAM International Growth, are both managed by Andrew Green, who takes a largely top-down view in looking for undervalued sectors.
Over this period, GAM International Growth produced a return of 9.36%, while St James's Place Recovery returned 7.09%. This compares to the sector average return of -38.64%.
Although theme funds were popular during the late 1990s and early 2000, investors who jumped on the bandwagon would now be suffering above-average losses. Among the worst performers over the period are two new economy funds, Framlington New Leaders and Invesco Global Dynamic Themes, with losses of 62.52% and 59.7% respectively.
The GAM funds achieved their strongest outperformance in any of the three discrete 12-month periods in the year ending June 2001. While the average return in the sector during this period was -14.09%, GAM International Growth delivered 19.1% and St James's Place Recovery returned 25.46%.
On both funds, Green failed to make positive returns in the two subsequent years but still substantially outperformed the average.
The two funds were similar in terms of alpha, annualised mean return, annualised standard deviation and beta over the three years. GAM International Growth had the highest annualised alpha, at 17.55, while St James's Place Recovery had the second highest, with 16.58, substantially exceeding the sector average of 0.37.
The annualised standard deviation of the GAM fund over this timeframe was 19.13%, while St James's Place Recovery managed 19.16%, both slightly below the sector average of 19.35%.
GAM describes Green's style on the International Growth fund as deep value and contrarian, paying little attention to index sector weightings. The manager seeks areas with excessively negative sentiment but with a catalyst for change.
There are no specific risk limitations on the GAM fund but Green tries to protect against downside risk by limiting the size of individual positions in the fund to less than 4%. In addition, he has the flexibility to invest up to 3% of the portfolio in bonds or up to 30% in cash if he feels the stock market is overpriced.
Gary Potter, fund of funds manager at Credit Suisse, puts the performance of both Green's funds down to the his contrarian, value-driven approach.
Potter is more familiar with Green's investment style through the GAM UK Diversified fund but the same philosophy is applied to the two global funds, he said.
In the first six months of 2002, GAM International Growth outperformed due to substantial holdings in South African gold shares, which held up against general market falls.
However, performance was held back during the first quarter of 2003, as the fund was positioned to take advantage of a cyclical recovery in the global economy too early. This positioning finally paid off, however, with the portfolio making strong gains during April and May 2003.
'Such is the nature of Andrew Green and the way he runs money,' Potter added. 'His way of thinking often results in the fund being positioned early for the next phase of a market cycle. A bias towards mid and small caps would almost certainly have helped him in recent months.
'Green's views are very much from a thematic, top-down perspective. He tries to determine where the next piece of outperformance will come from.'
Potter gives the example of cyclical stocks being bombed out and cheap earlier in the year, at which point Green bought.
'Green went in early,' he said. 'This obviously didn't pay off in the first few months but it has been beneficial since.'
Potter is confident Green has since moved on in his thought process. 'I'm sure he would be moving on to the next contrarian view, whether it be Japan or anywhere else,' he said. 'What shapes his thinking is that macro, contrarian approach and the figures demonstrate he consistently gets it right.'
The new breed of theme funds, which gained popularity during the bull market of late 1999 and early 2000, have been far less successful. Invesco Perpetual Global Dynamic Themes and Framlington New Leaders have been among the most volatile funds in the sector.
The worst year for Framlington New Leaders in performance terms was the 12 months ending 30 June 2001. Over this period, when highly valued technology stocks crashed substantially, the fund's value fell by 34.29%, substantially more than the sector average.
The slight outperformance in the year to the end of June 2003 did little to recapture any of this lost value, with the fund shrinking by 9.65%, only marginally less than the sector average decline of 10.59%.
The annualised alpha of Framlington New Leaders for the three years is -95.81 and the annualised mean return -25.15%.
William Calvert has managed the fund since May 2002, taking over from Neil Birrell, who remained at Framlington as chief investment officer.
The fund was launched with the mandate of investing in high beta sectors such as technology, media and financials, which have not performed well during the three-year bear market, Calvert said.
This also explains the higher than average volatility of the fund, with an annualised standard deviation of 27.19% and a beta of 1.38, he noted.
The outperformance of the fund in the year to June 2003 was due to the sharp market rally in these sectors of recent months, Calvert said
The fund does not follow any benchmark so should not be correlated to the rest of the sector, according to Calvert. It invests in around 60 stocks and the current bias is in the mid-cap arena, he noted. Current themes on the fund are financials, healthcare and technology.
The performance of Invesco Perpetual Global Dynamic Themes has been almost as dismal. In the 12 months to June 2001, the fund substantially underperformed the sector average with a loss of 29.67%.
In the 12 months to June 2003, however, the fund managed a marginal outperformance of -8.71%.
The annualised alpha of Invesco Perpetual Global Dynamic Themes over the three-year period is -5.35 and the annualised mean return -23.69%.
Like Framlington New Leaders, the fund had higher than average volatility, with an annual standard deviation of 27.19% and a beta of 1.31.
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