Risk/return analysis of offshore funds investing in UK equities shows a cluster grouping with most m...
Risk/return analysis of offshore funds investing in UK equities shows a cluster grouping with most managers staying fairly close to the index in risk/return terms.
Most of the funds that have significantly outperformed the index have done so at the price of higher than average standard deviation.
The arithmetic mean of funds in the sector shows an average three-year return of 51.77% from January 1997 to December 1999. This breaks down as 18.1% over one year, 11.28% from January 1998 through to December 1998, and 15.29% from January 1997 through December 1997.
The average annualised mean return in the sector has been 15.65%, while the average annualised standard deviation has been 12.87%.
One fund that has outperformed the average while showing lower than average standard deviation is the Swiss Life Proteus UK equity fund. It has achieved total returns 88.65%, which breaks down as 43.19% over one year, 17.46% from January 1998 through December 1998 and 12.17% from January 1997 through December 1997.
David Holloway, investment marketing manager at Swiss Life, said: "Our investment management teams seek to add value through both asset allocation and stock selection. We look for companies with faster than average growth and try to avoid 'closet indexing'.
"Rather than tying ourselves to a specific investment style such as 'value' or 'growth' we take a pragmatic approach depending on the prevailing economic and market background.
"Fund managers have freedom of action within the overall limits set on investment and they consider in detail the earnings outlook for each holding and put it in the context of the outlook for the sector and the stock market as a whole."
Strong fund performance in 1999 was boosted by an overweight position in information technology, media and telecommunications stocks in the final quarter, Holloway said.
"The market focused on growth stocks and became increasingly excited about the opportunities available to these sectors given the explosive growth in internet, mobile and broadband communications."
Looking forward, the Swiss Life UK equity team see the market as being highly valued from a historical perspective.
"We expected interest rates to rise from their year end level of 5.5% and there has already been one rise of 25 basis points so far this year. At this stage, the market is looking for rates to peak at around 6.5% during the year.
"Although retail price inflation remains extremely subdued in the UK at present, the Bank of England remains concerned about the tightness of the labour market and the surge in house prices, and this concern is influencing the setting of interest rates.
"More positive for UK equities is the outlook for earnings. The market currently expects GDP growth of 3% this year, although we believe this will now be exceeded. Some economists have revised their forecast for GDP growth to 4%.
"Although some companies, particularly retailers, are experiencing margin pressure in the current low inflation environment, we are expecting more positive than negative earning surprises this year. Overall, we expect earnings growth of around 15%."
Liquidity has been a major driving force behind the UK equity market in recent years and this is forecast to remain positive in 2000 with share buyback and M&A activity continuing at record levels, according to Holloway.
"Private investor activity has recently shown a noticeable rise, fuelled by the availability of low-cost dealing and interest in internet stocks. On a longer-term basis, the UK remains a euro convergence play, although not during the term of the current Government.
"Overall, we expect the market to remain supported by the prospect of strong earnings growth, continued high level of corporate activity, good liquidity and strong private investor interest.
"The major risk to the market is if we see gilt yields rise due to inflationary pressures and higher interest rates. We believe, however, that interest rates are likely to peak later this year, which in turn should lead to a rally in the gilt market, therefore providing further support for equities."
A fund with lesser but still above-average returns and with a lower standard deviation profile is the Allied Dunbar UK Capital fund. The fund has returned 63.66% over three years.
This breaks down as 16.29% over one year, 18.37% from January 1998 through December 1998 and 18.9% from January 1997 through December 1997.
The fund is managed by sister company Threadneedle Investment Management's UK team.
Alex Lyle, joint head of pan-European equity investment at Threadneedle, said: "The fund is run in a similar fashion to all Threadneedle's equity funds. The process involves three important models - a preferred stock list, a top 20 stock list and a sector weighting model.
"Portfolio construction is highly disciplined, with input from 20 fund managers and analysts in the team. Each manager and analyst has particular sectoral responsibilities and everyone contributes to a debate that establishes recommended weightings for the top 20 stocks in the market.
"The whole team also contributes to the preferred list, which establishes our 25 best stock ideas at any one time. The stocks on this list are held across all of our funds.
"Sector weightings also emerge as the result of a discussion whereby sector specialists make a recommendation that is then debated by the team. As a result, there is a high degree of commonality in the way our funds are run."
Lyle added that in thematic terms, the Allied Dunbar fund profited against its peer group from two particular periods.
"We were cautious for most of 1998 and did well out of an emphasis on good quality companies and defensive companies, with a weighting to utilities and foods. Our other particularly strong pe
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