As is now traditional in International Investment, we have asked offshore fund research house and fund of fund manager Forsyth Partners to give us their top tips for funds that are worth keeping an eye on over the forthcoming year. To start with, however, Forsyth's Kirsty Hudson looks at last year's picks and asks how well they did
2004 has been a difficult period for active funds, most of which have struggled to keep up with their indices in a year characterised by no real macro trends or clear market direction, savage sector rotation and painful stock hits. This is illustrated in our selection of 'Red Hot Funds' for 2004 - many of these managers have proven themselves to be among the best in the world, but found the last 12 months to be testing. Bill Miller is widely renowned as one of the world's top practioners and his fund, the Legg Mason Value Fund, has produced better returns than the S&P 500 Index for 13 straight years. Yet in 2004 Miller has struggled to keep up with the index, at one point falling as much as 6.8% behind.
At the start of the year we correctly anticipated that 2004 would not be a time of rabid excitement at index level and that the task of selecting the best funds for the year would not be straight forward. We stated that it would be difficult to create strong macro trends and therefore it would be best to look for the great practitioners in interesting spaces as funds would have to have a reason to work, be something specialist, niche or different.
One of the reasons we chose the absolute return BDT Asian Focus Fund was its ability to protect on the downside by using cash. However it was this attribute that proved to be its downfall in 2004 - the manager became very bearish at the prospects for the US and emerging markets mid-year and consequently liquidated a large portion of the portfolio into cash. The decision unfortunately coincided with an emerging markets rally leaving the manager unable to capture these gains.
We stand by the view that the good active managers are in the best position to take advantage of long-term bubbles and extremities and that after a time of market inactivity it is these managers who should be on the right side of the trade when a breakout occurs.
2005 is expected to be another year of difficult market conditions, with inflation threats, rising interest rates and slower global growth. Therefore we have again tried to create a portfolio of the very best actively managed products, pragmatic managers and exciting new appointments - such as J O Hambro's Scott McGlashan. We have also chosen some specialist opportunities - such as the Clariden Luxury Goods Equity Fund - that focus on less aggressively traded areas.
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