Every bull market sees the rise of a group of previously unknown funds that soar to the top of the performance charts, sucking in investors’ money in the process. However, many of these funds achieve their success through aggressive positioning rather than manager skill, and when market conditions sour their performance crashes to earth – witness the fate of funds with a technology bias when that boom ended in 2000. In the industry such funds are often referred to derisively as “Beta Bandits” after Beta, a statistical term describing the degree to which a fund follows its benchmark. A fund with a Beta of 1.3 is likely to perform 30% better than its benchmark in a rising market, but similarly underperform by 30% when the market falls. Here we look at some of the high flying funds of 2003-2007 that faltered in 2008.
One of the top performing global growth funds in recent years was Neptune Global Equity, managed by Neptune’s Robin Geffen. However, a large part of the fund’s success was down to its weighting in emerging markets - over 40% of its portfolio at times. When these markets came crashing down in 2008 the fund fell with them, and after five straight years of top decile performance the fund fell almost 40%, underperforming the MSCI World by 26%. This fund may well bounce back - Geffen has a strong track record and a good investment brain. However, we have concerns that he is spread too thin – Geffen also runs Neptune’s Income, China and Russia funds in addition to his responsibilities as the group’s managing director.
New Star Hidden Value was another top performer of the bull market, with manager Jamie Allsopp being featured in the “New Star’s new stars” advertising campaign that adorned billboards nationwide. However, the good times were short-lived - after top decile performance in 2004 and 2005 the fund slipped to the middle of its sector in 2006 and 2007 before dropping almost 55% in 2008, making it one of the worst performers in the UK All Companies sector. Most recently the fund was hurt by holdings in small, illiquid companies when large caps were the place to be. Fund groups are happy to sing about their funds when things are going well, but they also like to bury their mistakes: in November New Star announced that they were merging this fund into Tim Steer’s UK Alpha fund. More recently they announced that they were also closing Allsopp’s Heart of Africa fund. He is a young manager and will perhaps learn from his mistakes, but that will be of little comfort to investors in his funds.
Allianz RCM BRIC Stars was a fund that found its way into many ISA portfolios, summing up its investments in the high profile economies of Brazil, Russia, India and China into a handy acronym. Following its launch in February 2006 the fund soared relative to the MSCI Emerging Markets index in 2007, then fell even faster as its markets, particular Russia, plummeted last year. Given the range of emerging markets available we think it’s a mistake for a fund to limit itself to just the big four, especially as these were the markets that received most investor money and perhaps became more overvalued as a result.
2008 was a year when more defensively positioned funds were the place to be - they may have looked pedestrian during the boom years but they still made investors money, then when the going got tough they showed their worth. There is a place for aggressive funds as part of a balanced portfolio, provided investors are aware of what they’re buying and what the risks are - Artemis’ European Growth and Global Growth remain on our buylist despite a poor 2008. However, these funds are run on a process that dates back to the early 1990s and has suffered setbacks before and recovered. It’s hard to imagine at the moment, but it is likely there will be a time when the “Beta Bandits” make the headlines once more. Rest assured that we’ll be around to tell you how to avoid them.