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IMA Active Managed Sector: Drawn too Broadly?

This sector contains a wide array of funds that make rankings difficult to use well.

Stephen Marriott, 19 November, 2007 | 9:57AM
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The IMA's Active Managed Sector allows for a high degree of flexibility as funds in the sector can invest up to 100% of their assets in equities, whilst the only regional constraint is that at least 10% must be held in non-UK equities. Thus managers can fully participate in equity markets but also invest in a wide range of different asset classes. Given this remit the sector is a natural home to fund of funds - of the 65 funds that have performance histories of at least one year, 40 are fund of funds.

This can lead to an element of investor confusion because on occasions it may appear that a number of funds have strayed into either the IMA’s

href="http://www.morningstar.co.uk/UK/fundscreener/results.aspx?lang=en-GB&Universe=FOGBR%24%24ALL&IMASector=LC00000064">Cautious Managed or Balanced Managed sectors. And from a Morningstar perspective, funds appear across a number of different categories, ranging from Global Large-Cap Blend Equity, UK Large-Cap Blend Equity to Asia-Pacific ex-Japan Equity. However, because the goal is to retain the right to invest up to 100% of the portfolio in equities, a fund would remain in the sector. The key question then from an investor’s angle is whether fund managers have been able to fully exploit the unconstrained nature of the sector?

The highest returning quartile of funds have clearly made the most of market opportunities during the last three years (to end Sep). On average they committed 83% of their portfolios to equities and 51% to mid and small-caps. This compares to the bottom quartile which devoted 77% and 27% respectively. This was obviously a higher risk strategy and is confirmed by standard deviation: the average for the top performers was 11.2%, some 2.5 percentage points higher than the worst performers. But risk has been rewarded with the top quartile funds outperforming by an average of 7.9% per annum. So have the top performers prospered more recently? Generally, they have adapted well to changing market conditions; producing positive returns of 0.7% on average in the three months to the end of September, which compares to an average loss of 2.2% for the fourth quartile group. And they’ve reduced risk relative to the worst performers: standard deviation over 1 year for the top quartile funds is 7%, compared to 7.5% for the bottom quartile funds. A survey of the top performers shows how portfolios have been changing - some have been increasing exposure in emerging markets, whilst many have reduced their small-cap weightings and raised cash.

On average, holders of the highest returning funds have benefited from a more adventurous style of investment. However, three years is too short a period to judge success and investors need to be careful of chasing performance. On this basis we’d recommend funds that benefit from a repeatable process.

Newton Managed fulfills this objective well. It benefits from Newton’s global thematic approach, whereby the in-house team of analysts identifies good value stocks that prosper from secular trends. Up to 50% of the fund must be invested outside of the UK. Naturally there are risks; the biggest concern is an incorrect identification of a theme. And one prevalent in the fund is growing domestic consumption in emerging economies, which has led to an aggressive position in Asia. Nonetheless, the fund has produced consistent returns and is a good choice for those looking for a diverse portfolio of equities with an international flavor.

A version of this article previously appeared in Investment Adviser, Financial Times Ltd.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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