All three indices dipped in August when the storm struck but bobbed back – and the panellists barely wavered in their allocations – except for some modifications to bonds and property.The market was rocked by shifts and trends over the past year. Adviser Fund Index (AFI) panellists have seen strong inflows into property funds slow down, the official listing of UK real estate investment trusts (Reits), the emergence of 130/30 funds, the increased resilience of emerging markets, the rise in prominence of exchange traded funds (ETFs) and a flight to quality in the fixed income market. The one big event over the past year, however, is the credit crunch, which started to take hold in the summer and is still making an impact.
Sam Sibley, AFI panellist and portfolio manager at Beckett Financial Services, says she opted to ride out the volatility in markets after the credit crunch started. She adds that changes in outlook, within both property and equity income, have been significant: “It’s been a strange year. “It had a strong start. We saw the peak and then the credit crunch bite. We decided to ride out the storm. We weren’t coming in and out of the market.”
In May Sibley reduced her mid cap exposure in search of managers who are free to move up and down the capitalisation scale. “We like managers who are good stockpickers from across the market, like Richard [Buxton],” she says. “They tend to be moving up the cap scale to seek returns.” Sibley holds the £1.56 billion Schroder UK Alpha Plus, managed by Buxton, head of UK equity at Schroders, in the Aggressive AFI.
Sibley’s exposure to property also changed throughout the year. By early summer she had reduced her exposure and was switching from British property to overseas. Sibley used to hold the L&G UK Property fund in the Cautious and Balanced AFIs, but changed into the £438m New Star International Property fund in November’s rebalancing. She also added the New Star fund, which was launched in June, to the Aggressive AFI, “as a diversifier.”
“We were never overweight property,” says Sibley. “We were decreasing our exposure in the early part of the year. Now we are investing in the international property theme. We like the New Star fund because they have teams on the ground across the globe.”
“The New Star fund is predominantly bricks and mortar,” she adds. “We don’t have exposure to global Reits funds. Reits behave more like equities in the short term. I look at property as a diversifier. [Different countries] are at different cycles. We like the diversification of a global outlook.”
From launch in June to December 10, the New Star International Property fund ranks 20 out of 80 funds in the IMA Specialist sector, according to Morningstar. The fund returned 3.46% compared with an average return of minus 5.4%.
As well as looking overseas for property funds, Sibley is looking overseas for equity income. She says it is harder to get returns from UK Equity Income now.
She holds the £281m Newton Global Higher Income fund, managed by James Harries, in her AFI portfolio. In May Sibley held 5% in the fund, now she holds 13%.
Like Sibley, Brian Dennehy, managing director at Dennehy Weller, has reduced his property exposure and moved into overseas, rather than British, property funds. Now he invests in European, Asian and Global property funds, including New Star International Property and First State Asia Property funds.
As well as shifting his property exposure, Dennehy also moved into more flexible bond funds, switching into the Artemis Strategic Bond fund during the May rebalancing. “That was a key move for us,” says Dennehy. “A strategic bond fund can go where it wants to. That is important in this environment and the environment earlier this year.”
In terms of adapting to events earlier in the year, namely the credit squeeze, Dennehy says his portfolios did not need much changing after it happened. “We didn’t do much after the event,” he says. “We had already made switches into [overseas] property and into more strategic bonds. We could accelerate that trend now.”
Mick Gilligan, associate director of fund research at Killik, agrees the credit squeeze has been the “big event of the year”. He says that emerging markets have offered investors an escape. “Emerging markets have been seen as safe havens from what’s been going on in the credit market.”
In terms of fixed interest Gilligan says there has been an extreme flight to quality. “The place to be, since the end of July, has been long-dated bond funds,” he says. “The Invesco Corporate bond fund has been well positioned through all of this,” he adds. Like Sibley, Gilligan moved out of small and mid cap equities because of concerns over liquidity, in the second quarter of the year.
For all three panellists the credit squeeze was the main event of 2007. Dennehy points out that it is still significant going into 2008. “There is going to be a bit of a slowdown globally, but nothing too cataclysmic.”
For Dennehy there are already opportunities in the corporate bond sector. “They look good value at the moment,” he says, “but people are looking the other way.” Dennehy also expects opportunities in banking, with property and property securities following suit in 2008.