In the first portfolio rebalancing of the year, several AFI panellists are increasing risk in their British equity portfolios on the back of strong performance over the past six months.This week sees the first Adviser Fund Index series rebalancing of 2006. The AFI panellists have the option to reassess their portfolio recommendations every six months, on May 1 and November 1, and many are making several adjustments. Having regard to the generally long-term investment horizons of the three AFIs, panellists can make as many changes to fund selections and weightings as they see fit. These rebalancing points give the 18 adviser groups the opportunity to appraise the suitability of their chosen funds and also consider the overall asset allocation and risk profile of their portfolio recommendations. Given the continued strong performance of most global equity markets in the past six months, several AFI panellists are adjusting the equity portion of their portfolio recommendations. Some have a bias towards making fund changes, whereas others have put more of an emphasis on altering asset allocations within the three portfolios. Tony Lanning, research and investment director at Origen, says: “The only changes we are making are to the Aggressive AFI portfolio by taking on more risk on the UK equity side. We are selling our core holdings in Cazenove UK Growth & Income and Artemis Income, and buying the more stock-specific Gartmore UK Focus and Framlington UK Select Opportunities funds.” The Cazenove and Artemis portfolios together represented about one-third of Origen’s previous Aggressive AFI portfolio recommendations, Lanning says. “We like the way that Nigel Thomas can move around between small, mid and large-caps within the Framlington portfolio,” he adds. “We now feel comfortable holding the more focused funds and using managers that are more comfortable in going anywhere within the UK equity universe.” Gartmore UK Focus (up 25.6%) and Framlington UK Select Opportunities (25.2%) outperformed Cazenove UK Growth & Income (21.2%) and Artemis Income (17.6%) over the six months to April 24, 2006, according to Financial Express. Lanning is also increasing exposure to Japanese equities in the Aggressive index by slightly reducing exposure to British shares. “We are selling out of Schroder Tokyo and buying into the more aggressive Legg Mason Japan Equity fund,” he says. “We consider the Schroder fund a more suitable bear market portfolio.” Philippa Gee, investments director at Torquil Clark, says: “Given the current levels of stockmarkets there was a need to re-evaluate some of our equity allocations. We are making allocations to multi-manager funds to form the bedrock of some of our AFI portfolio recommendations. This allows us to take more risk for the satellite holdings within the portfolios. In the Aggressive index we are switching to fund managers who are more individual in style and that look at stocks that would not usually fall under the radar screens of less-aggressive managers. We are increasing our exposure to smaller companies funds globally and the risk level within our UK holdings is being increased.” Exposure to Japanese special situations and smaller companies funds is also increasing in her Aggressive AFI recommendations, she adds. However, risk levels are being reduced for the Cautious index by adding a few more funds to spread the risk, says Gee. “There have been a lot of movements in the markets and it is time to draw breath,” she says. “It is possible that we might see a drop in the stockmarkets, maybe up to 10%, so we have to bullet-proof the Cautious portfolio.” While global asset allocation is changing slightly, Gee says, Torquil Clark’s AFI rebalancing changes are mostly confined to selection of the underlying funds within different asset classes and regions. By contrast, asset allocation, rather than fund selection, changes are more dominant in AFI panellist Bestinvest’s rebalancing recommendations. Marcel Porcheron, a research analyst at Bestinvest, says: “Broadly speaking, we have reduced exposure to emerging markets and Japan and added a bit to our UK equity weightings. We favour large-caps now more than we have done in the past and are leaning towards growth-style funds. We are still more positive on prospects for equities over bonds, although bonds are starting to look a bit more attractive.” Exposure to Europe (overweight) and America (underweight) remains broadly unchanged within the AFI recommendations, he adds. Bestinvest’s AFI recommendations also overweight British equities. Porcheron says: “Although the markets look fairly priced, merger and acquisition activity is providing a lot of support to the UK stockmarket.” He says companies that are positioned to thrive in the latter stages of the economic cycle should perform well. Since the previous AFI rebalancing on November 1, 2005, the Aggressive index is up by 21.7%, the Balanced AFI by 16.9% and the Cautious AFI by 11.3% to April 24, 2006. Over the same period, the average fund in the Investment Management Association Asia ex Japan sector (up 30.2%) has outperfomed the respective averages of all the main regional IMA equity sectors. The average IMA North America fund (up 11.1%) produced the lowest returns (see graph). Whether relative regional equity performance since the previous rebalancing will affect the AFI panellists’ new recommendations, causing shifts in asset allocation, is difficult to predict. But the new portfolio constituents and underlying asset allocations of the three AFIs will be revealed soon. 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 www.fundstrategy.co.uk/adviser_fund_index.html).