Unloved funds warrant greater attention
The active managed sector is relatively unloved, despite a stellar performance over the past one and five years.
Its 99 constituents’ combined assets total less than £6 billion - half that of the cautious and balanced managed sectors.
This is a pity as active managed funds can be as defensive as cautious or balanced managed funds, sheltering their assets in cash, deposits or fixed interest. But they can also commit all their assets to equities when times are good.
The sector has outperformed the other two sectors over the last one and five years, but has been less resilient over the last three.
The active managed sector includes both directly invested funds and funds of funds, which are subdivided into in-house and best-of-breed funds of funds.
M&G Managed Growth has been one of the most successful funds in the active managed sector, and is mainly an in-house fund of funds. About 80% of its assets are invested in other M&G funds, with the balance in companies with global leading brands, such as Unilever, Starbucks and Fosters.
Around a third of its portfolio is invested in the mammoth M&G Global Basics (managed by Graham French alongside his M&G Managed Growth fund), which has achieved an 89% total return over the last five years.
This is even better than M&G Managed Growth’s 73%. But while M&G Managed Growth may lag M&G Global Basics in a good year, it’s more widely diversified and should be less volatile.
Other successful funds in which it invests are M&G Recovery, managed by Tom Dobell, and M&G Global Growth.
M&G Managed Growth’s cash holdings are minimal, because French believes there are still lots of money-making opportunities in the equity market, thanks to demand from emerging markets.
He believes the Chinese market will continue to grow strongly for many years to come. This will mean rising prices for anything China needs, such as iron ore, energy and copper, and falling prices for anything China supplies.
Jupiter Merlin Growth Portfolio is also a fund of funds, but less than a quarter of its holdings are managed by Jupiter, with the rest under other managers, including Fidelity, Invesco Perpetual and Henderson Global Investors.
The UK accounts for 28% of the portfolio, it then has 24% in the US, 18% in the Far East, 20% in a mix of technology, Latin America, emerging Europe and gold, but very little in Europe and Japan.
The fund was relatively resilient in 2008 because John Chatfeild- Roberts and his team were sensibly cautious, but has lagged in 2009, because it has remained wary. The team says it always emphasises the importance of capital preservation in tough times.
“We are concerned as to how long the recovery will last,” Chatfeild-Roberts says. “Government spending at such high levels, plus the bank bail-outs and quantitative easing, is unsustainable over the long term. Underlying economies will need to recover to justify current market levels.”
Neptune Global Alpha fund is much smaller and is managed with a concentrated portfolio of equities. It has achieved top quartile returns every year since its 2001 launch, except for 2008, when its high emerging market exposure contributed to a precipitous fall. But it recovered well in 2009.
The fund had over 40% in cash at end March 2009, but was almost fully invested by end April. Since then it has consistently had over 60% in emerging markets and Asian companies, and around 15% in the US. Holdings are selected because they are the most promising companies in a well-positioned global sector.
Manager Robin Geffen shares French’s belief that the emerging markets story is far from played out: “We believe over the coming years they’ll provide greater investment returns compared with their developed market peers, due to their huge growth potential.”
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Active managed funds
These funds try to produce returns superior to a “benchmark index” such as the FTSE 100 by a combination of picking the right stock at the right price at the right time. A fund manager calls the shots and tries to outperform the index. “Passive” or “index tracking” funds just try to match the index as closely as possible and are managed by computer.