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Manager merry-go-round

This is the second in my series of regular updates on the world of funds, investment trusts, ETFs and all things related to Fund Research.

This week I’m going to talk about some fund return dispersion data I’ve been looking at. By fund return dispersion, I mean the difference in returns across fund managers within particular regions or asset classes.

Now, we all know that there can be a big difference between winners and losers, even when we are talking about funds and not stocks. But the first quarter of this year and indeed year to date has been noticeable in that this dispersion was much wider than normal.

Let’s take a look at some of the data first. In Q1, the difference between the best and worst performing UK All companies funds was a staggering 45%. Likewise in North America it was 41% for Q1, and that gap continued to grow in April. The difference between the best and worst performing US fund was 55% by the end of April. So how does this compare to other periods? If I look at 2019, the difference between the best and worst UK fund over the 12 months was 50% and in the North America universe just 30%. Clearly the dispersion within the first three to four months is significant

So why was that? Of course style was a major factor – anything that was invested in technology or e-commerce for example tended to do very well, and some of those managers even produced positive returns.

On the flip side, poor old value managers, who have struggled for pretty much the last decade, really suffered; just take a look at how energy and banks have done this year, both lagging for different reasons – energy due to the collapsing oil price and banks due to the fall in bond yields. I think the value versus growth discussion is one we will certainly come back to another time. And in terms of manager returns, because US managers tend to have a clearer style bias than in the UK, that dispersion can be exacerbated.  

However it’s certainly more than just style. If I focus on the US market, what is clear is that there is also a lot of dispersion from between managers with very similar styles. So for example Baillie Gifford American and Morgan Stanley US Growth top the list to end April, up 26% and 24% respectively, but there are also a number of growth funds in negative territory, so a good 30%+ behind. Likewise in the value camp, the worst performer is down 28% in sterling terms, but some funds that you could categorise as value are nearer being flat for the period. So there has also been some really significant dispersion between managers of similar styles.

So how is that relevant to you the investor? Well firstly, if you are selecting managers, it mattered more than ever who you were invested with. This was from both a style and the underlying manager perspective. Now, let’s not fall into the trap of thinking the winners were all skilful and the losers should be fired as poor investors, there was plenty of luck, good and bad in there, and we are talking about a very short period of performance.

I think it does highlight the need to have a balanced portfolio of funds though, and not having all your eggs in one basket. Like many others we adopt a balanced approach utilising a number of managers, but we do have a bias towards quality growth managers today, which was very helpful, and we continue to believe that is the right direction to be pointing for now. 

I think there are two more important points going forward though. Firstly, with a pick-up in volatility, stock pickers should have a better chance of outperforming as we see a greater dispersion between companies who are winners and losers. I’d rather trust that choice to an active manager today personally. So I guess I’m saying now is the time to buy active managers. Now that’s a discussion that could take up several more discussions in itself!

Secondly, I think as a fund selector, this elevated volatility should be helpful to those best of breed managers that we are all looking to invest with. It’s the same principle as a fund manager who is picking stocks. Longer term, those funds with a genuine edge, who really are taking a long-term view, or who have better insights for whatever reason, should shine through, and if we as fund pickers have correctly identified them, this is the time in which the value of the disciplined fund selection process should be evident. So my second conclusion is a slightly self-serving one – I think now is the time that having a well-resourced fund research team will hopefully pay dividends as manager returns really diverge regardless of style.

Now, as I said earlier, one quarter’s data does not really mean much whatever you are measuring, but I think we are likely to see dispersion remain elevated both at a stock level and also a fund level. Let’s see if active managers can use this to really prove their worth. And for those of us that think we can do a good job at picking funds and go that extra mile to really understand a manager before investing, let’s see if the same is true. I’d be interested in your views. So that’s all for this time. Look forward to speaking to you all next time. 

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