In 2008 we experienced the progressive effect of the global Credit Crisis and its subsequent unprecedented and aggressive effect on property values, companies and individuals. The initial effects were primarily contained in the financial sector and considered to be mainly under control until the collapse of Lehman Brothers in September which in turn sparked a series of mergers or protective takeovers. This quickly extended to the bail-outs and the quasi-nationalisation of banks in the UK and around the world. October was probably the worst month for stock markets in living memory and the cumulative effect hit the High Street as consumer spending was reigned in and famous retail names were lost amidst pre-Christmas sales. The reality of a recession has since been confirmed by official figures.
Given this challenging environment for investors and both investment advisers and managers, I have reflected on the returns for 2008 across the broad range of assets which collectively comprise a balanced portfolio.
The worst performing assets were Private Equity, down 48%, Emerging Markets, down 36%, Commercial Property, down 32% and the FTSE All-Share, down 29%. On the plus side, Global Bonds were up 42% (mainly due to the benefit of currency volatility), Cash returned 4.5% and UK Government Index-Linked Gilts 4%.
The volatility across all assets and markets was such that the principles of modern portfolio theory (of diversification to reduce risk) were overwhelmed. Even cash, the asset not considered exposed to market risk, became the cause of greatest concern for almost everyone for a very unsettling period of time. Even now, with banks part-nationalised or supported in other ways by Governments, full confidence in them as institutions has not recovered.
Fiducia’s Portfolios Benchmark Tested
Against that background, how did the Fiducia portfolios perform? To have a proper context to assess performance we need a benchmark and for this we use the equivalent sectors of the Investment Managers Association (IMA). The IMA is the trade body for the UK’s £3,400bn asset management industry. It collates and publishes statistics from all its members on fund values and performance classified within sectors and includes quartile and decile rankings for all their members funds. Therefore we are able to compare the performance of our model portfolios to the relevant IMA sector in terms of both performance and volatility. The outcomes for 2008 are set out below.
The only Portfolio style where we underperformed the relevant IMA sector is Adventurous. There is no direct equivalent of our Adventurous portfolio and so it is benchmarked against the IMA Active Managed sector against which we also compare our Growth portfolio. As can be seen from the Volatility figures (24.46% v 13.92%) these are not similar investment styles. Our Adventurous portfolio is still fully invested whereas many of the leading funds in the IMA Active Managed sector now have typically up to 20% in cash and/or 20% in Bonds.
In 2006 our Portfolios produced returns in the range 8% (Cautious) to 18.5% (Adventurous) and in 2007 from -0.2% (Cautious) to 9% (Adventurous). In terms of our Quartile ranking in comparison to all the individual funds within each IMA sector, our Cautious, Prudent and Balanced portfolios all achieved 1st Quartile ranking for 2008. The Growth portfolio was 2nd Quartile and the Adventurous was 3rd Quartile, but I have explained above what I believe the reasons are for that outcome.. Our Balanced Portfolio was ranked 17th out of 138 funds in 2008 and was 11th out of 112 funds over 3 years.
We are encouraged by these results and our challenge is to maintain and improve upon the standards we have set.
The only portfolio style where we underperformed the relevant IMA sector is Adventurous. There is no direct equivalent of our Adventurous portfolio and so it is benchmarked against the IMA Active Managed sector against which we also compare our Growth portfolio. As can be seen from the Volatility figures (24.46% v 13.92%) these are not similar investment styles. Our Adventurous portfolio is still fully invested whereas many of the leading funds in the IMA Active Managed sector now have typically up to 20% in cash and/or 20% in Bonds.
In 2006 our portfolios produced returns in the range 8% (Cautious) to 18.5% (Adventurous) and in 2007 from -0.2% (Cautious) to 9% (Adventurous). In terms of our ranking against the individual funds within each IMA sector, our Cautious, Prudent and Balanced portfolios all achieved 1st Quartile rankings for 2008. The Growth portfolio was 2nd Quartile and the Adventurous was 3rd Quartile, but I have explained above what I believe the reasons are for that outcome. Our Balanced Portfolio was equivalent in rank to the 17th out of 138 funds in 2008 and 11th out of 112 funds over three years.
We are encouraged by these results and our challenge is to improve upon the standards we have set. Gordon Kearney, Head of Investments at Fiducia said “While we would like to have posted positive numbers across our range of portfolios in 2008, our relative outperformance of the industry benchmarks reflects our commitment to a well thought out asset allocation process, portfolio diversification and disciplined fund selection. It has been adherence to these sound principles that has enabled us to outperform our benchmarks in what have been extremely volatile and uncertain times in equity and bond markets.”