What Investment’s monthly review of developments in the investment fund markets

The volatility being experienced by the wider market is being reflected amongst fund managers. A few days before it was due to launch (on 13 October), Gartmore announced that it was postponing the arrival of its proposed European Absolute Return Fund.

Richard Pursglove, head of UK retail at Gartmore, emphasised that ‘This is not a decision we have taken lightly. It has been made solely in the interest of our investors. With significant changes taking place in both the markets and the regulatory environment, we have decided it would be imprudent to launch a new fund at this particular time.’


Uncertain times

It is understandable that investors would be unwilling to put money into new launches in times such as these, but if it is not possible to even get an absolute-return fund away, a fund which, after all, is supposed to be able to perform in all market conditions, that is an indication of just how low investor confidence has fallen.

However, it is still possible to raise new funds with a sufficiently attractive proposition. JPMorgan Indian Investment Trust is in the process of issuing new shares, but with a significant proportion as subscriptions shares which will be issued to exiting investors at no cost.

David Barron, head of investment trusts at JPMorgan Asset Management, explains, ‘Subscription shares, which are similar to warrants, are a popular feature of the investment trust landscape, offering immediate value to shareholders and providing a geared investment into the market.’

The investment trust is issuing subscription shares to shareholders on the basis of one subscription share for every five existing ordinary shares. The trust is also placing new ordinary shares in the market, with subscription shares attached on a similar basis. These will be priced at a one per cent premium to the trust’s published net asset value (NAV) on 29 October 2008.

Baron adds that ‘The move has been taken by the board to grow the investment trust to meet continued demand and investors looking to gain exposure in the region. The Indian economy has experienced rapid growth in recent years and continues to be driven by structural change, fundamental economic reform, massive infrastructure investment and a young population.’

Focusing on higher returns

Elsewhere, several open-ended funds have announced changes to their investment strategies. Lazard UK Income Fund has amended its investment objective, to enable its manager to invest in a broader range of securities, including up to 20 per cent in overseas equities and other securities such as corporate bonds and preference shares.
Lazards say that the change was proposed following comments from investors that they are increasingly looking for total returns rather than income alone. Indeed, many of Lazard UK Income’s peers in the IMA UK Equity Income sector already invest along similar lines.

Legal & General Investment Management (LGIM) has also announced changes in the management of its Japanese and the Pacific Growth trusts. The typical number of holdings in both funds will be reduced to around 60 (previously there were
80 holdings in the Japanese trust and 95 in Pacific Growth). This move is in line with LGIM’s active equity philosophy that high conviction “best ideas” portfolios will outperform throughout the investment cycle, which has already been put into practice with the group’s UK and European funds.

Lloyd Branford, senior fund manager on the Pacific Growth trust argues that ‘Although the stock specific risks are increased with the stock concentration, the Asian performance of our Global Growth Trust, where 59 stocks are held, has generated better performance than Pacific Growth since it became a more focussed portfolio in August 2006.’

Alan Booker, senior fund manager at the Japanese Growth trust adds ‘The Japanese market has been through some difficult times in recent years and our decision to concentrate the Japanese Trust is a consequence of recent declines in quality global companies, that represent the strength of Japan in the future. They now trade at attractive valuation discounts to the market and these companies now present some good opportunities for the fund going forward.’

Performance is becoming elusive

Finding a fund manager that can deliver positive returns in the short term is, however, not going to be easy. New research from fund of funds specialists T Bailey highlights the difficulty of finding fund mangers that can outperform in both bull and bear markets.

T Bailey’s senior analyst, Elliot Farley, points out that ‘Only five out of the 160 funds in the IMA UK All Companies sector, with a long enough record managed first quartile performance through the bear market at the turn of the century to March 2003, through the bull market that followed till June last year, and then through the current bear market to date. They are the BlackRock UK Special Situations, CF Walker Crips UK Growth, Fidelity Special Situations, M&G Recovery and Marlborough UK Leading Companies funds.’

He adds, ‘Only three out of the 59 funds in the IMA UK Equity Income sector with a long enough track record have managed the same feat: Invesco Perpetual High Income, Invesco Perpetual Income and St James’s Place UK High Income – all three managed by Neil Woodford!’

Farley points out that ‘There are 338 funds listed in the IMA UK All-Companies sector alone now. The chances of an investor picking out a fund that will perform in both bull and bear markets through the next decade are low.  It means an investor needs to monitor his fund portfolio constantly and this is where funds of funds deliver benefits.’


Attractive valuations

Among the closed-end investment companies, however, some analysts are already suggesting that many shares have been marked down too far and value is starting to appear Alan Brierley, director of Investment Companies at Collins Stewart, insists that many companies are now trading at what we regard to be extreme and unsustainable valuation levels. A feature of the investment company sector since the onset of the credit crisis has been that discounts have actually narrowed, while share buybacks have fallen. We believe this reflects a “too late to sell” psychology and a hope that a sustained recovery is imminent. Indeed, this mirrors the experience post the bursting of the dotcom bubble, but we are less sanguine.’

He argues that ‘The ratings of many companies are not sustainable and this technical situation represents an opportunity to sell at historically narrow levels. We expect discounts to revert to mean, at best, once this position closing is finished, while any further downside in equities will compound matters for shareholders. The rush for the exit door is likely to become very crowded and sectors that look particularly vulnerable include Global Growth, Global & UK Growth & Income, UK Growth, Asia ex Japan, Global Emerging and Fund of Funds.’

Brierley adds, ‘It is becoming increasingly difficult to identify value in the sector at the moment. Two companies that stand out are Alliance Trust, on a 22 per cent discount, which we recently introduced to our core recommendation list given its defensive value characteristics, and BH Macro, on discounts of five to nine per cent, which has de-rated in line with its peers, but is well positioned to benefit from these challenging market conditions and extend what is an exceptional performance record.’

He concludes, ‘Despite the potential for a short-term rally, we believe the de-leveraging process has much further to run, and with credit markets frozen over, housing markets in freefall, and consumer spending to slow dramatically, we continue to recommend a highly risk averse strategy with a focus on capital preservation rather than the generation of absolute returns. Our core recommendations remain BH Macro, Candover, Dexion Absolute, Finsbury Worldwide, Perpetual Income & Growth and RIT Capital, with the introduction of Alliance Trust, given its defensive value qualities.’