Aggressive hit hardest by market falls

When markets around the world plummeted, the Aggressive AFI suffered. Over the long term however, the index comfortably outperforms the FTSE All-Share and MSCI World ex UK indices.

Since the rebalancing of the Adviser Fund Indices on May 1, the performance of the Aggressive AFI has taken a battering. The value of the index fell by 9.9% from May 10 to May 23, according to Financial Express.

With more than 90% of the Aggressive AFI invested in equities, it is not surprising that performance was affected by the recent equity market downturn. But while most global stockmarkets saw marked losses, the relative performance of the Aggressive index was poor compared with several benchmarks.

The FTSE All-Share index fell 6.9% and the MSCI World ex UK index was down 6.2% from May 10 to May 23. The Association of Private Client Investment Managers and Stockbrokers Growth index (down 6%) and Investment Management Association Active Managed sector average (down 7.1%) also outperformed the riskiest AFI.

The generally higher level of volatility of the Aggressive index compared with the above benchmarks has contributed to recent relative underperformance (see article).

But despite recent setbacks, longer-term returns produced by the Aggressive AFI are still comfortably superior to those of the Apcims Growth index, IMA Active Managed sector average and FTSE All-Share index. The Aggressive index returned 35% from November 1, 2004, to May 23, 2006.

The best-performing constituent funds over the first three AFI seasons (from November 1, 2004, to April 30, 2006) have not reacted well to the reversal in fortune of global stockmarkets. Over the 18-month period prior to the rebalancing, Threadneedle Latin America (up 121.3%), JPMorgan Natural Resources (106.2%) and Jupiter Emerging European Opportunities (102.1%) all saw stellar returns. But from May 10 to May 23, 2006, the three Aggressive AFI constituents were down 21.3%, 19.2% and 21.7% respectively.

The AFI panellists made significant changes to their portfolio recommendations for the Aggressive index at the May 1 rebalancing. A total of 22 new funds were introduced to the Aggressive AFI, with around 20% of previous constituents dropped. The 220m ResolutionAsset Argonaut European Alpha fund, managed by Barry Norris, has entered the Aggressive AFI for the first time.

“We look for undervalued stocks where we think a company’s intrinsic value is higher than that reflected in the share price,” Norris says. “We are bottom-up stockpickers, with a focus on valuation.”

The portfolio held 46 stocks at May 23, with France and Italy the best-represented countries, making up 37% of the fund. Despite the downturn in share prices, Norris says, underlying dynamics driving markets are the same as they have been over the past 18-24 months.

“Business in Europe is booming,” he adds. “For the first time in years the economic environment is providing firms with a tailwind, not a headwind. Balance sheets are stronger than they have been for 20 years, and merger and acquisition activity should continue. Recent share price falls were a painful, but necessary, correction. There was a lot of euphoria in the markets and there has just been a bout of profit-taking.”

The search for alpha over the past three years has been dominated by “exotica” stocks, with managers looking further east and down the small-cap scale, Norris continues.

“The strategy had relative merit up to six months ago, but the valuations of many of these stocks are now higher than blue chips and investors are paying a premium to take on additional risk,” he says. “We have no exposure to Eastern Europe and very little in small caps. We have taken down the relative risk level of the portfolio over the past couple of months. There is now more in blue chips than there has ever been.”

Vinci, a French toll road and construction company, has performed well and is trading cheaply, Norris notes, while shares of Norwegian insurance company Storebrand have not performed as well as expected. The portfolio dropped 12% from May 10 to May 23, compared with a 10.6% fall in the average IMA Europe ex-UK fund.

Another fund joining the Aggressive index that uses a focused, bottom-up approach is F&C UK Opportunities, run by former DWS manager Phil Doel. Launched on December 30, 2005, the 87m fund holds 25 stocks, all with similar weightings. Every company held makes up between 3% and 5% of the total portfolio, and will be reweighted or sold should the total value of the holding fall outside this range.

“The fund is not representative of any index and is purely a best-ideas, stockpicking portfolio,” Doel says. “We hold a diversified spread of investments by size and region of firm. There are four broad investment categories: trading stocks, short-term investments, long-term investments and ‘backbone’ holdings. These categories generally carry similar weightings.”

Stocks are categorised based on anticipated holding periods. The duration for holding shares ranges from up to six months for trading stocks, to more than three years for backbone holdings, Doel says. UK Opportunities holds 14 FTSE 100 stocks, 10 mid-sized firms and one small cap. Recruitment firm SThree has performed well, while Doel has sold out of cruise operator Carnival after poor performance and a recent profits warning. F&C UK Opportunities fell 11% from May 10 to May 23.

The Adviser Fund Index Series – A Summary
The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see