Abbey shakes fourth-quartile habit

At a dinner of personal finance editors a couple of weeks ago hosted by outgoing chief executive Luqman Arnold to introduce us to Abbey’s new Spanish masters, the topic of Abbey National UK Growth was cautiously raised.

The caution was wise. A year ago, Abbey National UK Growth was probably the most despised fund in Britain. Variously described as a “dog fund”, a “sinking supertanker” and “even worse than an endowment policy”, it languished at rock-bottom in the performance tables.

Abbey wants to call a halt to these stories. Yes, the criticisms were probably deserved, it says. But today the fund is very different, and the rescue operation performed on the fund a year ago has been a success.

While the figures are encouraging, for a big fund (it still has £1.25bn under management) we are still talking about a
performance that puts it more on a par with Leeds United than anything in the Premiership. The fund was launched in 1995, in the days when the first nervousness about endowments was beginning to show. The idea was to package a steady, low-risk unit trust into an Isa or Pep, then sell it as an alternative to endowments for the lender’s millions of mortgage customers.

At first, the fund wasn’t too bad – in the first four years it managed average performance, and at one point grew to £2bn in size. In a sense, it was doing precisely what Abbey wanted: plodding but safe, investing in the big names that its customers would know – the Glaxos and Vodafones – and perfect for drip-feeding in regular monthly amounts.

But at the end of the 1990s its small army of unitholders weren’t drip-feeding in their money; they were about to flush it away. In 1999 the fund began a catastrophic decline, and by October last year it was ranked 331st out of 332 funds in the UK equity sector over one year. A slavish adherence to growth stocks such as technology and media was largely to blame for the slump. Abbey clung on when others bailed out after the end of the dotcom boom, and a switch into more defensive stocks came too late.

Tinkering at the margins failed to halt the fund’s decline. Last October Abbey finally lost patience with the fund manager running the trust. Just weeks after its corporate makeover (millions spent on dropping the word “National”), it declared that it was going down the multi-manager route. It parcelled the £1.2bn that was left into three portions, giving State Street Global Advisors 50%, JP Morgan Fleming 25% and Barclays Global Investors 25%.

So how have they got on? Over the year the fund is up 12.5%, a shade below the average for UK growth funds of 13%. But over six months it is up 3.5% compared with an average of 2.8%, and over three months it is ahead 2.6% compared with the sector’s 1.5%. That means it has progressively moved from third to second to first quartile. First quartile and Abbey National UK Growth are not words that have been seen together in the same sentence before, so the new managers must be doing something right.

Abbey’s John Kelly, who has masterminded the group’s switch to multi-manager, says: “It’s not one big event; rather a number of factors. The three managers all have very consistent approaches to the market – they focus on what they know best. The combination has worked well, and when one has slowed, the other has come through.”

Amusingly, the biggest positive bet in the fund is now HBOS – parent group to Abbey’s arch-rival Halifax. And what have the combination of brains at State Street, JPMF and Barclays decided is one of the fund’s biggest negative bets? Erm, Abbey National. Other major positive bets include SABMiller, William Hill, Next and Yell. The largest negative bets are RBS, Lloyds TSB, Abbey National, Anglo American, Rio Tinto and Prudential.

But the fund’s persistent big-cap bias shows up in the list of top 10 overall holdings. These are, in order, BP, HSBC, Vodafone, Glaxo, HBOS, RBS, Shell and Barclays. BP and Vodafone are, in fact, negative bets – the holding is about 1% below their weighting in the FTSE All-Share. But clearly anybody buying Abbey National UK Growth cannot be hoping for much more than a market-plus-1% gain.

Intermediaries are unimpressed. Towry Law investment director Phil Clements says: “This is classic marketing department stuff. The recent rebound in the market has been concentrated in a few shares at the top end of the index, where the Abbey National fund has always been focused.

“It has always held a lot of BP, which has done well because of the rise in oil prices. It would have been extraordinary if this fund hadn’t done well in the past few months.”

He says that since the All-Share came off its lows in March 2003, the Abbey fund is up only 29.5% compared with 40% for the market as a whole and 70% for Invesco Perpetual’s UK Growth fund.

It is highly unlikely that fund strategists ever advised their clients to buy Abbey National UK Growth, but they will occasionally see it in the portfolios of new clients. A year ago would have been an easy decision to tell investors to switch. Today it is a more difficult proposition. It can be argued that the multi-manager approach at Abbey is beginning to produce good results. The new funds it launched last October have done rather well: the Multi Manager Cautious fund and the Multi Manager Equity fund have both moved into the top 25% of funds in their sectors over the one-year period.

Abbey’s Kelly says: “Above-average performance for the whole family of funds is a great boost following a challenging year for markets overall. We believe we are now well placed to continue to deliver consistent performance.”

But for someone who is using the Abbey fund in the hope of repaying their interest-only mortgage in 10 or 15 years’ time, Clements thinks it is still worth switching. He remains a firm believer in the equity income story, suggesting that long-term Abbey investors might want to switch to Neil Woodford at Invesco Perpetual or George Luckraft at Framlington. And if you really are interested in growth, he argues, why would you want Abbey National UK Growth when you can have Ed Burke’s fund at Invesco Perpetual or Tony Willis’s at HSBC?

PATRICK COLLINSON
The Guardian Personal Finance Editor