Sent flying

Global markets nosedived and investors sought sanctuary in absolute returns - some of which failed to fulfil the role of capital protection as fresh regulatory constraints were introduced. Adam Lewis looks back at a tumultuous year.

Global markets nosedived and investors sought sanctuary in absolute returns – some of which failed to fulfil the role of capital protection as fresh regulatory constraints were introduced. Adam Lewis looks back at a tumultuous year.

After a fairly innovative 2007, 2008 was billed as the year of the “boring funds”. However as asset classes and sectors fell in the wake of the continuing credit crunch, in terms of product development, the past 12 months proved anything but boring.

As oil prices soared to new highs at the start of the year, the main themes in product development centred on commodities and the oil-rich countries that were benefiting from it. Some groups moved into the Middle East and North Africa (Mena) while New Frontier funds (smaller emerging markets) also proved popular. HSBC launched two such funds during the course of the year, while groups moving into Mena included Franklin Templeton, Investec, Schroders, Societe Generale and Pictet.

Groups also continued to expand their product ranges into commodities, with soft commodities proving popular. The start of the year saw some groups launch funds investing in agriculture, with the diversification argument coming into play.

However, as the year progressed, and asset prices started to fall dramatically, one main theme emerged: absolute return funds.

The success story of the year was the BlackRock UK Absolute Alpha fund, managed by Mark Lyttleton. Over the course of the year assets in the fund grew from about GBP 100m to GBP 1.3 billion, with it consistently being a top seller across the fund supermarket platforms.

As groups gained confidence with the extended investment powers granted by Ucits III, and to piggy-back off the BlackRock success, several groups announced plans to launch similar funds throughout the year.

If was not tagged absolute return, it was multi-asset or target return, but the main point of the portfolios remained the same, not to lose investor’s money.

The problem says Toby Hogbin, head of product development at Martin Currie, is that many so-called absolute return funds have not delivered on this aim. Several funds have posted negative returns over the year, and in May this year Credit Suisse, Hogbin’s previous employer closed its Target Return fund because it said its small size (GBP 8m) made it uneconomic to run.

However over its life the Credit Suisse failed to outperform cash,with its value down about 15% over the past two years before closure.

“We are in market conditions where the absolute return solution is very right for investors,” says Hogbin. “However it has become extremely difficult to deliver such a return in current market conditions.

“In the past protection was achieved in absolute funds by shorting or by using a counterparty bank. However, there is now a potentially regulatory impact on a manager’s ability to short and the bank managers use as counterparty are themselves a source of risk not just protection.”

According to figures from Financial Express, the IMA Absolute Return sector – which was only created in April – the average fund in the sector fell 3.55% over 12 months to December 9. While such funds failed to provide positive returns they enjoyed the fourth best return of all IMA Sectors; only beaten by Global Bonds (11.93%), UK Gilts (8.8%) and Money Markets (2.62%).

In the face of this added risk and a result of reduced inflows from investors, several of the proposed fund absolute return launches throughout the year, have been “put on ice”. Cazenove and Gartmore have both shelved plans for European absolute return funds, while groups that went ahead with launches saw limited inflows.

Indeed, Ben Yearsley, senior investment manager at Hargreaves Lansdown describes 2008 in general as “the year of almost but not quite” for fund launches. He says: “Lots of funds were planned but many had to be pulled because of the market conditions.”

At the start of 2008 it was Robin Stoakley, the managing director of Schroders’ UK retail business, who predicted the year would see more funds launched for bear market conditions, that is the “boring funds”. Nearly 12 months on while the year may not have been boring in terms of markets, he says “on the funds side the year was not loaded with innovation”.

Schroders’ two main fund launches of the year were its Diversified Target Return fund in April and UK Income Defensive fund in February. To date the two funds have accumulated just £20m, but Stoakley remains upbeat about their long-term prospects.

“Both are performing as we hoped and have done well in the institutional market,” he says. “We have also seen a lot of interest in them from insurance companies. However in general 2008 wrong-footed the entire funds industry and we don’t expect a raft of products in 2009. Next year fund managers will have to manage their resources as efficiently as possible, it will be about going back to basics.”

The problem with the absolute return concept, according to Stoakley, is that he says the industry have not decided what they really are.

“A very knowledgeable manager once told me that cash is the only absolute return product,” says Stoakley. “As such while we never rule anything out we have no plans to launch an absolute return product. It needs to be more properly defined, for example are they meant to beat cash or inflation?”

Darius McDermott, the managing director of Chelsea Financial Services, says before the violent market falls in September and October, investors sought cash-plus funds as a way of replacing old With Profits funds. In this battleground, he says BlackRock were winning the battle with its UK Absolute Alpha fund, but this all changed after the market falls towards the end of the year. “The market falls in September and October, were a defining time,” says McDermott “I have worked in the industry for over 13 years and September and October were the most dramatic equity markets I have seen. Everything went out of the window and all asset classes fell violently.”

Interestingly, things may have come full circle and the equity funds that investors were ignoring at the start of the year, may be coming back in fashion. According to a poll by JP Morgan, America is the preferred equity market for most IFAs. Research conducted among more than 150 IFAs showed over half (51%) favoured America, compared with emerging markets (25%), Japan (18%) and Europe (6%). At the same time last year it says just 10% of IFAs favoured America.

“I can’t remember the last time US equities were the best-selling asset class, but this could well be the case in 2009,” adds Hogbin.

Stoakley says while structured products may not be dead “right now they are on life support”. This is because he says it is more difficult to offer guarantees as they are being scruntised.

Structured products were attacked by the IMA in September after the association stated that the disclosure practices for the performance of such products made them risky. A press release from the IMA compared the performance of National Savings & Investment guaranteed equity bond (GEB) issues with the performance of the FTSE 100 Index, finding that on average GEBs underperformed the index by 4.5% annually. This provoked an angry reaction among structured product providers, who said the analysis was simplistic and unhelpful as GEBs do not represent the whole of the structured products universe.

In this environment, both Stoakley and Yearsley predict a resurgence in popularity for equity income funds, as people seek to buy more quality assets. According to both the IMA and Fidelity FundsNetwork, for September – amid all the market falls – the UK Equity Income sector was the most popular peer group. While this did not mark a month-on-month change for FundsNetwork, it is necessary to go back to 2005 for the last time UK Equity Income topped the net sales rankings.



Sector changes

The Investment Management Association’s (IMA) Performance Category Review Committee (PCRC) were busy in 2008 redefining and creating peer groups. At the end of April after much canvassing from the industry, the IMA finally launched an absolute return sector. The peer group was the IMA’s first new category since the launch of UK Zeros in 2004 and had been planned for four years.

However, the sector remains controversial because many groups and industry commentators still dispute what the definition of “absolute return” should be and it is impossible to properly compare the performance of funds in the sector.

Despite this uncertainty the sector was the best-selling net retail peer group in June, July and August, according to IMA statistics.

In July the IMA announced it was to split the UK Corporate Bond and UK Other Bond sectors into three more focused peer groups; Sterling Corporate Bond, Sterling Strategic Bond and Sterling High Yield.

The change took effect on September 1. The Sterling Strategic Bond sector covers funds that invest across the British credit risk spectrum, including convertible and preference shares. The changes were designed to allow better sector comparisons and bring the definition of funds more closely to the ABI’s fixed income sectors.

The most recent change to the IMA’s list of sectors occurred in November, after the association announced that from January 1, 2009, funds that invest in commercial property will be given their own peer group.

At present commercial property funds form part of the Specialist sector, but from next year the IMA will flag certain fund types in sub-groups of funds; property fund of funds, direct property funds, property security funds and hybrid property funds.



Investment Trusts

Charles Cade, the head of research at Numis, summarises 2008 as a year of “dire performance, ballooning discounts and deteriorating trading liquidity”. He adds the new issue boom of 2005-2007 is over and a period of consolidation is being entered, which he says will see numerous funds disappear and many others forced to return capital.

The funds hit hardest by the year’s downturn were those invested in asset classes that benefited from the strongest growth in recent years. For example, Cade says the love affair with property ended in 2008, with the market capitalisation of the property fund sector falling from GBP 14.7 billion at the start of 2008 to just GBP 5.4 billion.

“Property funds were smashed in terms of asset values and discounts [to net asset value],” says Peter Walls, the manager of the Unicorn Mastertrust. Other areas to be hit were funds of hedge funds and venture capital private equity funds. He says investment trusts in these areas are trading at wide discounts because the availability of debt to leverage buy-outs is no longer there.

“All these negative influences have led the average investment trust discount to be at their highest for the whole year,” says Walls.

In this environment Walls adds 2008 was a scant year for new issues. However, while few new funds were launched, there were some big manager changes in the year, with certain boards awarding the management of their funds to new groups.

Following the departure of Roger Whiteoak from Axa Framlington in March, the board of the Throgmorton investment trust handed the investment mandate of the portfolio to BlackRock. The move brought to an end a 51-year link with Axa Framlington and its various predecessors.

After Whiteoak’s departure Throgmorton was initially approached by the Gartmore Growth Opportunities Trust about a possible merger, which prompted the board to consider all its options. After a beauty parade BlackRock was awarded the mandate.

Mike Prentis, manager of the BlackRock Smaller Companies trust, now runs Throgmorton’s assets using a long-only strategy.

However, alongside this Richard Plackett, head of BlackRock’s smaller companies team, runs an additional 30% of the trust’s value in a contracts for difference (CFD) portfolio which can take long and short positions.

Elsewhere in September the board of the GBP 875m Edinburgh Investment Trust awarded its investment mandate to Invesco Perpetual, where it is managed by Neil Woodford. Woodford replaced Fidelity, which had run the trust since 2002 using a multi-manager approach. In a recent Fund Strategy (November 24) it was reported that Woodford sold over half of the portfolio he inherited in the first week of running the fund.

One trust which grabbed many the headlines in 2008 was Eaglet. In December 2007 three shareholders – Knox D’Arcy, Laxey and QVT – gained control of the Eaglet board with the stated aim of restructuring the UK smaller companies trust. As part of this deal, in March Unicorn were replaced by Knox D’Arcy as the investment manager.

At the end of October, almost a year after the takeover, the board announced proposals for the fund, which included a change of investment policy, change of name and a tender offer for up to 49% of the trust’s shares.

However, following an extraordinary general meeting in late November the trust’s future was hanging in the balance after shareholders voted against several resolutions meaning none of the board’s proposals could be implemented. The board is working on new proposals now, which may include just winding up the fund.


Key dates

January: Highest close for the FTSE 100 in 2008 (January 3, 2008, 6479.4).

February: Northern Rock nationalised.

March: Bear Stearns collapses and is sold off to JP Morgan.

April: Consumer Price Index (CPI) hits 3%.

May: Reserve Bank of India raises cash reserve ratio to 8.25%.

June: G8 meeting takes place in Osaka, Japan.

July: Crude oil peaks at $147 a barrel.

August:Beijing Olympics begin.

September: American government seizes control of Fannie Mae and Freddie Mac. Lehman Brothers files for bankruptcy protection.

October: HBOS, Lloyds TSB and RBS receive GBP37 billion bail-out. Lowest close for the FTSE 100 in 2008 (October 27, 3852.9).

November: Barack Obama elected 44th president of America.

December: British interest rates cut to 2%.


A Year of Manager Changes

Job cuts across the asset management industry were a prevalent theme towards the end of the year as groups continued to feel the bite of the credit crunch. However 2008 was not unique in terms of other manager changes, with several high-profile managers coming and going throughout the year.

March saw the first big change when Roger Whiteoak, manager of the Axa Framlington UK Smaller Companies and Throgmorton investment trust, resigned from the group. Whiteoak has still not resurfaced in the industry, but his move did prompt the board of the Throgmorton trust to review its choices and the result was BlackRock being handed the investment mandate in June.

In April New Star announced it had taken on Charles Deptford and Trevor Green from Barings and RCM respectively, which proved to be the start of a busy few months for John Duffield’s company.

In June Green was handed management of the equity portion of the Managed Distribution fund, a role previously held by Toby Thompson. In August Deptford was handed control of Stephen Whittaker’s Equity Income fund, before Whittaker, joint chief investment officer, left the group in November. His departure followed a restructure of the group’s fund range, which saw Green take over the underperforming UK Growth fund and other funds merged as the group looked to cut costs.

In June Invesco Perpetual had to make several changes to its funds after Ed Burke retired. Burke, the lead manager of the UK Growth fund and the UK Aggressive fund, handed over management of the funds to Martin Walker and Stephen Anness respectively.

Gartmore was another group making the headlines after it reshuffled several of its desks in the middle of the year. Following a review of the multi-manager range, Bambos Hambi, head of multi-manager, left the group in May. He was replaced by Tony Lanning who joined Gartmore in November 2007 to replace the outgoing Marcus Brookes (pictured, below) to Cazenove. Soon after Hambi’s departure Tim Callaghan, manager of the European Growth and European Focus funds, also left Gartmore after an internal review. Stephen Jones, head of the European desk at Gartmore, took over both funds. Then as the year ended Gartmore was again in the news (Fund Strategy, December 8). This followed the announcement that Karl Bergqwist, the co-head of the group’s fixed income team, and Ashley Willing, the co-manager of the UK Focus fund, were both being made redundant as part of the group’s plans to cut its headcount to save costs.

This year will also be remembered for sadder reasons. In March, Nils Taube, founder of Nils Taube Investments (NTI), died. Taube’s career spanned more than 60 years. The most recent fund he ran was the SmithWilliamson Taube Global fund, launched in April 2007. It was the first offering from NTI, a boutique Taube established in January that year.

In July Sir John Templeton, the founder of Templeton Mutual Funds, died from pneumonia, aged 95. His death brought an end the story of a contrarian investor who was a pioneer in the American mutual fund industry. Templeton who was born in America but was a naturalised Briton, began his career in finance on Wall St in 1937. He co-founded the investment firm Templeton, Dobbrow and Vance in 1940, but it was not until 1954 that he started running mutual funds.

In October the investment trust industry said goodbye to Ian Rushbrook, managing director of the Personal Assets Trust (Pat). Rushbrook ran Pat for 18 years, over which time the trust’s assets grew from GBP 5.5m to £160m. He started his career at Ivory & Sime in 1967 and in 1975 he took over the management of the Atlantic Assets investment trust. Known for his risk averse approach to conserving investors’ capital, in July last year Rushbrook warned in an interview that the American financial sector had “created an apparently perpetual motion credit machine that could only end in disaster”. By November he had 100% of Pat into cash.