Last month, investment research manager at OBSR Gill Hutchison looked at multi-manager funds with a particular focus on relative versus absolute returns and asset allocation. However, with these issues closely allied to the question of benchmarks, it is important to understand in more detail the use of sector average performance as a way of judging a fund's results
Life would be a good deal easier if we were able to compare all funds within the same sector to each other and draw conclusions about their performances simply by referring to the sector averages and quartile rankings.
IMA and ABI sectors are certainly good starting points in helping us to organise the fund universe, but widely drawn as they are, they are just that, starting points.
Consider the IMA UK All Companies sector - according to Lipper, the sector currently features almost 350 individual funds. Within that universe of funds, we can point to a huge variety of fund mandates and approaches, including those that can be considered mainstream (broadly representative of the market), large-cap funds (FTSE 100 companies), mid-cap funds (FTSE 250 companies), multi-cap funds (with flexibility to invest across the market), special situations funds (fund-specific mandates), focus funds (limited numbers of stocks), high alpha funds, multi-manager funds (multi-manager/fund of funds/hybrids), index funds, ethical funds, and funds that are managed with an absolute return mandate.
No doubt there are more. In that context, how meaningful is comparison to a sector average of such a heterogeneous group of funds? At the fund level, significant performance differentials can occur particularly when a trend emerges - for example, the outperformance of mid-caps that we have witnessed over the past three years or so.
Clearly, those funds that have the flexibility to capitalise on such trends have the potential to reap the benefits, but we must be careful how we judge the performance of those funds with mandates that are perhaps less favoured by the prevailing environment.
Even in the usually sedate UK Gilt sector, in the past we have seen marked performance differences between funds that are mandated to represent the broad gilt market compared to those that are restricted to long or short gilts.
Benchmarks in the multi-asset and multi-regional sectors are a more complicated proposition. In particular, the IMA Active Managed, Balanced Managed, Cautious Managed and Global Growth sectors feature many different kinds of funds. Understanding a fund's chosen benchmark is arguably even more important in sectors that span asset classes and regions - even if we just consider the universe of multi-manager funds, we find that a wide variety of benchmarks are used.
Those funds that actively compete in the retail space typically cite the sector average (which can be mean or median) as a benchmark and regularly monitor regional and asset class exposures of the sector as a whole using external data providers. This input is used to a greater or lesser extent to arrive at the chosen asset allocation position for a fund.
F&C, Fidelity and Gartmore multi-manager propositions can be viewed in this context. Other funds, particularly those that are managed with an absolute return mindset, are less concerned about how the peer group or the benchmark is positioned. Take CF Miton Strategic Portfolio for example, which had 32% of its assets in managed cash as at the end of April, together with other positions that differ markedly from many other funds in the Balanced Managed sector (although such positioning is entirely in keeping with the manager's investment approach).
A prescriptive approach
Other propositions are more prescriptive in their approach to benchmarks and have set out defined composite benchmarks against which performance should be measured. Such benchmarks may be put together in light of average sector positioning, while others are constructed on the basis of a company's own philosophy and approach to asset allocation. Such funds are often not targeted to fall into specific IMA or ABI sectors and their composition can differ significantly from their peers.
This can result in patterns of performance that at first sight can look unusual (for good or for bad) compared to the competition but may be entirely appropriate in the context of the benchmark that is being followed. Examples of multi-manager fund propositions that use composite benchmarks are Abbey Multimanager, MLC and Scottish Widows/Frank Russell.
In many cases, these propositions are carefully considered with the company's own client base in mind and the fund range will usually feature a number of sub-funds that are suitable for a range of risk, return and time horizon aspirations. The relationship between the fund provider and the advisers and/or clients is all the more important here both in terms of ascertaining the most appropriate fund for the clients' needs (acknowledging that this is likely to evolve over time) and in terms of keeping advisers and clients informed of how the funds are performing against their specific objectives.
UCITS III and NURS conversions add yet another dimension to this question with many other 'alternative' investments thrown into the sector average melting pot. In the final analysis, funds should always be considered in the context of what they are trying to achieve. With fund diversity increasing all the time, gauging a fund's success or otherwise against its own benchmark is more important than ever, especially as we seek to manage clients' expectations effectively.
Abbey Multi-Manager Growth 37.5% FTSE All Share
12.5% FTSE World US Index
12.5% FTSE World Europe ex UK Index
5% FTSE World Japan Index
7.5% FTSE All World Pacific Basin ex Jap Idx
20% FTSE-A British Govt All Stocks Idx
5% iBoxx Sterling Non-Gilt
MLC Growth Portfolio 45% FTSE All Share
40% MSCI World
11% Lehman UK Aggregate
4% Lehman Global Aggregate
Scottish Widows Progressive Ptfl 30% FTSE All Share
45% FTSE World ex UK
25% Lehman Global Aggregate
Global Growth Sector
Credit Suisse Multi-Mgr Constellation Ptfl MSCI World
Scottish Widows Opportunities Ptfl 36% FTSE All Share
54% FTSE World ex UK
10% Lehman Global Aggregate
T Bailey Growth 40% FTSE All Share
15% S&P 500
15% FTSE World Europe ex UK
7.5% MSCI AX Far East Free ex Japan
15% MSCI Emerging Markets
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