FE data shows that seven Aberdeen funds with more than £1bn in assets under management (AUM) were bottom-quartile performers in their respective sectors last year. No other fund group had more multi-billion pound portfolios in the fourth quartile.
All but one of the seven funds have an emerging market focus, including the likes of Aberdeen Emerging Markets, Aberdeen Asia Pacific Equity and Aberdeen Global Chinese Equity.
Source: FE Analytics
FE Alpha Manager Young (pictured) says that Aberdeen’s focus on quality companies with strong business models and predictable earnings worked against them in emerging markets last year, but is confident that these stocks are the best to back over the long-term.
He says any manager or investor that expects to outperform year-on-year has unrealistic expectations, given investment sectors and styles go in and out of fashion. “One thing I guarantee clients is that there will be periods when we underperform,” said Young, speaking exclusively to FE Trustnet.
“Fund managers who promise to outperform every year are kidding themselves and investors.”
“Having enjoyed a strong run over previous years, the share prices of some of the companies we invest in underperformed markets as investors took profits.”
“The compelling underlying fundamentals of these companies did not change and the businesses actually continued to perform well.”
Source: FE Analytics
“However, money was recycled into shares of companies that were arguably financially weaker and more cyclical in nature, which are not typical Aberdeen holdings.”
Young adds that currency weakness in markets where Aberdeen has long-standing overweight positions, including Brazil, India and Turkey, also weighed heavily on performance.
“In contrast, countries such as China, Korea and Taiwan, where we are underweight because of a lack of quality companies, held up better amid the volatility,” he added.
The manager points out that the six emerging markets funds in question are all ahead of their sector and benchmark over the longer-term.
Performance of funds and indices over 15yrs
Source: FE Analytics
FE data shows that all six of the funds beat their sector and benchmark in 2011, and all but Aberdeen Global Chinese Equity did so in 2012.
Aberdeen porfolios tend to perform strongly in down markets, but are susceptible to underperformance when markets rise – especially in steep rallies.
The remaining multi-billion pound Aberdeen fund that achieved bottom quartile status in 2013 was Aberdeen Global World Equity, led by Bruce Stout and his global equity team.
Although Young’s comments refer directly to emerging markets, they are still entirely relevant to the £4.3bn global fund, which also focuses on quality above all else.
Stout recently told FE Trustnet that he was wary of the current equity “bull run”, which has made him even less likely to back companies that are of low quality.
Like the other six funds mentioned earlier, Aberdeen Global World Equity is ahead of its sector and benchmark over the longer-term.
Our data shows it has returned 73.18 per cent since its launch in May 2006, compared with 55.18 per cent from its IMA Global sector and 67.74 per cent from its MSCI AC World benchmark.
It has also been significantly less volatile, performing much better in the down markets of 2008 and 2011.
Performance of fund, sector and index since launch
Source: FE Analytics
A number of other high-profile Aberdeen funds struggled last year, including Aberdeen Japan Equity, Aberdeen European Equity, Aberdeen North American Equity and Aberdeen UK Equity Income.
Our data shows that more than half – 27 – of the 51 Aberdeen funds operating in the IMA unit trust and OEIC universe were bottom quartile in their respective sectors in 2013.
The results make for even worse reading when looking only at pure equity funds – 26 of 32 were bottom quartile.
Young emphasises that the group’s stringent focus on quality is the reason for these disappointing numbers, but says he remains optimistic that the funds will come good over the long-term.
“The worst thing to do in these circumstances is to chase performance and follow the herd,” he said.
“We prefer to remain objective and continue to focus on company fundamentals. Over the long-term, companies that are financially strong with experienced management and business models able to weather bad times as well as perform in the good times should win out.”
Paul Warner (pictured), AFI panellist and investment director at Minerva Fund Managers, is a big fan of Hugh Young and Aberdeen in general, and says he will be sticking with his exposure to the Aberdeen Asia Pacific Equity fund. “I have huge respect for Hugh Young, and would have given exactly the same reasons for Aberdeen’s underperformance that he gave,” he said.
“I’d add some of the funds have also been hit by an overweight to India.”
“One year of underperformance is not something I would worry about. I was recently speaking to Bill Mott [manager of the Psigma Income fund], and he highlighted the fact that quality companies haven’t had a great time of it of late.”
“They had a good time in 2011, so in many respects it’s of no real surprise that other areas have caught up.”
“However, when you’re being kept afloat by central banks pumping money into the system, there’s always a case for quality.”
Warner says that investing in emerging markets, and particularly the Far East, could be a cheaper way to play the US recovery.
“Everyone is very positive on the US, but I think a lot of that is priced in. The Far East has a lot of very good cheap companies and if the US does do as well as a lot of people are saying, those exporting to the US could stand to do very well,” he added.
In an article tomorrow morning, FE Trustnet will highlight the other multi-billion pound funds that were bottom quartile performers in 2013.