November 2009

FUND SELECTION: changing positions

In Sweden, retail investors moved massively out of equity funds all of last year and have moved massively into equity funds (preferably emerging markets) all of this year. Niklas Tell comments...
niklas_tell2.jpgIt is a well-known fact that 2008 was a horrible year for long-only equity managers. Its aftermath could also prove that 2009 will have been the year that highlighted those fund selectors who were really excellent, and those who were able to add value from those who were merely decent.

At a recent Gam investment conference, Greg Woodard, a portfolio strategist at Manning & Napier and advisor on Gam funds focusing on US equities, highlighted the difference between the crisis we have just experienced and the previous crisis in the wake of the tech bubble collapse in 2000. In the latter case, active managers in US equities had the opportunity to sidestep the horrors simply by avoiding two sectors – technology and telecoms. In 2008 there was nowhere to hide as everything fell.

The result? There was a big difference in performance between the top quartile and the bottom quartile managers following the tech bubble collapse, whereas there is less of a performance dispersion trail to follow this time around.

This is a challenge for selectors, who still need to find the managers that are positioned to do well.

Past performance pitfalls
Past performance has always been accompanied with the health warning that past performance is not a guide to future performance. So, if past performance has always been a data point you need to take with a pinch of salt – what if you cannot use it at all? If headline performance between top and bottom quartile managers doesn’t provide guidance, selectors will need to look elsewhere. One possible starting point would be to look for increased portfolio turnover. This could indicate managers who have taken the opportunity to upgrade their portfolio holdings to position their funds for the years ahead. This should be a time when qualitative fund research adds value.

Here is a question for you: What factors are you looking at when evaluating manager performance in the wake of the financial crisis?

Also, on a related note, we are in the process of looking closer at investor decision processes and why some investors seem to be quicker than others when it comes to being in the right asset classes and right sectors at the right time. As an investor, regardless of size, it is all well and fine to carry out research and find asset classes and sectors that you think will help reach your overall performance targets. The tricky part seems to be going from the research stage to actual implementation.

Nordic know-how
In our discussions with representatives from fund groups active in the Nordic region we have heard several examples of how some investors were quick to add to equity positions and move into credits early this year. Others seem to be still debating on how to do this and with whom to do it.

In this financial crisis there appears to be a type of investor who has done all the right things – and that’s the retail investor. In Sweden, retail investors moved massively out of equity funds all of last year and have moved massively into equity funds (preferably emerging markets) all of this year. They have one thing going for them – a quick and simple decision process as they only have to consult themselves and possibly their significant other.

Why is it that some institutional investors seem to be structurally late out of, and into, different asset classes and sectors of asset classes?

If you are interested in discussing this, please join me at

• Niklas Tell is a partner at Tell Media Group AB

©2009 Funds Europe

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