by Tomas Hirst - Fund Strategy
With turbulence in Europe and a difficult short-term outlook for Britain, AFI panellists have used the May rebalancing as an opportunity to switch to Asia Pacific and North American funds.
The May rebalancing has thrown up a few surprises as Adviser Fund Index (AFI) panellists grapple with uncertainty in markets. On a macro perspective the moves within the Aggressive portfolio appear to follow market sentiment.
With the eurozone crisis rumbling on and showing few signs of a swift resolution, the region has found itself downgraded by panellists after a modest warming of sentiment towards the region at the last rebalancing.
Similarly, the difficult short-term outlook for Britain has seen the country shifted down in panellists’ allocations.
The main beneficiaries have been the Asia Pacific region and North America. That between them these regions boast the economic powerhouse of China and both the dollar and yen, considered by many the two “safe house” currencies, may help to explain this increase in interest.
Some panellists, however, suggest their moves have been more than simply a defensive play in the face of turbulent markets. “We took a short-term tactical overweight in Japan through the Neptune Japan Opportunities fund,” says Ben Willis, the head of research at Whitechurch Securities. “I know that every year somebody says that it will be Japan’s year, but the market is looking compelling on a relative basis.”
“Every year somebody says that it will be Japan’s year, but the market is looking compelling on a relative basis”
The Neptune fund, managed by Chris Taylor, was the second-highest new entrant into the AFI Aggressive portfolio and despite Japan’s recent reputation it can hardly be said to be a dull offering. Over three years to May 17 the portfolio has returned 82.42% against an Investment Management Association (IMA) Japan sector average return of 1.27%. This has put it firmly at the top of its sector over that period.
Taylor, however, who achieved his impressive performance by reflecting his bearish view on the Japanese market in taking a short position on it through 2008, has seen relative performance slip in the past 12 months.
The manager took the view that the yen looked overvalued and hedged the portfolio into sterling to protect against the currency weakening. Over the past 12 months, however, the yen has strengthened 13.43%, biting sharply into the fund’s performance and leaving it 58th of 59 funds in its sector over one year.
Willis says that although the currency hedge has not played out yet, he agrees with Taylor’s analysis and says the hedge is a core reason behind his allocation towards the fund.
The Neptune fund was not the only Japan offering to leap up the popularity charts. The GLG Japan Core Alpha fund, whose mean-reversion strategy appears to have proven compelling, was the fourth most selected. Over three years Stephen Harker and Neil Edwards’s fund returned 32.14%.
Of the funds ejected from the Aggressive portfolio, those that saw the biggest reversal of sentiment were the Artemis UK Special Situations and M&G UK Select.
The M&G Select fund lost its Old Broad Street Research A-rating in March after the news that Mike Felton, the manager, is to remain on leave because of ill health. In his absence the fund is being managed by Garfield Kiff, who runs M&G UK Growth and is also the deputy manager of UK Select.
Over the past year the IMA UK All Companies sector is up 20.88% while the M&G UK Select fund has risen 12.98%.
Not all panellists say that geographical allocation is the most important aspect of portfolio construction in the current environment. Some argue that companies whose earnings are disconnected from the fates of any particular economy could be in a stronger position.
“We’ve decided to largely move away from geographical funds towards ones that operate on a thematic or sector basis,” says Graham Toone, the head of investment research at AFH Wealth Management. “We like funds such as the Sarasin EquiSar Global Thematic fund, and there are also some interesting opportunities in equity income. Fund managers are looking for companies that truly operate on a global basis.”
While companies with strong overseas earnings, particularly those with a presence in Asia, seem best positioned to benefit from a pick-up in global growth, Toone says that there is a contrarian side to his thinking that argues such a view has become too mainstream.
Because of this, while the outlook for the British economy looks precarious, he still holds British-focused managers like Neil Woodford, the manager of the £7.5 billion Invesco Perpetual Income fund.
Interestingly, while there were marginal shifts between sectors, and some less marginal geographical allocation moves, the cash level in the Aggressive portfolio remained steady in the rebalancing. This could suggest panellists have retained some of the optimism gained since the rally took hold in March 2009 or perhaps returns on cash are so minimal that advisers are struggling to justify moving into it.
