Over the three years to 31 December 2008 the fund had lost 25.26 per cent of its value compared a loss of 13.84 per cent for the FTSE All Share index, putting it firmly in the forth quartile within the IMA UK All Companies sector. The fund has better recently; it placed in the top quartile for the month of December, beating its benchmark by 4.14 per cent.
It is possible therefore that this fund is a bit of a late bloomer, but its high tracking error and negative information ratio suggest that the funds active style is not providing enough return for risk being assumed. The funds annualised Alpha of -2.54, while not being exact suggests the manager is losing the fund around 2.5 per cent a year in excess of the damage being done by the falling UK equity markets.
It is this combination of increased risk in the form of higher volatility and low alpha that have led to the fund being awarded its one Crown rating. Despite its previous poor performance the fund only narrowly missed out on being awarded two Crowns. This is likely due to the forward looking nature of Crown Ratings putting more weight on recent periods than earlier ones. If the funds recent improvement continues the future may not be as bleak as the funds life to date.
Performance of the funds over the past 3 years
Source: Financial Express Analytics
By contrast the Margetts Greystone UK Equity fund has had an altogether more positive start to life, recognised by the fund receiving a rating of three Crowns The fund, also launched in November 2005, returned -10.8 per cent for the three years to the end of 2008. Although this is clearly nothing to celebrate in absolute terms, when compared to its peers it looks rather more favourable.
The IMA UK All Companies sector and the FTSE All Share both suffered greater losses over the same period, of 18.64 per cent and 13.84 per cent respectively. While the fund is not a stand out performer using any specific measure, its positive Alpha, steady returns and lower than average volatility mean it is well deserving of its three Crown rating. The fund manager is credited with adding around 1.6 per cent a year to value of the fund and the funds positive information ratio, although low, suggests the manager is making adequate returns from the risk he is taking.
The obvious difference between the two funds is the way they gain exposure to the market. The Margetts Greystone UK Equity fund is a multi manager product and invests in the UK equity market through its holdings in other UK equity funds. The Fidelity UK Specialist fund follows the more traditional route of directly investing in the equities themselves. Relying on the expertise of the top nine or ten fund managers in the country has clearly benefitted the Margetts fund.
Its holdings include the Newton Higher Income fund, which outperformed the sector by 8.72 per cent last year, and the Invesco Perpetual High Income fund, run by industry superstar Neil Woodford. While a fund of funds approach has its advantages, the additional costs involved in paying for an extra layer of fund management make it an expensive way to invest in UK equities. Clearly, the pooling of expertise has benefited the fund negotiate conditions that could conservatively be described as ‘trying’; however the fund has underperformed all of the mutual funds held in its portfolio, undoubtedly due to additional fees involved, proving that direct investment is still capable of producing superior returns, even in markets as volatile as today’s.
While the multimanager aspect may be the most obvious difference between the two funds it probably isn’t the most important. The Margetts Greystone UK Equity fund had over 25 per cent of it’s assets in cash at the end of November compared to a paltry 1.4 per cent for the Fidelity UK Specialist fund. The Margetts fund’s high cash holdings provided a safe haven from which to weather the storm that has been battering equity markets. The funds Beta of 0.81 shows the fund has avoided the full force of the fall in the UK equity market over the last year. Credit for this asset allocation decision must go to the manager, although the ability to take such a decision owes a lot to the flexible mandate of the fund.
The very different fortunes enjoyed by these two funds have been highlighted by their contrasting Crown ratings, and can be attributed in no small part to different cash holdings. This goes to show that even little details like allocation limits in the mandate can have a greater effect on a funds performance than the fund manager or investment style; a reminder to always read the small print.