In a world of plunging stockmarkets and unprecedented volatility even some big name fund managers found it tough last year. Investors looking at newspaper headlines or their portfolio balances could be forgiven for thinking that the bad news was universal. However, it wasn’t all doom and gloom - here we focus on the managers who got it right in 2008.
Relative Heroes
A number of equity funds were able to achieve good relative returns during the year, principally by taking a defensive stance. Cazenove’s Chris Rice is a rare manager who combined astute macroeconomic calls with strong stockpicking. During 2008 he took overweight positions in defensive sectors such as food, beverages and utilities and was underweight banks and commodities, enabling his Cazenove European fund to outperform the FTSE Europe ex UK benchmark by 15%. Meanwhile the Asian and emerging market funds of First State and Aberdeen outperformed strongly due to their focus on quality businesses at attractive valuations as market movements sorted out the wheat from the chaff.
Invesco Perpetual’s Neil Woodford made his name by eschewing technology stocks during the tech boom of the late 1990s, a position that was vindicated when they subsequently collapsed. Since then he has made a habit of calling market movements correctly and when we spoke to him in 2007 he was already predicting recession. He went into 2008 with a zero weighting to banks and, though his High Income fund dropped almost 20% on the year, this was 15% better than the FTSE All Share index. Elsewhere in a tough year for global funds, Mellon’s James Harries was able to boost returns on Newton Global Higher Income by hedging out his sterling exposure as the currency plummeted.
Absolute Heroes
Well though those funds performed, they still lost investors money due to their focus on relative returns. In the world of absolute return funds the headlines were made by hedge fund closures and even fraud, but some funds have still performed creditably. BlackRock UK Absolute Alpha hasn’t maintained the heights of recent years but still rose by 1.53% over the twelve months, whilst Cazenove’s UK Absolute Target fund is already up 5.06% since its launch in July, far in excess of traditional UK equity funds. However, overall the IMA Absolute Return sector fell by 0.56% during the year, showing investors still need to choose the right funds.
The Japan sector also dropped slightly, falling 2.6% over the 12 months, but the Topix benchmark was up 1.32% and a number of funds made money during the year. Best of the lot was Neptune’s Japan fund which rose 84.26% – manager Chris Taylor protected the fund against market falls by selling a Topix index future, as well as maintaining a high cash weighting. Of Bestinvest’s recommendations JO Hambro Japan rose by 10.28% and Morant Wright Japan was up 22.64% – Japan was a rare market where small and mid cap stocks outperformed large cap last year, and both funds benefitted from a mid cap bias. Our three star rated Schroder Tokyo and SG Japan Core Alpha also gained in value.
Just three IMA sectors made money during 2008. The UK Index Linked Gilts sector, including the Bestinvest rated Royal London Index Linked fund, was up 2.98% and the UK Gilts sector was up 11.63% as investors took shelter in government backed assets. However, the top performing sector was Global Bonds which rose 16.36% in the year. Most funds in this sector invest primarily in overseas government bonds and so benefitted not only from the flight to safe assets but also from the appreciation of overseas currencies against sterling. Some funds did better still; amongst Bestinvest’s recommendations Baring Global Bond was up 31.13% on the year, Invesco Perpetual Global Bond was up 22.67% and Thames River Global Bond rose by 35.81%. As always investors should be wary of taking past performance at face value - government bonds are now trading at historically high valuations, suggesting this performance is unlikely to be repeated going forward.
Whilst the Global Bond fund managers were arguably just in the right place at the right time, one manager managed to add value whilst investing in one of the worst performing sectors. Philip Gibbs’ Jupiter Financial Opportunities fund rose 7.32% despite the disasters that befell the banks which make up much of its investment universe – the FTSE World Financials index by comparison dropped 35.32%. When we saw Gibbs early last year he was already predicting hedge fund closures and banking collapses and positioned the fund accordingly, using cash, fixed interest and index shorts to protect investors.
2008 has shown the benefits of a macro view but also the dangers – managers who bet on the long term prospects for emerging markets and commodities may ultimately be correct but they came unstuck last year. It was a year when many stockpicking managers also suffered – it was no use being in the right stocks when you were in the wrong sector, or country, or currency. In the long run we expect a return to a stockpicking environment as markets settle down, but for the moment we remain cautious.