F&C: Retail investors ditching alternatives on performance woes

Dean Cheeseman, head of retail multi-management at F&C says that many of these products were launched on the back of sales directives rather than the inclination of fund managers resulting, for example, in mangers using techniques including shorting even though they did not have the experience.

Investors – in particular older private clients - are instead keen on income solutions as interest rates hit new lows and dividends fall or are scrapped. Cheeseman says that demand for transparency and honesty has increased, meaning risk management will become a key focus.

This trend is also confirmed by sales figures from fund supermarket Cofunds which reports bond funds gained momentum throughout 2008 to achieve record inflows in the fourth quarter – 38 per cent of all its net sales. Cautious managed was also popular in the fourth quarter taking 11.8 per cent of sales, albeit down on previous quarters after losing sales to bonds.

Specialist funds are experiencing the highest outflows, in terms of Cofunds net sales figures. It said 40 percent of those on its platform are in net redemption.

This means fund management groups are likely to focus on risk based multi asset products, says F&C. This is a trend already apparent in the institutional market where investors are being offered diversified growth funds, which include assets such as property and alternatives.

Oliver Sonnbichler of the F&C multi manager team said these are more popular than traditional balanced mandate funds.

Many high alpha strategies, for example hedge funds and private equity, significantly underperformed in 2008 even though they were high drivers of growth in previous years. These include F&C’s own 130/30 fund – Luxembourg domiciled F&C Enhanced Alpha UK Equity Fund which over one year has considerably under performed the FTSE All Share and its offshore sector Equity - UK.

However US based State Street reports that its private equity assets under management grew 60 per cent in 2008, while a survey it conducted found institutional investors are favourable towards private equity funds, with 49 per cent planning to increase their allocation to this over the next 12 months. UK investors and analysts are also favourable towards private equity investment trusts - even after SVG Capital announced a rights issue. 

Another reason why there might be a reduction in alternative assets is because the number of emerging markets and specialist funds may reduce.

Antipathy towards alternative assets is also apparent among closed-end funds. WINS Investment Companies research reports that as private equity and funds of hedge funds de-rated massively last year a wave of corporate action has kicked off among alternative asset classes, and a significant contraction is underway in the fund of hedge funds sector.

Property funds are also experiencing withdrawls. For example, the F&C multi-manager funds have reduced their exposure to closed-end property funds because of debt levels and massive share price falls caused by negative investor sentiment about the asset class.

Instead the F&C multi manager funds are getting exposure to property via certificates – for example swaps with exposure to the IPD indices.

This was part of a process of de-risking during 2008, with around a third to half of the porfolios changed – driven by what the F&C multi-manager team describe as one of the worst years in history – certainly in the second half. They have applied a macro overlay to the portfolios.

But Cheeseman does not expect to have to make such drastic changes in 2009.

In terms of their equity exposure, the funds reduced small and mid caps and increased large caps, while the level of beta – volatility – in the portfolios was decreased to lower risk. Paul Carne, fund manager in the F&C fund of funds team, said this was easily achieved with the addition of the BlackRock UK Absolute Alpha Fund in February, although this fund’s performance did not do so well later in 2008, and according to Trustnet data underperformed the IMA absolute return sector over six months.

This caused BlackRock UK Absolute Alpha to fall out Cofund’s top 20 funds in terms of net sales in the fourth quarter, after attracting the most sales in the first, second and third quarters.

Carne also said that the equity portions of the F&C Multi Manager funds are now focused on cash flow yields, using funds such as Artemis Income which places greater emphasis on cash generative companies than, for example, banks which have largely cut or scrapped their dividends. Rensburg Equity Income is also a holding.

In terms of bond exposure funds buying into bank debt on the basis that it is cheap were removed. Carne said: “We do not dispute that it is cheap but we run a balanced mandate and were nervous of funds following this strategy, so sought ones in a different space.”

These include M&G Strategic Bond Fund and Fidelity Sterling Bond.

Exposure to high yield bonds is also down, though the F&C funds still have some. Carne said: “While high yield bonds look good with 20 per cent plus yields they still involve a lot of risk.”