Picking a fund manager that will consistently outperform over the long-term is like finding the pot of gold at the end of the rainbow. And while advisers have greater access to investment research, manager selection has not gotten any easier.
Determining the best multi-sector, or balanced, fund has its own particular difficulties, due to the need to find a manager that can demonstrate expertise in a variety of asset classes.
In this year’s Fund Manager Performance Review, Money Management examined the returns of multi-sector funds in a bid to determine which fund managers were able to consistently beat their peers and industry benchmarks over an extended time period.
With quantitative analysis provided by Portfolio Construction Forum, the research looked particularly for persistency trends — that is, the ability to maintain a level of performance consistently over both three and five-year periods.
Balanced fund returns
According to Deidre Keown, analyst with Portfolio Construction Forum, the research shows that there is little persistency in the absolute returns of the funds over time.
However, she adds: “Some persistency appears, particularly in the top and bottom deciles.”
At the top is the Maple-Brown Abbot PST, a clear standout with top decile rankings for rolling average one-month and three-month returns over both the three and five-year periods. Keown notes: “However, its rolling average one-year return decile ranking has slipped over recent times to the third decile. Still it’s the clear leader. Its nearest rival appears to be the Tyndall Premier Growth Fund.”
At the other end of the scale, Keown says, “persistency is clearer” with Credit Suisse Capital Growth PST, HSBC Balanced PST, Hyperion Balanced Fund and Merrill Lynch Balanced Fund consistently achieving nineth and 10th decile rankings.
But Keown says in their defence: “It’s important to note that over the latest three-year period in particular, each of these funds still achieved very respectable, positive rolling average returns.
“They are probably in excess of what would have been achieved by an investor putting their money into term deposits.”
Reasons for outperformance
According to Tyndall chief executive Michael Good, an overweighting to Australian shares relative to other managers has helped their performance.
He adds: “We’ve had a very good period from the collapse of the tech boom being a value manager and our equities being managed on that basis”
Ausbil Dexia chief executive Paul Xiradis also attributes their performance to Australian equities.
“If you look at the asset class of a balanced fund, there tends to be one or two dominant sectors within that. And in our case, it’s definitely Australian equities. We have been ranked in the top decile for our equities portfolio for around seven-and-a-half years,” he says.
For Emilio Gonzalez, Perpetual’s chief investment officer, a consistent approach is key.
“We aren’t changing tracks every year or every three years, irrespective of market dynamics. The last five years has seen the market go extremely high and then go into a dump and then come back out of it again. Despite those cycles, we have stuck to what we know best,” he says.
Asset allocation
Performing in a range of asset classes is key to consistent performance, but how important is asset allocation? While more fund managers move to strategic asset allocation in order to reduce the perceived risks, groups like Tyndall are still committed to a tactical approach.
According to Good, 20 per cent of the group’s balanced fund’s outperformance is the result of asset allocation.
“If you talk to the consultants, they would say that managers don’t add anything through asset allocation — that timing is not proven. I’ve always had a bit of an issue with that, because I think that when you split those functions between stock selection and asset allocation you actually end up making separate decisions which can affect the whole.”
At Ausbil Dexia, over the past three years, the asset allocation has moved to a more strategic approach. Xiradis says: “The reason we changed is because there was a fair bit of noise in some of the tactical asset allocations being generated.
“And what we have found is that if you take more of a strategic call, you can capture the big moves and maintain those big moves without the volatility of moving in and out of asset classes in a shorter period of time.”
Gonzalez adds: “I think at the end of the day, the strategic asset allocation of a fund will determine the overall performance of that fund.”
Specialist managers
The research by Portfolio Construction Forum includes those funds where all asset classes are completely managed in-house, as well as funds where particular asset classes are outsourced to specialist managers.
For instance, Vanguard is responsible for part of the international equities exposure within the Ausbil Dexia balanced fund. Tyndall continues to manage all classes in-house, as does Perpetual, apart from listed property trusts, which are managed by James Fielding, which has a joint venture with Perpetual.
There is no evidence to suggest that either approach has an impact on performance.
However, the increased focus on specialist funds management has had a detrimental effect on balanced funds in general.
Xiradis says: “It’s something we have been discussing internally. There seems to be a push away from balanced funds unfortunately. I think in part that’s driven by the way the industry is now structured, with wraps for instance. And even at the broader level, superannuation funds are very much going down the specialist route.”
Good agrees, saying: “It’s been a dying sector for five to 10 years as specialisation comes into play, and the master trust and fund of funds approach has taken over.”
Xiradis says fund inflow is still increasing, albeit at a much slower pace these days.
However, Gonzalez is still optimistic about the future of balanced vehicles.
“The pure managed funds have lost some appeal. But nonetheless, there’s a few out there which over time can provide very good returns, providing that the house can demonstrate that it’s got expertise in the different asset classes,” he says.
