Also in this issue: Sector Focus: IA UK All Companies Adviser Insights: The top-rated funds that aren’t on your radar FE Analytics Masterclass Bambos Hambi’s golden rule and much more...
Column: JB Beckett
Adviser Insights: Top-rated funds that aren't on your radar
Asset Allocation: Brewin Dolphin
Editor's Letter: Welcome to FE Professional
Sector Focus: AI All Companies
FE Analytics: Diversification benefit
Top-rated funds that aren't on your radar
Sector Focus: IA UK All Companies
FE Analytics: Product Update
A New Fund Order: JB Beckett
The AFI Soapbox: Ben Willis
Investment Trusts: Miranda Seath
Profile: Bambos Hambi
The AFI Soapbox
Column: Miranda Seath
Cover Feature: The assault against active
FE Analytics: Masterclass
Profile: Bambos Hambi
FE Invest: Absolute return funds
Cover Feature: The assault against active
FE Analytics: Masterclass
Welcome to the first issue of FE Professional – the new magazine for those using FE Analytics and professional fund selectors. We’ve pulled together the resources of the award-winning FE Trustnet team, the wide-reaching data held across FE and some of the best financial journalists and commentators out there to bring you a fresh magazine offering in-depth analysis of what’s happening in the funds world. Every issue will be based around a cover story looking at some of the most pressing issues in the industry – starting with the question of how active funds justify their place in client portfolios after lacklustre returns in 2016 and mounting criticism of active management. There’s also profiles of leading fund managers (this month we’ve caught up with Standard Life Investments’ Bambos Hambi) and a deep dive into model portfolios (with Brewin Dolphin being the first provider we’ve explored), plus opinion pieces from highly regarded commentators and investors like JB Beckett, Ben Willis and Platforum. What’s more, we’ve drawn upon the considerable resources of FE to bring you top-down analysis of fund sectors (starting with the industry’s biggest), overviews of adviser research trends (this month focusing on top-rated equity funds that are being overlooked), insight into how to better use FE Analytics and the thoughts of the FE Invest team to offer you something unlike any other magazine on the market. There’s a lot of exciting things going on in the magazine and we hope you enjoy it. We’re always keen to listen to our readers and produce a magazine that truly meets your needs – so if you have any feedback or areas you want us to cover, please drop us a line on
All the best,
Editor, FE Professional & FE Trustnet
Welcome to FE PROFESSIONAL
*As at 31 December 2016. The combined assets under management of the T. Rowe Price group of companies. The T. Rowe Price group of companies includes T. Rowe Price Associates, Inc., T. Rowe Price International Ltd, T. Rowe Price Hong Kong Limited, T. Rowe Price Singapore Private Ltd., and T. Rowe Price (Canada), Inc.
Portfolio Manager in the U.S. Equity Division at T. Rowe Price
US equity investors are likely to continue to face an uncertain investment environment in the coming months and quarters as markets wrestle with the details of how President Trump’s campaign promises are likely to translate into legislative programmes.
A global, independent investment management firm solely focused on providing investment management and long-term results for clients Over £656bn* in assets under management In 1979 we opened our UK office and launched our OEIC Fund Range in 2016 Offer investors a full range of equity and fixed income strategies across multiple asset classes, sectors, styles, and regions
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Learn more on the study and the strength of the T. Rowe Price Active Management Approach
Thomas Rowe Price, Jr., our founder, focused on meeting each client’s individual needs and emphasizing the importance of their success. More than 75 years after he launched his company, we continue to embrace that client-centered philosophy.
Thomas Rowe Price, Jr. (1898–1983)
Since the November election, financial markets appear to have largely discounted better economic growth, higher inflation and higher interest rates. At this point, however, we remain unconvinced that economic growth is likely to accelerate rapidly in the near term. Investors need to remain cognisant of not only the potential pro-growth aspects of the new administration’s policies, but also those that are less supportive of US economic growth, such as the potential for protectionist trade policies and the dampening impacts of higher interest rates and a strengthening US dollar. Against this background of elevated uncertainty, we will continue to focus on bottom-up corporate fundamentals, seeking companies with compelling business models and strong management teams that can provide attractive risk-adjusted returns in a variety of different market environments. In our view, it is precisely at such times of high volatility and uncertainty within global markets when experienced and well-disciplined active investors can deliver real value for clients. The increased use of passive investments and exchange-traded funds has had a pronounced impact on financial markets over the past decade. While we recognise there can be merits to passive investment strategies, we firmly believe when executed properly, well-resourced, skilled active management can add meaningful value for long-term US equity clients. Some of the greatest scepticism around active management of US equities focuses on the large-cap segment of the market due to the perceived lack of inefficiencies. However, an analysis into the performance of T. Rowe Price US equity strategies has shown that our active portfolios have delivered investors with positive results across large-cap, mid-cap, and small-cap segments of the market over the past 20 years. As might be expected, relative performance of our small-cap portfolios has been, on average, stronger than that from our large-cap strategies, given the fact that, in general, smaller companies tend to be less followed than large caps, providing attractive opportunities for skilled active managers with a research-intensive approach. Nonetheless, a significant majority of our US large-cap funds also beat their benchmarks, generating positive excess returns, net-of-fees, over all relevant time periods. Perhaps one of the study’s most notable findings is that our strategies’ relative performance has tended to improve over longer periods of time, illustrating why judgements about the capabilities of active managers based on short-term results can be a critical and costly mistake for investors focusing on long-term wealth creation.
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IMPORTANT INFORMATION For investment professionals only. Not for further distribution. Past performance is not a reliable indicator of future performance. Data as of April 2016. For additionalinformation on the complete analysis, visit troweprice.com/active The content of this material is being furnished by T. Rowe Price for general informational purposes only. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. The views contained herein are as of March 2017 and may have changed since that time. Issued in the European Economic Area by T. Rowe Price International Limited, 60 Queen Victoria Street, London EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. in the United States, European Union, and other countries. This material is intended for use only in select countries.
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“Advisers are asking why take the manager risk? There is a simplicity to delivering a known outcome”
“If you can stand back and ask what is the investment business still about, it should be about delivering advice with all the levers and tools that are in the box. This active or passive question: it is a cul-de-sac”
The FCA’s Asset Management Market Study
Given this persistent assault on active management, can professional fund pickers expect to find themselves under increasing pressure from clients to move towards index-tracking strategies? Barry Neilson, business development director at Nucleus, says the platform is seeing a steady increase
Active funds and their bad 2016 showing
Is passive winning the battle with active and does that mean it will win the war?
The FCA’s asset management review is scrutinising active fund managers while largely giving passive a clean bill of health. In addition, the RDR and the end of trail commission and related platform rebates has removed two obstacles to passive. The past year has done little to win any favours for active management, given how its various surprises – not least the commodity rally and Brexit result – seemed to wrong-foot many managers. The chart below shows how the average IA UK All Companies fund, for example, lagged the FTSE All Share by close to 6 percentage points in 2016.
Neilson says: “We are in a long-term lower return market. The old world where you could sustain a 3 per cent TER with a double-digit return is long gone. Cost is a big driver. “But adviser behaviour is changing too. Previously, many advisers saw their role as maximising performance. But if you have cash flow modelling at the heart of client engagement, you are trying to understand from the assets they have today what return they need to buy the holiday house in Spain and retire at 55. If that only needs 4 per cent then your job to give them the most predictable, least volatile journey to delivering 4 per cent every year.
Webb argues that there are lessons to be learned from the institutional market’s core/satellite passive and active approach – one being that you should give “an active fund manager the length of time to deliver outperformance”. “It is extremely unlikely that an active manager can outperform the market every year if they are genuinely trying to find businesses where the value has not been recognised,” he adds. “To date on average, active managers have underperformed in the last five years but if you take an average you are going to get an average including closet index trackers. It includes managers investing in those companies where value hasn’t been recognised yet. The last five years have been characterised by unprecedented QE that has bailed out a lot of terrible companies. “In the last six or seven months, we have seen a cyclical rotation into poorer quality companies like banks and miners. It doesn’t mean an active manager is going to sell his high quality stocks and buy banks and miners to chase short-term cyclical rotations.”
FE Professional contributor
“You move from how do I maximise outperformance to minimising underperformance. Advisers are asking why take the manager risk? There is a simplicity to delivering a known outcome.” Of course, the active fund management industry isn’t taking this lying down. Rathbone Unit Trust Management chief executive Mike Webb says: “Passive and active both have a place in client portfolios, but the idea one should be used to the exclusion of the other is not correct and never has been.”
The Financial Conduct Authority is looking into whether the asset management industry has effective levels of competition and whether investors – both retail and institutional – are receiving good value for money. The regulator expects to publish its final report in the second quarter of 2017 but the interim findings came out in November and heaped some heavy criticism on active management. It highlighted some well-known problems in the industry, including how difficult it is to compare overall costs across different products and the challenges of working out the full impact of fees on performance. But one of the report’s most striking features was that the FCA seems to have a growing belief that passive funds are a better overall investment than actively managed funds. The paper argued that active funds have failed to demonstrate higher returns than the market on a consistent basis and highlights their higher fees. Among the remedies proposed by the regulator were suggestions to make asset managers more accountable for delivering value for money to clients and the threat of ‘naming and shaming’ underperformers. The deadline for feedback on the interim report was 20 February and more than 140 responses were submitted.
Among them, Old Mutual Global Investors chief executive Richard Buxton said: “We believe the asset management industry is already competitive on price. Certainly at OMGI, we have passed on savings achieved because of asset growth to investors and worked with large-scale distributors on the introduction of preferentially priced share classes. However, despite initiatives to reduce fees, it is our strong belief that consideration of value for money, rather than purely cost, should drive investor decisions.” However, Vanguard Europe head Sean Hagerty said: “As a provider of both active and passive investment funds, Vanguard has built its reputation on the principle that costs matter. Every pound paid in fees is a pound less of return for clients. Investors cannot control the markets, but they can control what they pay to invest, and that makes an enormous difference over time to their returns. Performance is a potential. Costs are a certainty, hence why investors should focus as much, if not more, on costs. A ‘health warning’ on the impact of costs would be a clear sign of intent from the industry that it’s putting the needs of the investor first.”
“It is extremely unlikely that an active manager can outperform the market every year if they are genuinely trying to find businesses where the value has not been recognised”
Webb sees particular challenges for passives from current political and economic conditions. “Passives by their nature are always backward looking. If you look at the companies that have survived from the formation of the FTSE, it is only a handful. Take that forwards, in a period of genuine uncertainty where geopolitics may provide that one in 20 years' impact on macroeconomics and capital markets. Do you want to leave that to a computer?” he adds. Chelsea Financial Services managing director Darius McDermott is also a firm advocate of the value that active management can bring to a portfolio: “I am in no way anti-passive but I am pro-active. There is a time and a place for passive but I also believe a lot of passive is solely bought because it is cheap.” He also points out that a five-year assessment of many active firms’ funds shows many groups consistently posting outstanding performance. He says: “Take River & Mercantile – 100 per cent of their five funds have outperformed over five years and by an average of 50 per cent. Stewart Investors have 10 funds in the survey and a 100 per cent have outperformed by an average of 33 per cent. For Unicorn all four funds have outperformed by 32 per cent. That is the specialist. Then in number four is Baillie Gifford – 95 per cent have outperformed over five years by 25 per cent. This shows some active managers doing a pretty good job.”
But what of advisers? Investment Quorum chief executive Lee Robertson believes that recent years have been more of a case of a gradual drift toward passive than anything more earth shattering. “Among advisers, IFP types were early adopters; with RDR some advisers probably moved to protect their own margins. There is this drift to passive. We run portfolios that are active and passive but also run pure passive for clients who want that reduction in costs. Yet we don’t see a big sea change coming.” Others see a more deliberate shift away from active and have done so in their own business. Plan Money director Peter Chadborn says his firm is now predominately passive and has been using the Vanguard LifeStrategy funds for the last three years. “It has been a weight off our shoulders both workload-wise and in removing the inherent risk of running portfolios,” he explains. “We have been able to keep our costs including the total cost to access the propositions well below the industry average. It future proofs our business from the downward pressures on cost of advice and investment and the direction of travel from the regulator in terms of enforcing transparency.” The move was driven by the firm, not client demand “We noted the disillusionment with the active sector and became more aware of how the difficult it is for analysts and active managers, let alone for us, choosing managers. It was also a gradual repositioning as the financial project manager rather than the investment manager. We have put more of our time into cash flow planning.” Yet many IFAs remain resistant to the concept especially in current market conditions and believe in stressing the potential benefits of active funds to their clients. Worldwide Financial Planning IFA Nick McBreen says: “[Passive investing] all looks great in a bull market. It is so easy. The robo-advisers in particular are going overboard. But whatever question you ask you end up with this basket of Vanguard and ETFs and passives. “When it goes pear shaped, are you engaged with someone who is going to manage this? Robos say they will manage it through thick and thin. The economies of scale mean they can’t do that and the algorithms can’t do that. “If you are going to advise people, you should use a combination of the instruments – active and passive and alternatives in order to deliver a plan. If you are just an order taker, in a bull market you’ll look fantastic. “But we have got a market that is very contrarian in terms of the bigger macro picture. The FTSE at 7,200 – what is going on? It is good example of being diverted by one index. If you can stand back from that and ask what is the investment business still about, it should be about delivering advice with all the levers and tools that are in the box. This active or passive question: it is a cul-de-sac.”
There are several reasons for active funds’ underperformance in 2016, not least that many portfolios were positioned for a Remain result in the Brexit referendum, most managers just didn’t quite believe Donald Trump would win the race to the White House and the rally in commodity prices took investors – and their energy underweights – by surprise. Another big factor in the UK was an overweight towards mid-caps, which ultimately hampered returns when investors flocked to the relative safety of international-facing FTSE 100 names. While 12 months is too short a time to judge the value of active management as a whole, as this underperformance came at time when the FCA seemed to highlight the merits of index trackers and continued price cuts in the passive space, it is easy to see why some clients could be left wondering exactly what active funds are bringing to their portfolios.
in the use of passives of 1.5 per cent to 2 per cent every quarter. This could take Nucleus from two-thirds active to 60:40 or even 50:50, with passive in some 60 per cent of all models on the platform.
Certainly, passive investing appears to have had the upper hand in some recent skirmishes – with 2016 in particular being a year of attrition for active management. Passive fund houses – most notably Vanguard – have ratcheted up their marketing spend and progressively cut charges, while arguing that high-charging active managers should carry a ‘health warning’. Fee cuts in Vanguard’s LifeStrategy range have even taken the battle into the multi-asset space.
Most investors went into 2016 expecting it to be a volatile year given some obvious political and macroeconomic headwinds on the horizon but few expected active managers to have quite the rough ride they did. FE Analytics shows the average member of the IA UK All Companies sector, for example, posted a 10.82 per cent total return over the year while the IA UK Equity Income sector made just 8.84 per cent; this is far below the FTSE All Share’s gain of 16.75 per cent. The same trend of active underperformance can be seen in a number of other fund sectors.
Performance of UK funds vs FTSE All Share in 2016
This information has been issued and approved by Baillie Gifford & Co Limited and does not in any way constitute investment advice. The value of an investment in the Fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.
The best detective novels are those in which the clues were there all along,
but where it takes the searing insight and intellect of the detective – and by extension the reader – to understand the truth. If done well, it should only be obvious whodunnit at the final reveal: there’s no fun in reading a detective story where you exclaim ‘doh!’ on page one. Similarly, sometimes the best investments are those which are revealed only with the passing of time, where the outcome was not certain from the beginning, but where, on looking back, you realise the clues were there all along, hidden in plain sight. It’s those sort of big winners that the Baillie Gifford American Fund is looking to uncover. We believe that the short-term earnings forecasts which enthral the market are red herrings. The traits which make exceptional growth companies so special, and indeed rare, are often intangible and, at the very least, not easily spelt out in a discounted cashflow valuation. As a result, these companies are systematically underappreciated by stock markets, with Wall Street in particular only prepared to give credit for what it can see, not what is to come namely the true potential of a company. This is where Tom Slater and his US Equities team beg to differ in their investment approach. Rather than succumbing to short-term number crunching, relying on the research of others or indeed being diverted by macro-economic soothsaying, Slater is clear about what it is they are looking for and it’s not what’s already apparent to the market, “Even if we really like a business, if we really like a management team, if we think there is something really special about the culture, unless we can say how our vision of what the company will look like five years from now differs from what’s implied by the market price we won’t buy it.” As a result, only those companies which the team believes have a special culture and edge, that are addressing a large market opportunity, and whose full potential has not been spotted, make it into the portfolio. But once they are in, these companies stay. We recognise it takes time for the advantages of their respective business models and the strength of their individual cultures to become obvious to others and thus the dominant drivers of their stock prices. We are prepared to let the truth reveal itself over time. So, spoiler alert, looking at today’s portfolio may give some indication of who the long-term winners might be. No doubt there will be plot twists along the way, but five years from now, you too might catch yourself going ‘doh!’, as you see for yourself what it was our investors spotted.
Best and worst IA UK All Companies performers over 5yrs
CFP SDL UK Buffettology
Over the five-year period, the FTSE All Share made a 55.25 per cent total return with annualised volatility of 10.04 per cent. In doing so, the index has lagged many of its international peers in sterling terms – while it’s ahead of emerging markets, the index is far behind the 139.46 per cent gain in the S&P 500 and the 89.32 per cent rise Japan’s Topix. Within the FTSE All Share, the strongest performance came from technology companies – which are up 155.82 per cent – followed by financial services (133.46 per cent) and consumer goods (100.87 per cent). At the bottom is basic materials with a 6.64 per cent loss, although this area has bounced back strongly more recently and rose 84.54 per cent over the past year.
M&G - Recovery
Click a hotspot on the scatter chart to view more about that fund
IA UK All Companies
of IA UK All Companies funds have beaten the FTSE All Share over the past five years…
AUM in the IA UK All Companies sector
But this popularity can’t hide the fact that the average IA UK All Companies fund currently has a relatively lacklustre track record against the FTSE All Share. While the sector is beating the index over five years, the average fund is lagging over one-, three- and 10-year time frames. What’s more, the average fund has been more volatile than the index and has posted a higher maximum drawdown over the past decade. These figures have been used to demonstrate the underperformance of active funds, but it’s worth keeping in mind that the sector is home to more than 270 funds and many have very different aims. Within the peer group, there are all-cap funds, equity income portfolios, those with a focus on the FTSE 250, small-cap funds, ethical products and funds of funds, not to mention index trackers. The wide-ranging nature of the sector makes comparisons between the ‘average’ fund and the index difficult, but when we look at things on an individual fund level then clear examples of strong performers emerge. Some 51 IA UK All Companies funds are headed up by FE Alpha Managers, including Lindsell Train’s Nick Train, Invesco Perpetual’s Mark Barnett, Fidelity’s Alex Wright, JO Hambro Capital Management’s Alex Savvides and Schroders value duo Nick Kirrage and Kevin Murphy. Furthermore, 22 funds – including Invesco Perpetual High Income, Liontrust Special Situations, CF Lindsell Train UK Equity, Evenlode Income and CFP SDL UK Buffettology – hold the top FE Crown Rating of five. Over the following pages, we have used FE Analytics to pull together several graphics giving insight into what’s been happening in this popular sector.
This is the sector’s largest member – the £11bn Invesco Perpetual High Income fund, which is helmed by FE Alpha Manager Mark Barnett. It has made 71.84 per cent over five years, beating both its average peer and the FTSE All Share by a good margin with annualised volatility of 8.35 per cent. There’s a little cluster of former IA UK Equity Income funds in this part of the chart – just below is Invesco Perpetual Income while Invesco Perpetual UK Strategic Income and Rathbone Income are immediately above it.
One of the best known funds in the IA UK All Companies sector, the £3.8bn AXA Framlington UK Select Opportunities fund is headed up by Nigel Thomas. While the fund has a strong long-term track record, it is now just behind the FTSE All Share over five years with a 51.78 per cent total return. Thomas, who has more than two decades of investment experience, focuses on growth companies and attempts to find those that can develop and grow by exploiting economic changes. Current holdings include RPC Group, Rightmove and Paddy Power Betfair.
Source: FE Analytics, bid to bid total return in sterling to 28 Feb 2017
Standard Life Investments UK Equity Recovery
Source: FE Analytics MI Tool
Sitting in the bottom right-hand corner is the £3.4m Elite Webb Capital Smaller Companies Income & Growth fund, which is managed by Peter Webb. The fund has made less than half of the FTSE All Share’s gain with a total return of just 21.9 per cent over five years while being more volatile with annualised volatility of 13.6 per cent. However, the fund does operate in an inherently riskier part of the market as it focuses on smaller companies. In fact, around three-quarters of the portfolio is in the more volatile AIM market.
are ahead of the index on a one-year view after a lacklustre 2016
This £464m fund has made the IA UK All Companies sector’s highest return over five years after posting a 146.72 per cent rise, with annualised volatility of 12.58 per cent. Headed up by FE Alpha Manager Luke Kerr, the fund focuses on the best mid-cap ideas of the Old Mutual Global Investors UK equity team and has limited ability to take short positions. The two funds to its right on the chart are also managed by the same team: Old Mutual UK Mid Cap and Old Mutual Equity 1 both focus on UK mid-caps and are led by FE Alpha Manager Richard Watts.
IA UK All Companies and FTSE All Share cumulative returns
Risk/reward over 5yrs
Source: FE Analytics
This £109.9m fund, run by FE Alpha Manager Keith Ashworth-Lord, is based on the principles of investment legend Warren ‘Sage of Omaha’ Buffett and has an exclusive deal to use the name in the UK market. Ashworth-Lord therefore focuses on businesses with strong operating franchises and experienced management teams. Current holdings include Scapa Group, Trifast and RWS Holdings. Over the past five years, the fund’s 146.64 per cent total return is the IA UK All Companies sector’s second highest (after Old Mutual UK Dynamic Equity) and more than twice that of the FTSE All Share.
Source: FE Analytics, bid to bid total return in sterling between 29 Feb 2012 and 28 Feb 2017
FTSE All Share
10 most researched IA UK All Companies funds over 1yr
Elite Webb Capital Smaller Companies Income & Growth
Tom Dobell’s £3.3bn M&G Recovery fund has struggled over recent years, largely because value investing has lagged growth. Its five-year total return is 37 percentage points lower than the FTSE All Share at 21.90 per cent; this puts it in the bottom decile of the IA UK All Companies sector. However, the fund has benefitted from the resurgence in value over recent months and is in the top decile on a one-year view after making 34.31 per cent. Top holdings include GW Pharmaceuticals, BP and First Quantum Minerals.
Old Mutual - UK Dynamic Equity
IA UK All Companies and FTSE All Share over 5yrs
AXA Framlington UK Select Opportunities
With assets of more than £160bn, the IA UK All Companies sector is the largest in the Investment Association universe and home to some of the industry’s best known funds. Given the UK investor’s bias to the home market, pretty much every portfolio will have exposure to at least one of its members – a trend strengthened by the transfer of several of the most popular IA UK Equity Income funds into the sector over recent years.
The IA UK All Companies sector has done slightly better than the FTSE All Share, with a total return of 59.13 per cent over the five years in question and annualised volatility of 9.77 per cent. Active managers were buoyed by relatively high allocations to mid-caps, which surged on the back of ultra-loose monetary policy and renewed investor sentiment. However, the sector is now lagging in the index over one and three years after events such as the Brexit result and rallying commodity prices seemed to wrong-foot active funds and led to underperformance in 2016.
Source: FE Analytics, bid to bid total return in sterling between 29 Feb 2012 and 28 Feb 2017
Invesco Perpetual High Income
This £55.2m fund has made a 115.21 per cent total return but sits far away from the rest of the pack after posting the sector’s highest annualised volatility at 19.62 per cent. As the fund’s name suggests, it has a value bias to its portfolio and invests in undervalued companies where manager David Cumming thinks there is potential for positive change. Given the underperformance of value, the fund was in the sector’s bottom quartile in 2014 and 2015 after making losses in both years but made the highest return of 2016 with a 51.50 per cent gain.
“After 2000 I decided I would have to get hold of underlying portfolio holdings and would need to understand managers much more,” he says. “This is because at the time managers were so overweight in TMT they got hurt badly – even corporate bond managers were positioned incorrectly.”
Performance of Bambos Hambi vs peer group composite since launch of MyFolio range
“The result was that we had a very strong 2016, with half a dozen of funds we own – such as Invesco Perpetual European Equity Income, JOHCM UK Dynamic and Morant Wright Nippon Yield – all ending the year top decile,” he says. Not only does Hambi build up a picture of funds he has yet to invest in, he also conducts the same forensic approach regarding managers he already holds in the fund. He meets all those he owns at least twice a year and at the same time asks them to complete quarterly questionnaires on their views of the market and what they have been doing in the fund. “By getting the portfolio holdings every month and receiving all the attribution analysis I know exactly the impact on manager’s fund if any of the companies they own publishes a profit warning,” he says. “So when Brexit happened and equity markets fell out of bed for a couple of days I could inform you before looking at the performance numbers who was going to do well and who was set to do badly.” With over £10bn of assets under management and a team of 11 behind him, including six dedicated fund analysts, both getting access to fund managers and doing this extensive due-diligence is not a problem. So what advice would Hambi give to an adviser who may not have these resources behind them?
aving managed money since the mid-1980s it’s fair to say that Standard Life Investments’ (SLI) Bambos Hambi has seen his fair share of market cycles. But in a career spanning over three decades, the head of fund of funds management says there was one event in particular that led to an evolution in his fund-buying process and the introduction of a rule he has vowed not to break.
“We are cautiously optimistic on markets right now,” he says. “We think Trump's policies will extend the cycle and we added to equities immediately after his election and have just increased this again recently.”
Helping Hambi make these asset allocation calls are SLI’s multi-asset team, economists and the addition of a political strategist a couple of years ago. Indeed, since he started at SLI six years he says this resource has added 0.4 per cent to performance annually. “When I first started out you only had a few equity classes and some government bonds to choose from,” reflects Hambi. “Over the years since asset classes such as corporate and high yield bonds have been introduced, to the point today where we now consider 19 different asset classes across our MyFolio range. Having such a strong team behind me is a huge advantage in navigating these.” With all these challenges Hambi says the advice he would give any fund pickers is the same as that which he has passed onto his sons - do the work. “You cannot take shortcuts,” he says. “If you do something, do it properly and work hard it at. The experience of 2000 was not nice but things have worked out well since. It is all part of the learning process.”
Risk/return of Standard Life Investments MyFolio Multi Manager range over 5yrs
“For those advisers still picking funds themselves, who may get more minor access to managers such as the odd lunch or annual fund conference, my advice would simply be for them to pick up as much information as they are able to”
FE Professional contributor
Bambos Hambi’s golden investing rule
Fund of fund manager Bambos Hambi graduated with a degree in Mathematics from the University of London and began his career in 1978 at Legal & General, in the actuarial department, before moving to their investment division. He joined Morgan Stanley Quilter in 1987 to manage pension and discretionary equity portfolios. He soon progressed to head up a team managing portfolios which focused exclusively on holding collective investments such as unit trusts. After brief stints at Friends Ivory Sime (1997-2001) and Rothschild (2001-2003) running fund of funds - heading up the latter's fund of fund desk - he joined Gartmore in November 2003 as head of the group's multi-manager business. He then joined Standard Life Investments in 2011 where he is head of fund of funds management.
About Bambos Hambi
About Bambos Hambi
“For those advisers still picking funds themselves, who may get more minor access to managers such as the odd lunch or annual fund conference, my advice would simply be for them to pick up as much information as they are able to before they attend,” he says. “It is all about being as thorough as possible and the internet is a great resource for this.” While the five Ps process has remained the same for the last 20 years, Hambi himself evolved as a manager in different ways. In addition to all the extra research he does, he says he is now much longer-term in his outlook and as a result is more patient than when he started. So what is his outlook at present given all the current uncertainties with Brexit and Trump’s election?
This experience not only taught Hambi that he needed to be more professional, but that he needed a more forensic approach to investing in managers. The key to this, he says, is doing much more preparation before he meets a fund manager. He says the team at SLI spends hours preparing for a manager meeting. This involves getting requests for proposals (RFPs), gathering information on all the underlying portfolio holdings and then running these through their own risk packages to gather an understanding of both the style and risks of the said fund. “Just getting the top 10 holdings from their factsheet is not good enough,” he says. “The due diligence is there to understand how a fund will be managed and importantly assess how it will perform in certain market conditions. This is because more often than not it is a manager’s style which drives performance.”
So what is this one golden rule that Hambi adheres to? It is that when investing in a fund there is no skimping on performing extensive due-diligence.
After managing discretionary money at Morgan Stanley Quilter for 10 years since 1987, Hambi moved to Friends Ivory & Sime in 1997 and it was there he introduced a fund-buying process, well known in the industry, called the Five Ps. Some 20 years later and running the £10bn MyFolio range, his focus on philosophy, process, people, performance and price (always he stresses in that order) remains steadfast but he says other elements of his fund-buying process have evolved. “When I first began running money I would allow fund managers to present to me,” he says. “However, this all changed back in 2000 when the tech, media & telecoms [TMT] bubble burst. Not only was it a very painful experience but it was the catalyst I needed to up my game and led to the introduction of a rule which I have not wavered from since.”
“You cannot take shortcuts. If you do something, do it properly and work hard it at”
Funds managed by Bambos Hambi
“Just getting the top 10 holdings from their factsheet is not good enough”
By Adam Lewis,
To put this in context, as an investment style growth has worked very well since the credit crisis while value managers have underperformed. Understanding this dynamic, Hambi says two years ago he started buying fourth-quartile value funds because he knew at one point growth would fall out of favour and value would come back as a major force.
THIS INFORMATION IS FOR PROFESSIONAL ADVISERS ONLY and should not be relied upon by retail investors. * Data from 21 May 2012. Source: Lipper Limited, class I distribution units, bid to bid in sterling to 28 February 2017. All figures show total returns with dividends reinvested. Sector is IA Mixed Investment 20-60% Shares NR, universe of funds is those reporting net of UK taxes. The Artemis Monthly Distribution Fund may invest in fixed interest securities and in higher-yielding bonds. The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities. The fund may invest in emerging markets. The fund may use derivatives to meet its investment objective, to protect the value of the fund, to reduce costs and with the aim of profiting from falling prices. The fund’s annual management charge is taken from capital. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority. Third party endorsements are not a recommendation to buy.
The economic outlook is remarkably resilient. Growth is generally better than expectations and even the forward-looking indicators are healthy: for the first time in many years, purchasing managers’ indices (PMIs – indicators of the economic health of the manufacturing sector) around the world are pointing towards a synchronised global recovery.
Our complementary perspectives – one of us specialises in equities, the other in bonds – means we can choose where best to invest in a company’s capital structure, switching between equities and bonds. One area that we both favour is financials. On the fixed income side, we have had a positive view on banks for a long time. Many of the problems related to the financial crisis have been resolved. At the same time, banks are benefiting from the steepening yield curve. Challenges remain, but we are now starting to invest in banks’ equities, particularly in the US. To complement this, in the fixed income part of the portfolio we are investing in the insurance sector, which offers very high yields.
Our complementary perspectives – one of us specialises in equities, the other in bonds – means we can choose where best to invest in a company’s capital structure, switching between equities and bonds. One area that we both favour is financials. On the fixed income side, we have had a positive view on banks for a long time. Many of the problems related to the financial crisis have been resolved. At the same time, banks are benefiting from the steepening yield curve. Challenges remain, but we are now starting to invest in banks’ equities, particularly in the US. To complement this, in the fixed income part of the portfolio we are investing in the insurance sector, which offers very high yields.
Purchasing Managers Index
What do we buy when bond yields are going up? Broadly speaking, we have shifted gradually towards cyclicals and financials and away from defensive stocks and bond proxies. That shift was partly prompted by the need to generate income: defensive shares had performed very strongly and their dividend yields were no longer attractive. Although the world feels far from normal, equities are behaving as we would expect in a time of rising yields. Keeping with equities, the fund still has little exposure to emerging markets. The environment of resilient economic growth and higher commodity prices should be beneficial for these areas. We remain cautious as they still face the headwinds of a stronger US dollar, higher US Treasury yields and President Trump’s anti-trade measures.
Jacob de Tusch-Lec
At the same time, the era of extreme monetary policy is coming to an end. Although it may be too soon to call the end of the bull market in bonds, government bond yields are certainly rising. To reflect this, the fund is biased away from longer-dated bonds and has a short position in gilts. Despite higher government bond yields, we think the outlook for credit remains positive. That being said, investment grade credit is looking fully valued. In the fund’s fixed-income component, we are therefore focusing on high-yield bonds and financials, which we think will provide better returns.
Exposure to financials
James Foster and Jacob de Tusch-Lec manage the Artemis Monthly Distribution Fund. The fund typically invests in 60% bonds and 40% equities and aims to provide a monthly yield. As the fund approaches its five-year anniversary, it has returned 90.1% since launch and ranks first in its sector*. For most of 2016, headlines were dominated by politics and in particular the rise of populism. In 2017, further strains from Brexit, elections in Europe and the new administration in the US will see politics remaining to the fore. But markets are becoming inured to the political backdrop. We continue to concentrate on economic and stock fundamentals.
Three year cumulative performance to 13/03/2017
Source: Bloomberg as at 31 December 2016
Populist policies – particularly in the US – are having inflationary consequences. President Trump is likely to cut taxes and raise expenditure. In the UK, meanwhile, the sharp fall in sterling is pushing up input prices.
Equities: investing when bond yields rise
A transition in the market
Performance of global funds vs sector and index over 3yrs
Performance of Asian funds vs sector over 3yrs
GAM Global Diversified is headed up by one of the most experienced managers in the business: FE Alpha Manager Andrew Green has worked on the £580.8m fund since its launch in 1984. While the fund is behind the MSCI AC World and sector over three years, it is ahead of both on a five-year view. Green has a deep-value approach and uses a mix of fundamental and technical analysis to find sectors or countries trading at what he considers to be depressed levels. The portfolio is constructed without reference to the index and currently holds Citigroup, BP and Newmont Mining as its biggest positions. The fund topping the list over three years is Morgan Stanley Global Brands, which has FE Alpha Manager William Lock as lead manager and five deputies behind him. As its name suggests, the fund is built around some of the largest household names with its portfolio being topped by the likes of Reckitt Benckiser, Unilever, Altria Group, Microsoft and L'Oreal.
The highly rated equity funds that advisers aren't researching
The table shows the full list of the 18 funds, ranked in order of their three-year returns. One thing that jumps out is that a number of the best performers focus on Asian or emerging market equities, although UK, global and specialist funds can also be found on the list.
FE Alpha Manager Ben Leyland runs JOHCM Global Opportunities as a high conviction stock-picking fund that is unconstrained by the benchmark. Reflecting this, the portfolio is underweight the US – the index’s largest constituent – by around 20 percentage points and is overweight Japan and the UK, with top holdings including Oracle, Wolters Kluwer and Japan Tobacco.
Veritas Asian is also a consistent outperformer when it comes to metrics other than total return, beating its average peer over five years for annualised volatility, alpha generation, maximum drawdown, downside capture and risk-adjusted returns. The other IA Asia Pacific ex Japan fund on the list is JOHCM Asia ex Japan Small and Mid Cap, which is headed up by Cho Yu Kooi with FE Alpha Manager Samir Mehta as deputy. The fund has turned in top-decile total returns over three and five years, beating the MSCI AC Asia ex Japan Small Cap index over both time frames. The fund’s small- and mid-cap focus means it has been more volatile and had a larger maximum drawdown than its average peer over the past five years but only by around 1 percentage point in the case of each. That said, its maximum gain has been the sector’s highest and its maximum loss the lowest, as well as it sitting in the top decile for alpha generation and risk-adjusted returns.
Some funds consistently get more attention than others and when we look at the most commonly researched offerings on FE Analytics, the same names top the list over and over again: the likes of Standard Life Investments Global Absolute Return Strategies, Fundsmith Equity and CF Woodford Equity Income are persistent favourites with professional investors. However, this doesn’t mean that these are the only funds to have built up strong track records. There are many others that score highly on FE’s various ratings systems but fly under the radar of fund researchers and the purpose of this article is to highlight a few. We used the FE Analytics MI Tool – which offers insight into the research behaviour of more than 9,000 professional investors using FE Analytics – to generate a list of all the equity funds sitting outside the top 1,000 offerings most researched by fund buyers during 2016. This list was filtered to find those that have an FE Alpha Manager at the helm and hold five FE Crowns for superior performance in terms of stock-picking, consistency and risk control over recent years. There were 18 funds left after the filter was applied. As there are only 46 equity funds with both an FE Alpha Manager and the top crown rating, this suggests that just under two-fifths of the space’s highest-rated funds aren’t appearing on professional investors’ radars.
Some commentators have argued that the strong run in quality growth stocks could be set to end as investors move back into value but the Morgan Stanley Global Brands team maintains that the quality compounders it favours deserve a place in portfolios. “In an era of extreme uncertainty which does not seem to be priced in by markets, we would argue that high quality compounders, whose prospects are far less dependent on events than more cyclical and lower-quality plays, are a relatively safe haven,” they say. “They are also more attractively priced after the violent sector rotation of H2 2016, with MSCI Consumer Staples now at its 20-year long-run average, a 20 per cent premium to the MSCI World index on forward earnings, and half that on forward free cash flow. Even if the compounders do not come back into favour in the near-term, their combination of steady growth and cash generation should protect the returns they offer over the medium term.”
Other Asian or emerging market funds that have won strong ratings from FE’s analysts but have been overlooked by professional investors include JPM Emerging Markets Small Cap, Matthews Asia China Dividend and Carmignac Portfolio Emerging Discovery as well as more niche mandates like Invesco Korean Equity and Henderson Gartmore Latin American. One reason why this group of funds may have been passed over is the general underperformance of emerging markets in recent years and the lack of investor interest in the asset class. But one area where there is constant investor demand yet highly-rated funds remain off the radar is global equities. JOHCM Global Opportunities and Ardevora Global Long Only Equity, for example, have made similar returns to the aforementioned Asian funds and sit in the IA Global sector’s top quartile after beating their MSCI AC World benchmark over three years. More specialist mandates like Morgan Stanley Global Brands are also topping the peer group after rising strongly on the back of the quality growth rally that dominated markets in recent years.
Certain global and Asian equity funds have been relatively ignored by professional fund pickers in the recent past despite achieving strong returns and being headed up by some of the best managers in the business, exclusive research by FE Professional shows.
Performance of Morgan Stanley Global Brands vs sector and index over 3yrs
FE Alpha Manager Ezra Sun’s Veritas Asian fund is one that has established a strong long-term track record, posting a 200 per cent total return over the past 10 years. This compares with a 139.41 per cent return from the MSCI AC Asia Pacific ex Japan index and a 145.22 per cent return from its average IA Asia Pacific ex Japan peer. Sun’s investment process focuses on dividend yield and earnings momentum, which he considers to be the two main drivers of returns. This has led him to include stocks such as Samsung Electronics, Macquarie Group and Naver Corporation as major holdings, with its biggest geographical exposures being to the more developed Asian nations of Australia, China and South Korea.
The £308.4m fund is managed with a benchmark-unconstrained approach; the underlying philosophy maintains that markets consistently underestimate the value created by well-managed companies in growth niches. Ardevora Global Long Only Equity, which has two FE Alpha Managers – Jeremy Lang and William Pattisson – among its team of four, has an approach that revolves around identifying when market participants are wrong and attempts to capitalise on the mispricing that many occur as a result. “We picture the market as made up of three sets of people: investors, financial analysts and company managers. We watch the behaviour of these people for signs of bias,” they explain. “For investors, we look for signs of excessive anxiety, or over-exuberance, and a fixation on recent emotive events. For analysts, we look for signs of overconfidence, blinkering, and belief in a good sounding story. For management, we look for indications of hubris, denial and excessive risk taking.”
The research capabilities offered by FE Analytics make it a powerful tool for the modern fund selector but with so many features being offered in one package, it can be a challenge getting full use of them all. FE Academy is the name of our new centre of excellence offering training on FE Analytics and helping clients to get the most possible value out of the tool. More information regarding the Academy, together with the associated costs can be found here:
“What we do as paraplanners is to build on what the adviser has learnt from their client and create suitability reports that are extremely personalised to their specific scenario. For all our propositions, we use FE Analytics for the analysis and research we do,” Holmes adds. Lovewell Blake places great importance on technical fund research to support its propositions. “Being able to position clients where they can feel comfortable that their portfolios are going to remain within their risk tolerance level is key to us,” he says. “The tools that we use within FE provide us with the ability to focus our attention on fund analysis and make an accurate assessment of what the potential outcomes could be to clients in the future.” Holmes first heard about the FE Analytics certification at one of the FE Adviser Forums. Lovewell Blake is the first fully certified firm, with 10 members of the team being awarded the FE certification.
Dean Mullaly of Mark Dean Wealth Management also points out that FE Analytics certification gives a greater understanding of the tool and what it can do for advisers. “Being a financial adviser these days seems to come with a life-long commitment to learning and then being tested, but going for FE Analytics accreditation was about more than just passing another test, it was about us as a firm evidencing our professionalism to our clients by way of the FE Accreditation kite mark and ensuring we were utilising 100 per cent of its capabilities,” he says. “We always suspected FE Analytics had more to offer than we had actually discovered, and going through the accreditation process proved we were correct.”
Find more information at http://www.fetrainingacademy.com
“We were very early adopters of FE Analytics because we wanted something that was a one-stop shop for us”
“Our clients vary from those who are very technically minded to those who have a much greater reliance on us to choose the right investments for them”
Your introduction to the FE Academy
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“Our clients vary from those who are very technically minded to those who have a much greater reliance on us to choose the right investments for them. What we want for our staff is for them to be in a position where, if they are asked about the specifics of an investment recommendation, they feel very comfortable giving our clients an explanation. This is where we feel the FE Analytics certification is important. “Historically we have had a lot of support from FE and it’s been fantastic. We were early adopters and we have been grateful to receive onsite training and seminars. I place as much importance on the FE Analytics certification as I do on my diploma. All our staff study for CII qualifications, and this exam is just as important because it demonstrates to everyone in the firm our ongoing commitment to keeping our staff up to date with market changes.”
To show how FE Analytics certification can benefit, we caught up with Neil Holmes of Lovewell Blake, who has completed the training. Lovewell Blake is one of the leading firms of accountants, business advisers and financial planners in East Anglia and has offices in Norfolk, Suffolk and Cambridgeshire. The firm has used FE Analytics for over 10 years and Neil Holmes finds it particularly important to his role as a paraplanner. “We were very early adopters of FE Analytics because we wanted something that was a one-stop option for us. It has continued to be the go-to for all our analysis and a mainstay in our investment process,” Holmes says. At Lovewell Blake a team of three paraplanners carry out what can be regarded as the more technical side of the advisory role. Working alongside an adviser, their job is to provide investment options specific to the client.
FE Analytics Masterclass
The majority of our training sessions qualify for structured CPD points. You will receive a CPD certificate after attending the training session to support your Continual Professional Development. Everyone is entitled to the complimentary Starter Module, which can be booked to get you up and running on the tool. Here, you will learn about the basic navigation of FE Analytics and the most commonly used analysis tools. But many users who wish to ensure they are making the most of the tool book themselves onto the three modular training sessions available with increasing levels of skill. Modules 1 to 3 will also give you all the knowledge you need to pass the FE Analytics exam to become FE Analytics Certified. FE has become aware over the past few years that FE Analytics proficiency is a very sought after skill in the industry and interviews can be won or lost over this detail. Therefore, the FE Analytics qualification has huge potential for those entering and moving within the industry. Most training is booked and conducted online so please contact your Relationship Manager to arrange face-to-face training. If you would like any more information or would like to sit the FE Analytics certification, please contact the training team at
“We want our firm to be presented as an FE Analytics certified firm, where staff are committed to ongoing learning and where we are at the forefront of technology. For Lovewell Blake the FE Analytics certification is also about having full confidence that staff can confidently justify their investment recommendations if they are ever in a position where a client, or the regulator, asks,” he explains.
The values mean:
The benefits of global diversification are illustrated in the table, which considers four portfolios each with increasing levels of diversification. Even when diversifying within the UK investors can achieve a significant reduction in risk. Relative to Portfolio 1, which contains only UK equities, the addition of UK gilts and UK property reduces volatility by over 35 per cent and reduces the maximum loss by over 40 per cent. However, much greater benefits are derived by diversifying globally. Portfolio 4 has exposure to global equities and bonds and includes alternative asset classes, and this diversification results in a 60 per cent reduction in volatility, roughly 70 per cent reduction in the maximum loss, as well as an improvement in portfolio returns.
Security specific risks Market risks
By combining assets that are not perfectly correlated – that is, do not move in perfect lock-step together – the risks embedded in a portfolio are lowered and higher risk-adjusted returns can be achieved. The lower the correlation between assets, the greater the reduction in risk that can be derived. Consider the situation in which an investor has exposure to just one asset class, such as to UK equities. The fortunes of this investor will rise and fall completely with that of UK equities. But if this investor diversifies to also hold UK gilts, some of the risks embedded in this portfolio can be removed without necessarily impacting on returns. As one asset class performs strongly, the other may not. In the October 1987 equity market crash for example, UK equities declined 27 per cent for the month while UK gilts increased by approximately 6 per cent. The chart below illustrates the risk/return relationship for UK equities and UK gilts. UK equities have a higher return and risk profile than UK gilts. The curved line, which represents different portfolio combinations of the two asset classes, indicates that the return/risk profile of a portfolio of assets is greater than the average of the individual assets. This is the diversification benefit explained by Modern Portfolio Theory. Diversification away from equities reduces risk while still providing attractive returns. Ideally diversification should not be restricted to one country but should include all asset classes globally. To understand the benefits of global diversification it is useful to separate the risk of investments into two broad types:
The calculation rules are:
Risk scores are a measure of risk/volatility Risk scores are more sensitive to more recent events than volatility Easier for our FE Analytics subscribers and their clients to understand
The diversification benefit indicates to what extent the risk of a portfolio has been reduced by the interaction of the investments held. We have chosen to use FE Risk Scores instead of volatility for this feature as:
FE Analytics Product Update
Security specific risks result from factors specific to the security, such as management skill at a company. Security specific risks can be almost eliminated by gaining an exposure to a whole asset class. Market risk results from factors that impact on groups of securities or a whole asset class, such as interest rates. By diversifying between asset classes, we can reduce market risk and because of different economic factors between countries, global diversification can reduce these risks even further.
We have just added diversification benefit to all versions of UK Analytics.
What is the diversification benefit?
The calculations are only done when the portfolio is saved When a portfolio is edited/viewed, we re-run the calculations as they will change weekly The Scores are always in GBP
This feature will sit in the Portfolio page only, just below the holdings. An example of this in action on one of our FE Invest Models is below.
Risk Score of Portfolio – this is the performance series of the portfolio. This can differ to the overall portfolio risk score due to any historic holdings Average Weighted Risk Score - a calculated weighted risk score proportionate to the percentage weighting of each of the current holdings in the portfolio, summed together Diversification Benefit – Extent of risk that the portfolio has been reduced by, represented as a percentage
Annualised volatility of IA sectors over 10yrs
been partly offset by increased flows to other products. GARS' gross inflows fell 40 per cent over the year, from £17bn in 2015 to £10.2bn in 2016.
ast month, Standard Life reported its profits for 2016, showing that the lower demand for its flagship Global Absolute Return Strategies (GARS) fund had
FE Invest research manager
R squared of absolute return funds vs indices over 10yrs
By definition, absolute return strategies don’t rely on the positive direction of an asset class to generate positive performance.
Charles Younes is research manager with FE Invest.
So far, we have highlighted that absolute return strategies should be considered by investors due to their capacity to control the risk but also to add diversification benefits to a portfolio. Therefore, this asset class shares many common features with cash. This is an option we are currently using with our FE Invest model portfolios. Our portfolio management team did not hesitate to replace cash in few of our model portfolios with selected funds from the IA Targeted Absolute Return sector. But we believe that, instead of sitting on cash, the robustness of their investment process should allow them to generate additional return, while maintaining a strong risk control. We also believe this is a bet we should make because of their performance and the probability of outperforming cash. Looking at the funds with a minimum of three years track record in the IA Targeted Absolute Return sector, we observe that 79.75 per cent of them have managed to generate a positive Sharpe ratio over the last three years. In other words, these funds have justified their extra risk relative to cash by generating excess return. Let’s now look at the funds within the IA UK All Companies and their information ratio relative to the FTSE All Share over the same time period. Only 41.90 per cent of these funds have managed to generate a positive information ratio. So less than half of the active UK equity funds can justify their excess active risk (as measured by the tracking error) to generate excess return relative to the FTSE All Share index. The odds are therefore on our side – and we believe this is still relevant to consider absolute return strategies nowadays.
It is also important to stress that absolute return strategies add diversification benefits to a portfolio, in addition to their capacity to control the risk. As explained above, these funds have a lower sensitivity to traditional asset classes. They can also rely on different sources of returns to generate performance. This feature is highlighted in the chart showing the r squared of the IA Targeted Absolute Return sector against major indices. Although being slightly skewed to UK and global equities, on average 50 per cent of the returns of the absolute return sector is explained by this equity factor. This skew might also be explained by the high number of long/short equity strategies within the sector.
Although the fund remains by far the largest in the IA Targeted Absolute Return sector, does this trend highlight a lower appetite from investors for these absolute return products?
Annualised volatility of multi-asset sectors over 10yrs
I believe these strategies also offer another edge in understanding the risk before investment (called ex-ante risk).
Indeed, while a plain-vanilla UK equity index tracker would have generated a double-digit return of 16.76 per cent in 2016, why would investors bother investing in complex strategies which averaged a positive performance of merely 1.06 per cent (as represented by the IA Targeted Absolute Return sector) last year? But performance does not tell everything. I believe absolute return strategies should be better considered because of their capacity to control the risk. With valuations of global bond and equity markets at historic highs, return expectations over the medium term for these traditional asset classes are now skewed to negative numbers. Therefore, investors might feel the need to diversify away from relative/directional/long-only strategies.
Most absolute return strategies integrate risk management in the investment process, so that the portfolio manager can assess how much absolute risk (as measured by the volatility) is in the portfolio. Thanks to the portfolio construction process, an absolute return manager can adjust the volatility of the portfolio before implementing an investment decision. Long-only managers don’t have this capacity, as they can only control the beta (or sensitivity) to the benchmark. Before the EU referendum vote, UK equity managers could only limit the volatility of their portfolios relative to the FTSE All Share by decreasing the beta. UK long/short equity managers could simply decide to move the net exposure to zero so that performance only depended on their stock-picking skills, rather than on the directionality of the UK equity market. Therefore, the charts on this page should not be a surprise to everyone. Over time, the volatility of the IA Targeted Absolute Return sector has been significantly lower than main IA sectors, even when compared to the mixed asset sectors.
For example, long/short equity strategies can adjust their net and gross exposures to increase or decrease their sensitivity to equity markets. The same applies for long/short fixed income strategies by playing on duration and credit spreads. Global macro strategies make several bets on both directions of different asset classes or markets, as the combination of different macro views should generate performance independent of the direction of the main asset classes over time.
also managed to close out our underweight to emerging markets in early 2016. Relative to peers we also appear to have a greater gilt weighting and have taken our Japanese equity weighting on an unhedged basis, benefitting from the appreciating currency in 2016,” Gutteridge explains.
Hood says: “The UK position was pretty in line with the benchmark going into Brexit and it hasn’t changed since. The view the asset allocation committee has held throughout is that the FTSE All Share derives a lot of its revenues from overseas and benefits from sterling weakness almost as much as a lot of the overseas indices.” Gutteridge adds that the team’s conversations tend to be more about whether to add to UK funds rather than if they should be cut. This is because if a weaker sterling meant that more international exposure was appropriate, then the expectation of a stronger pound means greater UK exposure might be warranted. UK equity funds held in Brewin Dolphin’s balanced portfolio include Threadneedle UK Equity Income, Investec UK Special Situations, CF Woodford Equity Income, Liontrust Special Situations and Old Mutual UK Smaller Companies, while some passive exposure is taken through Fidelity Index UK.
“It’s not just about it being cheaper, it’s about us being okay with that being a core holding in expressing our US view. Where we are rich in alpha we will go for it more aggressively; where alpha is less achievable, we’ll move towards passive.” While the US has been a notoriously difficult market for active managers to perform in, Brewin Dolphin does not only use passives for exposure here. Some 6.5 per cent of the balanced portfolio, for example, is in Clare Hart and Jonathan Simon’s £3.9bn JPM US Equity Income fund. “We’re very happy to have a large passive exposure in the US but in some mandates it’s useful to have an income-focused fund for the US,” Hood says. “The US is not the biggest dividend-producing region as there are tax incentives for firms to do buybacks over dividends. But where we are looking to fulfill an income mandate we go for a more income-focused fund like JPM US Equity Income.”
Ben Gutteridge, head of fund research at Brewin Dolphin, and research analyst David Hood say this outperformance has been driven by a combination of asset allocation and fund selection. “Within asset allocation we have had a longstanding overweight to the US, which has been a powerful tailwind. We
“We are more constructive on emerging markets now. We’d been underweight for a very long time – throughout 2013, 2014 and 2015 – but in 2016 we narrowed that to neutral and then eventually moved to a modest overweight when it was validated. “At this juncture, we still dislike the emerging market index as it is dominated by stated-owned businesses – Chinese banks, Gazprom, Petrobras – and we don’t want our emerging market exposure to be dominated by those kind of companies.
FE Professional editor
Performance of sterling vs the US dollar over 2yrs
On this basis, the Brewin Dolphin team thinks UK equities – where it holds a longstanding neutral allocation of 35 per cent in the balanced portfolio – are “reasonably well placed”.
“We recognise the value trade that is going on at the moment, which means that the consumer plays used by the likes of Stewart Investors and Fidelity are underperforming on a relative basis but these are the longer-term positions that we want to take in emerging markets.” The Asian and emerging market equity funds being used in the portfolio include Newton Asian Income and Fidelity Emerging Markets, both of which have established strong reputations. Another area where the team has a sizeable allocation is to absolute return funds, which have a 9.7 per cent weighting in the balanced portfolio. “Absolute return is one of the hardest sectors when it comes to finding managers or teams that have the skills to deliver what we require: a low correlation to the other asset classes,” Hood says. “Finding funds in that space that do something different and complement each other nicely is quite a difficult task.” He highlights the Aviva Investors Multi Strategy Target Income fund as a core holding of the portfolio. The £2.4bn fund is seen as one of the closest rivals of the popular Standard Life Investments Global Absolute Return Strategies fund, following its launch in December 2014. Suggesting absolute return strategies that sit well alongside Aviva Investors Multi Strategy Target Income, Hood points out that the balanced portfolio also holds Old Mutual Global Equity Absolute Return and JPM Global Macro Opportunities while offerings such as Henderson UK Absolute Return are used in the team’s other portfolios This allocation to absolute return fits in with the generally cautious outlook being taken by the team behind the Brewin Dolphin Managed Portfolio Service, which is blended with a pragmatic view of the global economy’s health. “It’s probably healthy to be permanently anxious as clients would prefer us to be cautious. I’ve been at the company for around 13 years and I can never recall a time when everyone was saying ‘this is an easy period to be investing’,” Gutteridge says. “Nevertheless, there is a level of anxiety in the asset allocation committee that has made us retrench a little closer to benchmarks than where we were two years ago. We made a move away from equities and into absolute return products, trying to dampen volatility. “But clearly equities have been very strong and we’re still overweight them. We see the economy being in reasonable shape, global inflationary pressures being relatively muted and the US tightening monetary policy modestly – and that leaves equities in an okay position.”
Brewin Dolphin's balanced portfolio asset allocation
“The UK funds we use have a mid-cap leaning. we’re overweight the FTSE 250 and we also have UK smaller companies funds in there, so there is a degree of gearing into the UK economy,” Gutteridge says. “They have not been a good Brexit trade; certainly in the days following the referendum it was clear that the right thing would have been to have been out of them on 22 June. But as it was we were in them and the right thing to do then was not to sell them but to persist with that trade.” The most meaningful geographical allocation taken by Brewin Dolphin is its overweight to US equities. In the balanced portfolio, there is a 19.5 per cent weighting to the US – an overweight of around 2 percentage points – and it is largely this position that makes the portfolio overweight equities as an asset class.The balanced portfolio’s largest individual fund weighting is to the Vanguard US Equity Index, an index-tracking product. The team is happy taking exposure to the growth businesses that dominate the US index, rather than rotating into value. “If you think about the style rotation at the moment – value, energy, financials catching a bid and growth being left behind – then being in a US value fund means you’re betting against companies like Facebook, Amazon, Apple, Google and Microsoft. That’s something we’re less comfortable with and we arrived at the view that a tracker isn’t a bad investment proposition,” Gutteridge says.
Performance of Brewin Dolphin balanced portfolio vs index over 5yrs
Global asset allocators remain wary of sterling and the February edition of the Bank of America Merrill Lynch Global Fund Managers Survey showed that the pound was the most underweighted of the mainstream assets. Many expect the pound to fall further as Brexit negotiations start and Europe presents a strong front to the UK, but Gutteridge is more sanguine. “We think that risk is so well understood that, based on valuations and the UK economy doing okay, sterling is quite well supported and might do a bit better than most fear,” he says. “We don’t hang our hats on our currency calls and our process is about incremental moves, but we are leaning into the view that sterling could perform well from here.”
Balanced portfolio's top 10 holdings as 31 Dec 2017
Gutteridge points out that JPM US Equity Income is long sectors such as financials and energy, which are expected to benefit from new US president Donald Trump’s deregulation plans. However, he is keen to stress that the team is not looking to make “some big clever Trump trade”; for example, it is not making any large US infrastructure plays as it expects the market to be disappointed by the impact of a Trump presidency here. Brewin Dolphin is also running an overweight to emerging markets, which account for 2 per cent of the balanced portfolio. “Emerging markets are a small allocation to our benchmark, so our overweight may be scoffed at by everyday investors. We have a modest overweight to a very small allocation in the benchmark,” Gutteridge says.
Brewin Dolphin’s Managed Portfolio Service (MPS) comprises five portfolios – cautious, income, balanced, growth and global equity – and spans Distribution Technology’s risk profiles three through to seven. Launched in August 2008, all five of the portfolios have outperformed their respective benchmarks since inception. In the case of the firm’s balanced portfolio – which sits in the middle of the range with a risk profile of five – the total return has been 64.21 per cent over the past five years compared with a 61.49 per cent gain in the FTSE WMA Stock Market Balanced index.
By Gary Jackson,
“On a fund basis we have been rewarded, over the long term, by being overweight to medium-sized UK companies. Clearly this has been a headwind since the EU referendum, but running the position post the sharp sell-off is so far proving the right strategy.” When it comes to current positioning, Gutteridge notes that the team is less bearish on sterling than many other investors and is positioned accordingly. The pound is down by close to 20 per cent against the dollar over two years, with sharp falls being seen after the UK voted to leave the EU – but it had been declining prior to this.
High-quality global leading businesses that can grow profits in a low inflation, low growth climate have been the darlings of the stock market over the past few years. However, with optimism over higher economic growth and a return of inflation there are signs that undervalued cyclical stocks could be returning to favour. This change in style bias emerged last year and if it continues then some of the top performing active funds of recent years may struggle. We have been adding ‘value’ funds to diversify our exposure across global stock markets.
The AFI Soapbox
In an environment where we expect market volatility to be driven by short-term political news-flow (Brexit negotiations, Trump and several European elections), having no strong view is probably the right view for 2017! Rather than trying to make big calls on unpredictable factors, our focus is to take a barbell approach and diversify risks across portfolios, assessing which assets are priced to offer the best risk-adjusted returns on a longer-term view.
Employing a barbell approach
Government bonds have been a great place to be invested over most time periods. But inflation is the enemy of the bond market and signs of inflation ticking up have seen investors predicting the end of the 30-year bull market for fixed interest. This seems somewhat premature and the end has been called before, but there is no doubt that the risks to low yielding government bonds look high in return for little reward. Managing the bond conundrum will be key this year, with special attention being paid to inflation protection and minimising interest rate risk.
The end of the bull market for bonds?
The weakening pound has been a significant factor for driving investment returns, particularly for UK investors in overseas markets. Exporters have been the big winners in the UK stock market as sterling has plummeted against dollar and the euro. It is a thankless task predicting currencies but it is important to manage the risks. Sterling could remain under pressure, but if the UK economy remains resilient then the pound could strengthen from here. As a result, we will aim to hedge currency in some of our overseas equity exposure to manage risk.
We do not see an economic climate strong enough to support interest rate rises across the globe, with the US perhaps the only major economy able to support a modest increase. With inflation eroding miserly returns from saving accounts and bond markets exposed to inflationary risk we maintain our favour for dividend producing shares at home and overseas. But companies who can grow dividends faster than inflation will be favoured over higher yielding bond proxies.
2016 was certainly the year of the Black Swan event – an event that comes as a surprise, has a major effect and is often inappropriately rationalised afterwards with the benefit of hindsight. The first major shock of last year was Leicester City winning the Premier League. Of course, this had little relevance for investors but Britain voting to leave the European Union and the election of Donald Trump as US president proved to be game-changing events for how we are positioning ourselves throughout 2017.
With regulators castigating active managers and many indices hitting new highs, 2016 was an exceptional year for passive investors. However, the tailwinds that have driven UK markets such as weak sterling and a recovery in oil and commodity prices may not produce the same impetus in 2017. With US-exporting blue-chip companies potentially facing headwinds from Trump’s trade agenda compared to smaller US domestically focused companies and a potential for recovery in economically responsive stocks, we believe good stock-pickers looking for contrarian special situations have good opportunities to outperform as we move through 2017.
Performance of gilts vs UK equities since 1 Jan 2000
Ben Willis is head of research at Whitechurch Financial Consultants and a member of the FE Adviser Fund Index panel.
Managing currency risk
The thirst for income
A return to stock-picking
On an aside, if you had speculatively put a £100 accumulator on the right outcome for all three events, you would have bagged £300m… Even though the vote for Brexit and Trump’s election win occurred last year, both are still dominating the headlines in 2017. Against a backdrop of Brexit and ‘Trumponomics’ we believe that we are in a ‘VILE’ investment climate. This is not as alarming as it sounds, but is an acronym for a year where we expect ‘Volatile Inflation and Low Expansion’. Inflation is typically an indicator of economic conditions and Donald Trump’s pro-growth policies and potential infrastructure spend have currently created a reflationary backdrop for the global economy. In addition, oil and commodity price reflation is beginning to hit headline inflation numbers across the globe, whilst the weak pound has had an impact on inflation at home. At the same time as the return of inflation, we expect economic growth both at home and globally to remain at historically low levels. The good news is that economies are still growing although economic growth in the developed economies has been at low levels for a longer period than most people alive today can remember. Economies will remain heavily reliant on policies from central banks and governments to support growth. Even though there has been plenty of focus on ‘pro-growth’ policies recently we do not see a significant short-term increase in global growth this year. However, we do believe that fundamental changes in the political backdrop have started to alter the economic backdrop and our outlook. In fact, we believe that this year can provide many opportunities for investors who are prepared to ignore short-term noise and focus on valuations and take a longer-term perspective. Taking this into account, we have identified several themes that we consider important in following a successful investment strategy in the coming year.
Head of research at Whitechurch Financial Consultants
Re-emergence of value investing
The FCA is. Simply read the FCA Market Study interim report. We simply lack enough supporting evidence for active managers. The challenge for broad statistical studies is that about 80-90 per cent of all new fund assets are invested in only about 1,000 funds, globally. That means the industry is trying to make near-term decisions based on legacy funds that are ostensibly not traded. If held for more than 10 years, such funds may have delivered strong returns. What we should be focusing on is the quality of funds being actively bought today.
A New Fund Order
The inescapable factoids include:
The day itself contained lots of numbers. Lots. All manner of mathematical and statistical proofs to demonstrate skill cannot be identified without 600 years of data, through to eye-opening forensic cost interrogations including slippage costs and brokerage fees that sit outside of the quoted ongoing charge. Some of the passive total cost outcomes were surprising. However, few PFIs buy funds on numbers alone. Numbers can ask questions but rarely provide meaningful answers. I tell this to new fund analysts straight out of CFA. To this extent the purity of numbers is puerile. To open, I noted the reliance on using broad samples of numbers and to remind ourselves that, even if ignoring the endless combinations of unique holdings, human decisions and factors within each fund, there are now about 100,000 funds listed globally. If we say on average each fund has 10 share classes then that is 1 million different customer outcomes assuming everyone bought and sold at exactly the same time, with the same amount, in the same currency, same dealer, same cost and with same investor aims. That said, I cannot (nor should you) ignore that the empirical trust of active versus passive investing has broken down. With it the very credibility of fund selection hangs. Not convinced?
Jonathan 'JB' Beckett is author of New Fund Order: A Digital Death for Fund Selection?, which examines the digital challenges facing the fund selection industry.
As Trump looks set to unwind a decade of fiduciary and capital regulation in the US, the factions within Washington's Elephants and Donkeys are becoming more apparent. Trump himself moves like a proverbial elephantine-proportioned ass in a China shop. Bye bye TPP, hello trade war. In his wake, partisan pro-Trump propagandists engage anti-Trump media vaulting the concept of 'fake news' into the public fore. Both sides are to blame.
Performance of average IA North America fund vs S&P 500 over 20yrs
Persistency-based research confuses us by looking for continuous outperformance. No-one can beat the market every year. Very roughly an active manager should only need to outperform the market one in every three years, and mitigate losses, to outperform over 5-10 years after fees. It is easy to confuse commoditisation of markets with efficiency. A commodity is driven by supply and demand, efficiency by information. Growing inflows into passives stretch price to earnings multiples. Where multiple expansion becomes stretched and priced beyond the normal arbitrage valuation between one asset and another, this is what we can define as a Minsky Moment – aka a bubble. In 2016 we saw how order-driven passive/ETF herding drove momentum into the largest indices. The momentum is compounded by the free-float mechanism. That herding can become both short-termist and volatile. This is the great challenge facing long-term passive investing, it diverges from the long-term Bogle teachings and from size effects.
Active management has been over-sold for 20 years by big firms, based on slick marketing, sporting events, hospitality, 3-5 year returns and a legacy commission-led adviser model. A legacy of 100,000 funds play easily into the hands of broad aggregate studies like Standard & Poor's 'SPIVA'. This also obfuscates the good active funds. There are far too many legacy active managers out there that are (at best) average and charge too much. Most active funds are structured to be inefficient operationally and expensive to trade. The underperformance of the 'median' panders to the academic teachings of Markowitz and Sharpe. Value style investing collapsed for nearly five years, a period historically unusual for equities. This discredited the concept of business cycle rotation, which together with falling trust and activism around cost, encouraged inflows into and the outperformance of passive funds.
Author of New Fund Order: A Digital Death for Fund Selection?
Like US politics, the UK asset management industry is undergoing a similarly politicised faction-driven debate. Like the demise of European centre politics, the seismic implications of the raft of FCA thematic reviews of the asset management industry are rapidly being felt. 'Fiduciary' has quickly become a taboo word; bi-partisan centrists rapidly disenfranchised. Rewind. Professional fund investors (PFIs) believe all funds should be bought not sold. I have underwritten (assessed) fund managers for about 17 years, interviewing over 2,000 of them in the process. I have actively selected dozens (rather than hundreds) in that time for both retail and institutional clients. I like to think I have added value, if through nothing else, by negotiating costs and completing due diligence on behalf of the customer. In my role as UK lead for the Association of Professional Fund Investors (APFI) and proud ambassador for the Transparency Task Force, I took my seat at the 'Massive Active Passive' debate on 8 February, alongside the likes of Daniel Godfrey and David Pitt-Watson. A 10-strong panel representing both sides with the random smuck like me stuck on the bi-partisan thorny fence. The token fund buyer. The political implications of this debate cannot be understated, the very survival of active funds and ergo fund research hangs in the balance. Herewith my arguments and my observations from other presentations are presented. Be in no doubt that the future of fund selection is being debated and will be decided by those who have spent little time selecting or conducting due diligence of active funds. It is being decided based on numbers: mathematics, simple performance over benchmark and cost (both seen and unseen).
The restoration of beta investing should itself be good for markets (in terms of liquidity). Meanwhile we need active investors to discover value, reward return of capital based on valuation and growth, and be good stewards. We ask a lot. Meanwhile fundamental indexers and smart-betavists appear both simultaneously attacked and enlisted by both active and passive camps. ETF innovation is needed and inevitable. Yet active management should actually work more than it does. It hasn't or it doesn't (or at least not frequently enough according to the numbers). The fact it clearly hasn't in the US tells us much more about the US market today (post 2011) than the active managers within it. However, managers have failed to address their own dysfunctions. These include the impact of supertanker size on performance or failure to pass on resulting economies of scale. Larger fund houses have put assets before outcomes leading to asset concentration and hurting free market competition. Regulation and risk management have driven active managers to increase their positions, set thresholds and limit sector deviation, which tends to reduce their calculation of activeness and therefore the potential ability to beat the market. Active managers have not addressed operational costs including staff and remuneration as it relates to the AMC, size and customer outcomes. Fake news? There is a great asymmetry in the narrative of how media and investors now comprehend failure. For active managers, style bias has been denigrated and a Damoclean sword hangs between trying to not lose money yet still trying to always beat a benchmark after fees. However, if the index loses that's okay because it's just the market: “Don't worry Mr Smith you are only paying 10 basis points and it's bound to recover.” Powerful propaganda to the people. By 2020, passive funds may well take over active funds by AUM in the US. Today, most empirical evidence is massively skewed in favour of passive investing and the US. Populism. Fund selectors have been too quiet. Cost needs to be addressed. Technology may be the answer. More empirical data is needed. The race is almost over. A New Fund Order beckons.
Investment trusts remain popular with the more sophisticated self-directed investor. The vehicles were dragged into the spotlight again, when investment management companies gated their open-ended property funds because they feared heavy redemptions following Brexit. The debacle didn’t hit Reits (real estate investment trusts) adversely and some advisers may still be regretting their decision to recommend open-ended property funds to their clients rather than the closed-ended structure of the Reits.
Miranda Seath is senior researcher at Platforum
Most advisers still avoid investment trusts, according to the gross sales data from adviser platforms. Some industry commentators predicted that investment trust sales would take off following the RDR. Until then, advisers were unlikely to receive any commission for recommending investment trusts, unless they sold clients F&C or Witan. So post-RDR and post-commission the question remains – why don’t more financial advisers recommend investment trusts to their clients?We have been investigating the distribution of investment trusts for our forthcoming report UK Fund Distribution: Investment Trusts. Part of our research has been to try to answer this question about advisers’ reluctance to use closed-ended investment structures. One answer to the question is advisers’ views about the complexity of the product compared with the much more straightforward open-ended mutual fund structure. Researching investment trusts is a good deal more involved. Discounts or premiums can make individual investment trusts more or less attractive at different times, while gearing (leverage if you prefer) is perceived as introducing an element of extra risk. And where there is complexity – especially where it involves potentially higher risks –there is a need for further explanations to clients. Some advisers would argue that investment trusts are probably mostly suitable for more knowledgeable and sophisticated clients. There are also structural issues to buying and selling investment trusts with which open-ended funds don’t have to contend. Lack of liquidity is advisers’ most common reservation about investment trusts. This feeds into the perception that they cannot be held in model portfolios because of the ensuing difficulties in rebalancing. The availability of investment trusts on some of the largest adviser platforms is another common obstacle. But advisers using FundsNetwork now have access to investment trusts and Cofunds and Old Mutual Wealth will be following. One investment trust enthusiast is dismissive of the notion that this is a real problem. In his view, advisers who are serious about using investment trusts will choose platforms that adequately cater for them. The thorny issue of holding investment trusts in model portfolios became a familiar refrain when we spoke to advisers for this research. Certainly, there are difficulties to overcome. One DFM made the point to us that they are perfectly happy to hold investment trusts in bespoke portfolios. But where advisers are outsourcing to their model portfolio service, they mostly won’t include investment trusts. The risk of poor liquidity when rebalancing a model portfolio might hold things up. Importantly, where DFMs are committed to rebalancing on set dates they have little control over whether they would be trading any investment trusts at a premium or a discount. But financial advisers who are significant users of investment trusts regard perceived lack of liquidity as a rather lame excuse. When one such investment trust enthusiast kindly gave me a lift to the station following an adviser roadshow, he was happy to share his scepticism about the lack of liquidity issue. He believes that – as with ETFs – some investment trusts are illiquid. However, many investment trusts are perfectly easy to trade: it is all a matter of doing the right due diligence. And the investment trust market among advisers does seem to be showing some signs of green shoots. The dividend yield on some investment trusts – especially those standing at a discount – can make them attractive income yielding vehicles, especially for clients in decumulation. We are surprised that so few advisers are exploiting the advantages of the investment trust structure for income-hungry clients. And when talking recently to the head of dealing at one platform, we hear that investment trust volumes have been slightly higher than ETFs in recent months. His view is that advisers want to include some actively managed funds in the client’s portfolio (although perhaps not in model portfolios). The sticky issue of liquidity at the re-balance might be improved by fractional trading of shares. We are seeing some movement on fractional trading, spearheaded by Winterflood, although it is said to be more complicated operationally to trade investment trusts fractionally than it is to trade ETFs. If more platforms follow 7IM and Ascentric and stop charging advisers for trading securities, this might remove another barrier to advisers recommending investment trusts. We are seeing evidence that more research agencies are offering robust research on investment trusts. We have also heard that investment trusts are now starting to be included on fund panels at major adviser networks, although clearly there is still some way to go here. Direct investors have long been fans of investment trusts and some investment trust providers regard them as a more valuable market than the clients of financial advisers. Whilst we don’t expect investment trust sales through financial advisers to rival Oeics any time soon, we would urge advisers not to write off investment trusts because of the structural obstacles to holding them. The perception that investment trusts can’t be held in model portfolios may be the most vertiginous hurdle to clear. But our research suggests that there are ways to overcome this difficulty – not least by adopting an old fashioned buy and hold approach. Advisers may rate investment trusts and recommend them based on sound due diligence or they may not: we are agnostic on this point. But platforms, market makers, research agencies and the investment trust providers themselves could do more to smooth the path for advisers to recommend investment trusts. It really might be a case of: ‘If you build it, they will come.’
Senior researcher at Platforum