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The giant funds starting 2015 with losses

08 April 2015

Most funds in the Investment Association universe have made positive returns in 2015 so far but a handful of billion-pound portfolios have lost money over the past three months.

By Gary Jackson,

News Editor, FE Trustnet

Nine funds with assets of more than £1bn lost money in the opening three months of 2015 with those focusing on Latin America, European bonds and emerging market debt having a particularly poor start to the year.

Sentiment in some parts of the market has been strong over the year to date. The FTSE 100 breached the psychologically important 7,000 barrier for the first time in its history last month while formerly unloved European and Japanese equities rallied on the back of stimulus efforts.

An FE Trustnet article last week revealed that the Neptune Frontier Emerging Markets fund was the best performing open-ended fund in the first quarter with returns of 26.36 per cent, followed by Pictet Biotech, Polar Capital Biotechnology, JPM Japan and JPM Russia.

However, not all markets and funds were buoyed during the three-month period. While FE Analytics shows the average fund in every sector has posted gains over the year so far, almost 150 funds have made a negative return.

This shrinks to just nine funds when looking at those with assets under management of £1bn or more, as the table below shows.

 

Source: FE Analytics

The £2.7bn M&G European Corporate Bond fund, which is managed by Stefan Isaacs with FE Alpha Manager Richard Woolnough as deputy, is the giant fund with the worst start to the year after falling 5.02 per cent over the three months.

As a point of comparison, the average Europe-focused funds in its IA Global Bond sector has made a 2.82 per cent loss over the same time frame.

However, this lacklustre performance is not really down to the managers’ investment calls but because the euro has weakened significantly against sterling on the back of the European Central Bank’s plan to pump €1.1trn into the eurozone economy through quantitative easing.


The graph below shows the difference in the returns from the sterling and euro share classes; while sterling investors have been hit with losses, those in the euro share class benefitted from gains of close to 2 per cent in the quarter.

Performance of share classes over Q1

 

Source: FE Analytics

This currency issue also explains why the £1.9bn Pioneer SICAV Euro Aggregate Bond, which is managed by Tanguy Le Saout and Cosimo Marasciulo, appears on the list. It lost 3.82 per cent in sterling terms but the euro share class has gained 3.11 per cent.

M&G European Corporate Bond appears on the FE Research Select 100 list of preferred funds, where it is highlighted for its experienced management team and stockpicking skills.

“The fund manager chooses not to take advantage of the full capacity he has for investing in lower-quality bonds, which could boost returns. Being aware of the risk it would add to the portfolio, he prefers to maintain a relatively low exposure to these securities,” FE’s analysts said.

“The focus is more on keeping a high level of quality bonds in the portfolio and spotting undervalued bonds by conducting extensive research into individual companies and how their debt should be priced in the current and upcoming economic environment.”

FE Alpha Manager Will Landers’ £1.34bn BlackRock Global Funds Latin American fund was hit by the second worst falls over the quarter with a drop of 4.73 per cent.

Investors in the Latin America region have suffered in recent months after sentiment soured towards Brazil, which accounts for just over half of the MSCI Emerging Markets Latin America Index.

Much of the fall in Brazil is down to the corruption scandal surrounding Petrobas, while Itaú Unibanco Holding and Ambev have also seen strong declines. Meanwhile, investors are put off by macroeconomic worries over growth, above-target inflation and budget deficits caused by the depressed oil price.

In his latest investor update, Landers said he is trimming exposure to Brazil – at 52.4 per cent the fund now has a 0.3 per cent underweight to the country – and increasing it to Mexico. Some 35.5 per cent of assets are in Mexico, giving the portfolio a 4.6 per cent overweight to the Central American nation.


Performance of fund vs index over manager tenure

 

Source: FE Analytics

The manager said: “We currently hold one of the highest weights, both absolute and relative to the benchmark, in Mexico in the fund’s recent history. The Mexican economy is finally showing signs of a domestic recovery, and the energy auction process is moving forward. In addition, Mexico is a direct beneficiary of the strengthening US economy.”

“Conversely, the fund’s current absolute weight in Brazil is at its lowest level since 2004. The headwinds from the fiscal adjustment process, the Petrobras corruption investigation and the potential for electricity rationing are combining to put pressure on earnings forecasts and reduce the attractiveness of the region’s largest market.”

BlackRock Global Funds World Mining, which is headed by Evy Hambro and Catherine Raw and has assets of £3.63bn, lost 2.60 per cent in 2015’s first quarter.

Natural resources funds have endured a tough few years after some called the end of the commodities super-cycle and predicted that slowing growth in China will lead to weaker demand for decades to come.

As well as posting a loss over the year to date, the BlackRock fund fell 18.23 per cent in 2014, 25.37 per cent in 2013, 27.32 per cent in the year before that and 28.52 per cent in 2011. Over five years, it’s lost 54.59 per cent.

Updating their investors last month, the managers warned that the recent weaker commodity prices suggest further cuts to analyst earnings will be needed in 2015 but said the news could turn positive in the longer term.

“As the year progresses, we would expect an acceleration of closures of high-cost capacity in oversupplied markets. This bodes well for the longer term and limits the industry’s ability to respond to the next upturn in demand, which will ultimately result in prices going higher,” they said.

Four of the nine giant funds to lose money focus on emerging market debt. The asset class has been held back this year by the stronger dollar and expectations of higher interest rates in the US.

Indeed, recent years have been tough with the average fund in the IA Global Emerging Market Bond sector losing 6.72 per cent over two years. However, some fund managers argue this has left emerging market debt at attractive valuations.

Peter Eerdmans, co-head of emerging markets fixed income at Investec Asset Management, said: “The asset class has re-priced: we think emerging markets are a lot cheaper and a lot more is priced in. Emerging markets have implemented reforms and now have flexible exchange rates, their current accounts look better, external debt is lower, and FX reserves are healthier.”

“To re-cap, many key factors in emerging markets are stronger today than in previous crises, so we think emerging markets will perform better in future crises.”

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