Rebalancing brings significant change

Last week’s rebalancing of the AFIs saw 23 new funds included in the panellists’ recommendations across the three indices, with 21 dropping out of the AFIs on the back of performance concerns.

The rebalancing of the Adviser Fund Indices took place last week and all three indices have seen significant changes to their makeup. While asset allocation and the number of constituent funds in each AFI has not altered markedly, there are many changes to the three indices’ underlying funds.

The AFI panellists have included 23 new funds in their portfolio recommendations that were previously not represented in any of the three indices (see table). The strong short-term performance of several of the new funds appears to have persuaded the panellists to add them to their recommendations.

Of the 20 best-performing Aggressive AFI constituents over the six-month period to May 3, 2006, seven funds are new AFI additions, according to Financial Express. Neptune European Opportunities (up 45.9%), Martin Currie Emerging Markets (40.9%) and Jupiter UK Growth (31.7%) are among the funds that were added to the AFIs following the rebalancing.

Of the constituent funds appearing across the AFIs before the rebalancing, 21 were dumped by the adviser panellists. Notable funds falling out of the AFI series include Credit Suisse Income, Fidelity Special Situations and Gartmore European Selected Opportunities.

The Aggressive AFI now comprises 108 funds (22 funds added, 21 dropped), the Balanced index has 103 funds (17 added, 17 dropped) and the Cautious AFI also totals 103 funds (14 added, 13 dropped).

Darius McDermott, managing director at Chelsea Financial Services and an AFI panellist, says: “We have not made any major asset allocation shifts but have made some changes to the underlying fund recommendations, mainly as a result of short-term performance-related issues.

“We have replaced Cazenove UK Dynamic with the Merrill Lynch UK Special Situations fund after average performance from the Cazenove fund.”

Chelsea’s recommendations have shifted slightly in favour of growth-type funds and include a small move up the market capitalisation scale by switching funds investing in small-caps to those with exposure to mid-sized companies. However, McDermott says the general shape of portfolio recommendations is unchanged.

As a result of the rebalancing, five new fund management groups are repre- sented across the three AFIs: F&C Asset Management, JO Hambro Capital Management, Rathbones, Royal London Asset Management and T Bailey Asset Management. However, Credit Suisse, iimia and Marlborough Fund Managers no longer appear after constituent funds managed by these groups were dropped.

While the overall asset allocation of the three AFIs has not changed materially, some general shifts have occurred. European equity weightings within each of the indices have increased, while exposure to American shares has generally fallen.

In aggregate, the AFI panellists have slightly increased their weightings to global emerging markets and reduced the bond allocation for their Aggressive index recommendations. The approximate 50/50 split between British and overseas equities remains broadly unchanged.

The Balanced AFI has seen an increase in British and global emerging market weightings, while exposure to the Asia Pacific region has declined. The panellists have shifted some of their overseas equity weightings to British shares.
Bond exposure in the Cautious index has dropped from 42% to 39%, while the allocation to British equities has risen to 40%, according to Financial Express.
The performance of the three Adviser Fund Indices over the past AFI season – the six months to April 30, 2006 – remained strong. The Aggressive AFI returned 19.5%, the Balanced index was up 15.3% and the Cautious AFI rose 10.2% over the period (see graph).

Each of the AFIs has maintained outperformance over its Association of Private Client Investment Managers and Stockbrokers and average IMA Managed sector equivalents. However, the performance of the Balanced AFI is only slightly better than the average IMA Balanced Managed sector fund (up 15.2%). The relative outperformance of the Aggressive index since the inception of the AFIs in November 2004 is the strongest ofthe three indices.

Next week’s Fund Strategy cover story will include detailed analysis of all changes to the AFIs following the rebalancing, including updated asset allocations, the rationale behind a number of the adviser panellists’ changes and an in-depth performance review of the AFIs over the previous season. Details of which fund management groups are best represented across the three AFIs will also be revealed.