The year was not kind, unless perhaps you were heavily invested in inflation-linked gilts.
The FTSE All Share had sagged 3.6% by December 29, the FTSE 250 was down 10.5%, and the FTSE Small Cap had fallen 12.9%. (The average inflation-linked gilt fund, however, rose a staggering 20.5% in the period.)
One can see the pattern here: nearly any kind of risk cost fund managers and their investors. Going down the cap ladder hurt; many commodities hurt; emerging markets hurt. Against this backdrop, active UK equity managers did not acquit themselves well--by our preliminary count, only 25% of funds in the Morningstar UK Large-Cap Equity categories beat the index through December 29.
The UK Large-Cap Value category fared best, losing 3%. The mid- and small-cap managers fared better than their respective indices on average, which likely owes to the lower degree of market efficiency in these areas combined with a general willingness to hold somewhat larger-cap issues.
We also wanted to see how the largest funds fared. The results were not entirely encouraging. Among the largest UK equity funds, Fidelity Special Situations, Newton Income and Schroder UK Alpha Plus fared worst, posting losses of 14%, 12.5% and 10.5% respectively. Sanjeev Shah was hurt by his financials exposure at the Fidelity fund, along with selected issues such as Yell Group (YELL). At Newton Income, Richard Wilmot ventured too deeply into materials companies, while Schroder's Richard Buxton had several stock-picking mis-steps and (like the other two) was too underweight in safe havens such as consumer defensives.
The biggest UK equity fund of them all, however, delivered in spades. Indeed, three offerings run by Neil Woodford--Invesco Perpetual High Income, Invesco Perpetual Income, and St. James’s Place UK High Income--rose 9%, 8.5% and 4.7%, respectively. Being heavily weighted in healthcare and consumer defensives helped enormously, as did a near zero weight in financials.
What are we to make of this? The first point is not to over-emphasise one year’s worth of performance--it rarely tells you much about a manager’s skills. Getting it right once is statistical noise, nothing else. Indeed, a big year may as likely be a contrarian indicator as a positive sign.
Focusing too much on the short term might have led investors to dump Woodford in 2010, for example, when he underperformed again after lagging in 2009’s speculative rally. It might well have led one to rush into defensively oriented portfolios in 2008, only to miss 2009’s gains.
Instead, investors and their advisers would do well to buy funds based on a thorough understanding of the manager’s approach and the resulting biases that are inherent in the portfolio. They also need to ascertain how this will play out in a portfolio context--if, for example, a client already has a consumer defensives-heavy portfolio, adding the likes of one of Neil Woodford’s funds to it may make no sense and result in large risks. Conversely, placing a fund such as Sanjeev Shah’s in a portfolio that is benchmark-like or growth leaning (as opposed to contrarian) could help add diversification.
It should be clear that advisers cannot do this sort of analysis properly without access to complete portfolio holdings and accurate aggregate risk exposures based on these holdings. It’s all very well for the FSA to expect more of advisers, and we applaud their efforts, but they need to help ensure advisers have ready access to the information required to do their jobs. Currently, the twice-a-year mandated disclosure falls far short.
This article first appeared on FTAdviser.com.
