Active Managed: Active Enough?
Few Active Managed funds have used their flexibility to full advantage in downturn.
Indeed, it appears the group of funds has done relatively little to shield investors from downturns in world markets. As a starting point, we calculated the per cent of the market downside "captured" by these funds over the past five years, relative to both the FTSE All Share and MSCI World indices. Despite the flexibility afforded by sector definitions, with a single exception--CF Ruffer Equity and General--every one of the 65 funds with records long enough to be considered funds captured more than 50% of both indice's downsides. For context, a 50-50 mix of the MSCI World and Lehman Sterling Aggregate would have captured 42% and 48% of the FTSE and MSCI downsides, respectively. The average downside capture for the sector versus the MSCI World was 93%, whilst the average downside capture versus the FTSE All Share was 99%. Further, investors in many funds actually experienced more downside than the equity indices themselves.
The news isn't all bad--because we have been in a relatively short, if serious market correction on the heels of a ripping bull market, the group's tendency to have heavy equity exposure has been a boon over the longer term relative to more conservative asset allocation approaches. However, it is clear that managers here are riding more on delivering growth than protecting capital. This is perhaps not surprising--if managers are compensated to beat their average peer in a group like this, they will tend to follow the herd--if the market is rising and peers have high equity exposure, they will feel pressure to keep their exposure high as well. They must do so to stay competitive. It's much, much harder to justify a move out of strong performing assets and underperform whilst markets are rising than to go with the crowd and look average no matter the environment. Still, it's cold comfort to investors who may expect the flexibility permitted to be used in their favour.
In general, we're not enamoured of much in this sector. If we had to pick a fund from this group, it should be apparent from our previous discussion of the Balanced Managed and Cautious Managed sectors that the Jupiter Merlin Growth Portfolio is going to be one of our preferred choices for reasons previously cited. For investors seeking an all-in-one offering to take them through to retirement, we believe Fidelity's Retirement series of target date funds is well worth considering. These funds are new, but they're built on a sound principle of adjusting their asset allocation to match investors' investment horizons through time. This strikes us as a more sensible approach than trying to time the market's ups and downs, and they can for the core of a portfolio, whilst leaving the investor or advisor freedom to add "bolt-ons" around the perimeter to tailor a portfolio.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
