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Absolute return: an insight into the top investors' minds
by Robert St George on Apr 03, 2014 at 11:43
Data from Citywire Discovery suggest that investors in the Mixed Assets - Absolute Return sector prefer known entities to top performers.
This week’s data from Citywire Discovery underline the important distinction between risk-adjusted returns and total returns, which is particularly pertinent in a defensive sector such as Mixed Assets – Absolute Return.
Citywire develops the risk-adjusted numbers quantitatively from a manager’s own information ratio – not that of their fund. This is distinct from other measures such as the Sharpe ratio, which is based on a nominal risk-free rate, by separating returns generated by benchmark moves from those generated purely by the fund manager.
The information ratio thus reveals the return a manager achieved in relation to the risks taken in deviating from a specific benchmark. This excess return is then divided by its own volatility – the tracking error – to indicate the gain the manager is making for each unit of risk taken in stock selection.
As the next chart shows, investors are sticking with those funds in the middle of the pack – generally those with the highest-profile managers – rather than those with superior risk-adjusted or absolute performance.
The chart above plots managers’ five-year risk-adjusted performances against their five-year total returns.
So those highest up are getting the most out of the risk they take, while those furthest right are simply producing the greater returns. The size of the bubbles represents their market share – the managers with the largest bubbles run the most money.
In a perfect world, the risk-adjusted numbers would be aligned with the total returns and all the managers would be precisely along the 45-degree line. And as the chart indicates, there is a close correlation between the two.
But there are outliers, as the best-risk adjusted manager is not the best total-return manager: Swip’s Jeff King holds the former crown, while Gary Reynolds at Courtiers takes the latter prize.
Equally interesting, though, is that the most popular managers are clustered in the middle of the performance pack. Citywire + rated Iain Stewart dominates through his £9.1 billion Newton Real Return fund, equivalent to a 40.7% market share.
Stewart has been consolidating this position recently, rising from a 39.6% market share just three months ago – a move worth almost £250 million. Conversely, Troy’s + rated Sebastian Lyon has lost the most market share in this peer group through that time, dropping from 11.8% to 10.5% despite his superior risk-adjusted and total returns over the past five years.
The analysis comes from Citywire Discovery, a new desktop system that allows fund buyers and fund groups to access track records of over 9,000 managers tracked by Citywire. It provides unique insights into peer group analysis, performance comparisons and competitor analysis. For more details contact email@example.com
Jeff King, Swip Diversified Assets
Jeff King, + rated by Citywire, can boast the best risk-adjusted performance in this peer group over the past five years. Despite this, his Swip Diversified Assets fund is among the smallest in the sector at £34 million.
Essentially a fund of Swip funds, King has in fact recently been running what he terms a ‘pro-risk bias within the portfolio’, being overweight in equities and commercial property and underweight in government bonds given that he views them as ‘expensive at current levels’.
If Swip Diversified Assets looks good in this Citywire category, though, the picture is very different within its IMA Mixed Investment 20-60% Shares sector. There it is consistently below average, outshone by more growth-orientated strategies.
Absolute performance (three-year total return): 9.7%
Gary Reynolds, Courtiers Total Return Cautious Risk
Courtiers founder Gary Reynolds, + rated by Citywire, has produced the best total return in this peer group over the past five years.
His £159 million portfolio contains an eclectic mix of assets: straightforward trackers of mainstream indices; smart-beta products based on the Rafi methodology, which weights indices according to their constituents’ fundamentals rather than size; index futures; traditional bond funds; high-income vehicles like Bilfinger Berger Global Infrastructure; and more esoteric quantitative equity strategies.
Before starting his firm in 1982, Reynolds spent three years as a liability risk specialist at Hogg Robinson.
Absolute performance (three-year total return): 17.8%
David Ballance and Steve Russell, CF Ruffer Total Return
David Ballance and Steve Russell, both + rated by Citywire, are vocal bears – not that they like the term. Russell (pictured) complained last year that ‘the moniker “bear market operator” is unjust and will only ever be heard from a relative return investor’, saying he preferred to regard his approach as ‘portfolio insurance’.
Within their £2.9 billion Total Return fund, Ballance and Russell recently made a surprise new addition to their portfolio: the Royal Bank of Scotland (RBS). ‘With the UK economy exhibiting encouraging growth, we feel that RBS gives exposure to that dynamic while its lowly valuation gives a margin of safety for a stock that might not be an instant turnaround,’ they explained.
‘Its domestically facing characteristics also give some protection from the possibility of further strength in sterling.’
Absolute performance (three-year total returns): 12.5%
Sebastian Lyon, Troy Trojan
Sebastian Lyon, + rated by Citywire, has attracted £2.2 billion into his fund thanks to the downside protection he offers: the fund’s maximum drawdown since its launch in May 2001 has been 13.7%, compared with 45.6% from the FTSE All Share index.
One of his recent sales exemplifies his conservative attitude. He first bought into Irn-Bru producer AG Barr a decade ago, and its share price has since risen six-fold (excluding the effect of stock splits) and its dividend by 125%.
‘So why have we decided to sell such a successful investment when we have no qualms about the business and believe the chief executive is one of the best creators of value we have come across?’ Lyon asked. ‘The answer is simply valuation.’ During his holding period, AG Barr’s price-to-earnings multiple has jumped from 14 to ‘an eye-watering’ 24, while its yield has dropped from around 5% to less than 2%.
Absolute performance (three-year total return): 11.2%
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Look up the funds
- Newton Real Return GBP Inc
- SWIP Diversified Assets A Inc
- Courtiers Total Return Cautious Risk
- CF Ruffer Total Return O Inc
- Trojan O Inc