High Risk in Active Managed Sector Leaders
Emerging Markets exposure has helped fuel the rise of the highest returning Active Managed funds.
Far and away the sector's top returning fund in the period is Robin Geffen's Neptune Global Alpha. Geffen has never been one to shy away from taking risk, and that shows in the fund's portfolio. The fund display a combined 55 per cent exposure to Russia and Hong Kong as of 30 September. While Russia accounted for 19 per cent of the portfolio on that date, it has been as high as 35 per cent in October 2004.
Those stakes have boosted the fund's performance tremendously relative to its sector peers but we're not sure there's much point in comparing it to generic Active Managed funds--it's simply a far different animal. Moreover, the risk associated with those positions is clear. While performance of this fund has been staggering, volatility remains uncomfortably high, with sector-topping annualised standard deviation over three and five years of 15%. This then, is a fund that might be worth a look given Geffen's emerging-markets expertise but should be viewed in that context as something that belongs at the fringe of your portfolio rather than the core.
Max King and Philip Saunders' Investec Managed Growth stands also lands near the top of the three-year performance ranking. Again, however, it's worth noting that the fund invests across an array of investment trusts and open-end vehicles, many of which specialise in niche areas of the market. Its top holding as of 31 August was JP Morgan Fleming Euro Fledgling Investment. Other holdings included Genesis Emerging Markets, Martin Currie China, Prosperity Russia, and Barings Emerging Europe. The fund is clearly tamer than the Neptune offering, with a lower emerging-markets allocation and a three-year annualised standard deviation of 11.5%. Given the experience of the managers, we think it's a sound choice for investors seeking out an aggressive go-anywhere vehicle, but more cautious investors will want to look elsewhere.
The two examples above illustrate a larger pattern--emerging markets and small- and mid-cap equities have enjoyed extremely strong bull runs over the past five years. Whether or not this can continue is open to question, but high levels of risk are associated with both areas and valuations look stretched. For those reasons, for core holdings, we continue to favour somewhat steadier offerings such as the Newton Managed fund mentioned by my colleague Stephen Marriott last week.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
