Asset allocation has unsurprisingly been the key determinant of performance in the IMA’s Balanced Managed sector over the three years to September 30. We will take a closer look this week at specific factors that determined the sector’s winners and losers over the past three years, and also point you to one fund that we think is among the best this peer group has to offer.
In keeping with the bull market of the past three years - this summer’s downturn notwithstanding - the funds with the highest levels of equity exposure tended to outperform their more conservative peers in the period. The median top quartile fund in the sector has about 81 per cent exposure to equities compared with 68 per cent of the median bottom quartile fund.
The top quartile managers in the sector also had a relatively high exposure to small- and mid-caps compared with large caps, reflecting the strength of these issues versus large-caps. However, the strong outperformance of mid- and small-caps may be difficult to sustain for very long: both areas have run hard over the past five years, and their valuations look stretched relative to large caps when compared to historical terms.
The top performing managers in the sector also displayed a clear preference for UK and European stocks and tended to avoid the lagging US equity market, which is not entirely unexpected. The much publicised events of this year, the sub-prime mortgage crisis and the ensuing credit crunch, trumped those investors who expected 2007 to be a better year for the US, which has lagged its developed market peers for a good few years. The continued weakness of the dollar is not helping matters, as it abets the deterioration of the US budgetary deficit and puts upward pressure on interest rates.
The quantitative representation of risk - standard deviation - in the bottom quartile funds has kept pace with that of top quartile portfolios over the three-year period, which suggests that the risk inherent in the two groups of funds was similar. This conclusion may be misleading, however, as fundamental risk in funds with a higher allocation to equity as well as mid- and small-caps tends to be higher than those that favour more of fixed interest and large caps, which is what the laggards did.
One of the funds we like in this sector is CF Midas Balanced Growth, run by manager and CEO Simon Edwards since April 2002. Edwards, backed by a team of five, runs the fund in a truly multi-asset style, investing in domestic and overseas equities as well as fixed interest, property, private equity and structured products to diversify returns and control volatility. Asset allocation and security selection, including the use of third party funds, has driven the fund’s top-quartile performance over one, three and five years as well as since launch. Relatively low charges – the fund’s TER is 1.58 per cent– and a buy-and-hold approach (25 per cent turnover) have also helped returns. Manager interest is closely aligned to performance, with more than £100m of company directors, staff and shareholders’ money invested in this as well as the only other fund in the company’s range, CF Midas Balanced Income.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
