This time last year the sun was still metaphorically shining on the world's financial markets with the FTSE skirting its year's highs and minimal downside risk priced into markets.
Complacency ruled and, as usual, trend extrapolation was the favoured predictive tactic of the fund management industry so equities, property, private equity, leveraged loans, leveraged anything in fact, high yield debt, commodities, the carry trade in currencies, and ‘Chindia’ were very much the flavour of the month. House price falls of 20%? – You must be mad!
A year on we have suffered the worst financial market conditions for a generation and following a truly ghastly June we are now witnessing annual returns for many investors that will be in double figures. So who have been the real winners and losers over the last year and what lessons can we learn in the way we invest our personal savings in the future
The conservative ‘Cash is King’ investor will be pleasantly surprised that despite base rates going down his savings rates have been going up as the Banks have had to look to the retail rather than wholesale markets for their funding. Commodities have been an obvious winner with gold the classic inflation hedge and ‘anti-asset’ substantially appreciating in value. UK Government Bonds have provided a safe haven returning around 6% in the year to the end of June with the real star, not surprisingly being index linkers returning 16%.
Obviously equities but there has been a huge divergence in sector performance between the ‘commodity’ sectors such as miners and oils which have posted some substantial gains and the ‘domestic’ sectors such as banks, retailers, homebuilders, many of which have halved or worse. Value managers have done particularly poorly forgetting the old maxim that ‘cheap stocks get cheaper’ if they underestimate, as they frequently due, the corrosive effect of multiple earnings downgrades.
A sobering exercise is to look in the newspaper at the share price year highs/lows column in these different groups, you may hardly believe your eyes in some cases. Property has been a graveyard, hurt by leverage and illiquidity. Daily dealt property funds are not the answer for a long duration asset class in which most of the return is traditionally from income not capital growth. Particularly badly hit have been property securities now trading at huge discounts to NAVs.
Particularly painful is that amongst the worst performing areas have been those which investors have traditionally looked on as safer havens to generate income. The IMA UK Equity Income sector, which traditionally has a high weighting in Banks, has fallen by 19% over the last year (to end June).
Jury still out…..
Absolute Return funds have been winners to the extent that most haven’t lost investors money, though most have returned less than cash so somewhat of a pyrrhic victory. The much beloved Emerging Markets have seen a real divergence between the commodity producers Russia and Brazil where you would still be in positive territory one year on and the commodity importers India and in particular China, which has halved since October.
Currencies are a zero-sum game which has seen a shuffling of the pack with the current account deficit currencies such as Sterling and the Aussie dollar now falling and the current account surplus currencies such as Yen and Swiss Franc beginning to appreciate. Put that down to carry trade unwind. Sterling looks particularly vulnerable at the moment.
A Tarnished Industry
These returns have raised issues that the financial services industry needs to deal with if it is to regain private investor confidence
Once again we have seen that no-one can consistently predict market movements and that to protect ourselves from our own ignorance we need strategic, diversified, multi-asset allocation. Most multi- managers haven’t cottoned on to this, so congratulations to Insight and Cazenove amongst others who have.
There is a need to reduce dependency on volatile, unpredictable equities and low returning assets such as government bonds. With the 26 year era of disinflation behind us we are no longer in a fixed interest bull market and yield of under 5% offer minimal real return.
Fund managers always hide behind the ‘equities are the best returning asset over the long term’ and ‘clients don’t want us to be holding any cash’ arguments but this is shirking responsibility. The last decade has shown that cash is an important asset class in its own right.
The Cautious Managed sector is perhaps the best example of where managers would have been expected to have protected investor losses but have singularly failed. Sadly it is amongst the largest and most widely regarded funds in the sector that the heaviest falls have been incurred such as Midas, New Star and Investec.
Fund of Hedge Funds and Structured Products are not a panacea but have a role to play for the private investor in reducing volatility and protecting the downside. They are sophisticated products so it is imperative that they are fully explained to and understood by investors.
Relative benchmarking is a bull market strategy, and we are not in a bull market. The APCIMS benchmarks haven’t helped the private investor in the past year.
Asset management companies’ raison d’etre is to generate revenue by high turnover and high fees. They are relentlessly bullish about all asset classes and launch opportunistic new funds at market tops. Fund manager bonuses are frequently linked to peer group rankings or relative-to-index performance rather than to the generation of positive returns. None of this is to the benefit of private investors.
Everyone is now launching ‘alternative asset’ funds with a disturbing implication that they are ‘absolute return’. Agricultural land, commodities, currency, water, wine, emerging market debt, asset backed lending et al have the propensity for losing as well as making people money.
Asset managers claim to add huge value in bear markets but the IMA sector averages for the last year (and indeed 3 years) for most equity classes including UK All Companies and UK Equity Income are worse than the relevant benchmark indices. ETFs anyone?
Triumphs and Failures of Asset Managers
It is disappointing, but sadly hardly surprising given the sea of mediocrity that is the UK asset management industry, that fund managers on average have done a poor job over the last year. The huge diversity in sector and stock returns offered a golden opportunity for fund mangers to prove their worth but too many have failed the test. Nevertheless some shining beacons stand out. Mark Lyttleton at Blackrock has put the overpaid and overrated hedge fund community to shame with his market neutral UK Absolute Alpha which has risen by 16% in the year to the end of June against a fall in the FTSE All Share of 13%.
Barry Norris at Argonaut European, the Asian team at First State, Steve Harker at SG Japan and just about everyone at Neptune are others in the bouquet department. All these managers have grasped that the game has changed. Spare a thought also for Philip Gibbs at Jupiter with the most poisonous of all chalices, a Financial Opportunities Fund. He’s lost investors some money but with minimal exposure to Banks and strategic use of cash and bonds he’s put up a fantastic rearguard action and the correct answer to the perennial question ‘when should I start buying UK Banks again?’ is ‘When he does’.
Reputations have been sullied by managers failing to recognise value traps or else trying to bottom fish in domestic UK stocks. Luminaries such as Bill Mott at Sigma (-22%), Carl Stick at Rathbone (UK Special Sits -37%) and Stephen Whittaker (-36%) and Toby Thompson (-34%) at New Star are all unexpected entries in this hall of shame and the Legg Mason US and Japanese funds continue their path of private investor wealth destruction . At least you could say these managers took a view. The worst offenders have been the large number of closet index huggers who have watched investor money trickle away whilst hiding behind a ‘keeping within a tracking error’ excuse. These managers will be those under most threat as UK asset management starts to polarise between low cost ETFs and high cost but high value added absolute return or specialist asset class funds.
Rob Pemberton is Investment Director at HFM ColumbusIFAonline
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