The end of the financial year has meant many investors have been scrambling to use their ISA allowance this week before deadline strikes. 
It has also been a week where the US Federal Reserve has caused another snap rally in equities, as (shock) Janet Yellen and co decided to keep interest rates where they are. It means that the initial forecast of four rate rises in 2016 looks a tad optimistic, but investors were initially very happy with the news as the FTSE 100 jumped to above the 6,200 level.
It has since retracted however, with poor Chinese PMI’s and fears of a US recession hurting investor confidence – which has again caused bond yields to rally with a UK 10 year gilt now at 1.45 per cent.
Outside of global macro trends, a number of interviews and heaps of data analysis has meant the FE Trustnet team has had plenty to write about this week.
Here are a selection of our favourites. Have a great weekend!
Mark Dampier: Why Hargreaves Lansdown no longer uses GARS
We start off with an article by reporter Lauren Mason, following a chat with Hargreaves Lansdown’s head of research Mark Dampier.
In the article, Dampier said that too many financial advisers place the likes of Standard Life GARS or Aviva Investments Multi Strategy Target Return in investors’ portfolios without fully understanding their investment processes.
Indeed, that is the major reason why he and the team at Hargreaves Lansdown no longer recommend the £26bn absolute return behemoth – which has had a tough 12 months, underperforming bonds, equities and cash – to clients.
Performance of fund versus indices over 1yr
Source: FE Analytics
“I can explain the fund and the strategies, I don’t actually think that’s very difficult, but can I really nail it and explain the decision behind being short the yen and long the dollar and how all of these strategies link together? Just suppose they suddenly correlate or something, I’d just struggle,” Dampier continued.
“The problem I have with absolute return funds is that they are perceived to be low-risk funds which is what they’re intending to do. I’m not trying to criticise GARS, it’s really more about the point of saying, if they’re low-risk funds but end up not being low-risk, from an adviser/broker point of view you’ve got a real problem on your hands.”
“Then you have to explain why, what you’re research is and how good it is. We can analyse most of our funds really well, we’ve got great quant strategies here, but for these types of funds we haven’t found a system that really enables us to do that as well as we’d like.”
Fundsmith Equity: Should you buy, hold or fold?
FE Alpha Manager Terry Smith’s Fundmsith Equity fund is fast becoming one of the most popular investment vehicles in the IA universe, thanks to a stellar run of performance since its launch in 2010.
While few doubt Smith’s stock-picking abilities, it is fair to say though that the past five or so years has been highly conducive to a strategy which revolves around owning defensive large-cap multinationals that offer reliable earnings, have little debt on the balance sheet and strong franchises.
As such, senior reporter Daniel Lanyon asked the question whether investors should consider selling down their exposure to the top-performing global fund so as to lock in profits.
Steve Lennon at Parmenion was one who thought investors should continue to hold the fund.
“For me personally, this fund forms the solid core of a global equity allocation. Like any fund, it can be expected to lag the market from time-to-time, particularly during cyclical bull markets or should a sector it will not hold rallies strongly.”
On the other hand, though, Adrian Lowcock at AXA Wealth said investors should hold off buying more at this point in time.
“Given the strong performance of the Fundsmith Equity fund and indeed how much this came a little unexpected by the manager I think it is realistic to expect periods of consolidation. Given the manager is not prone to switching holdings, over-valuation in the short term is likely to be a primary reason for underperformance and would follow outperformance relative to the market.”
Are the best days now over for active UK funds?
Up until recently, it had been a pretty good time to be an active manager in the UK with some 75 per cent of them in the IA UK All Companies sector beating the FTSE All Share in 2015.
However, following an interview with JPM’s Alex Dryden, news editor Alex Paget took a closer look at what has made the ‘average’ active fund perform so well.
“Essentially, for the last six or so years, the consensus play within the UK active fund space has been to be underweight underperforming sectors such as commodities and energy and use that to be heavily overweight smaller companies,” Dryden said.
“I would say these have got to fairly strained positions though, with the top decile of funds in the IA UK All Companies sector over five years now with a 71 per cent weighting to mid and small-caps.”
“Given most of them are benchmarked against the FTSE All Share which only has a 20 per cent weighting to mid and small-caps, you can see just how far active managers have had to stray away from the index to generate their outperformance.”
Though active managers are paid to make off-benchmark decisions and making bigger allocations further down the FTSE All Share index is certainly one of those, FE data shows just how correlated active fund performance relative to index is to the performance of the FTSE 250.
Relative performance of funds and indices
Source: FE Analytics
Dryden also pointed out that the underperformance of large-caps versus mid-caps may be about to reverse, given the stabilisation of commodity prices and a weakening pound – which is likely to have a profound effect on active manager performance.
The absolute return funds that have genuinely had you covered
In another data driven article, Mason took a look at the funds in the IA Targeted Absolute Return sector that have had the most number of positive weekly periods over the past three years – which includes a wide variety of market conditions.
While a week is obviously a very short period of time, investors are likely to check their portfolios more regularly during times of volatility to see how their funds are faring and the idea was to see which genuinely defensive funds have had their investors covered during times of stress.
First on the list with 104 positive weekly periods over the last three years is Kames Absolute Return Bond, which is headed up by Colin Finlayson and Stephen Snowden.
The next absolute return fund on the list for the highest number of consistent positive weekly returns is a long/short equity fund. Henderson UK Absolute Return is run by FE Alpha Manager duo Ben Wallace and Luke Newman and aims to deliver positive absolute returns each year through both long equity positions and derivatives.
Indeed, the last three years seem to have been a good time to buy into long/short equity funds in general, as more than half of the top 10 funds with the highest number of positive weekly periods over three years fall into this category – these include Argonaut Absolute Return, City Financial Absolute Equity and Old Mutual Global Equity Absolute Return.
However, the fund that is third on the list for its positive weekly returns is Premier Defensive Growth, which invests in global equities, property, bonds, alternative assets and private equity.
Five FE Alpha Managers you are probably ignoring
The final article in this round-up was put together by Paget and it took a look at the top-rated managers in the industry who are largely ignored by retail investors and advisers due to the sectors their main funds reside in.
Indeed, one of the major reasons managers gain household name status – apart from their stellar track records – is because of the asset class they focus on. For example, it is likely a manager running a large-cap UK equity income fund will attract more attention (both from investors and the media) than one who runs a P2P investment trust.
This is understandable, of course, given investors’ appetite for risk and as it is unlikely that investors will hold a variety of niche funds within their portfolio.
The five managers we took a closer look at all sit in the IA Specialist sector, and while their funds might not be every investors’ cup of tea, they have delivered significant outperformance in their given field over the longer term.