PA ANALYSIS: Indices are poor but funds are poorer

Funds in the IMA sector failed to keep pace with the two major indices with positive Q2 numbers.


During the second quarter, to 29 July, 2011, the larger market indices all fell. The FTSE All Share ended the period 3.34% down, the S&P 500 just edged it to finish 0.03% lower with the Russell 2000 more than 6% down overall. The FTSE Europe ex UK index, unsurprisingly, finished further down than any of them, at -8.38%.

The picture over the past month is no different, although UK small companies just about hit positive territory, returning 0.43% in July.

Positive Japan

But enough of the bad news – outside various UK and world government and corporate bond indices, the list of those in positive territory is a very short one, comprising UK property and Japan. Besides their positive returns, and the fact they are fairly uncorrelated to each other and the broader equity markets, they would appear to have very little in common.

In general, however, Japanese funds haven’t been able to keep up with the IMA Japan sector down 1.82% in the past three months although the six funds in the IMA Japanese Smaller Companies sector are up a combined 3.14%.

Chris Taylor is the manager of Neptune’s £135m Japan Opportunities Fund and is one of the most lauded in the sector. He has long said that Japan’s economy is broken and that it is a stock-picker’s market, with his focus squarely on Japan-based global sector leading companies.

His fund is down 8.83% in the past there months and is bottom quartile.

Japan is still one of those investments that people who have owned it for a while will hang on to otherwise they’ll simply crystallise their losses; those who haven’t owned it for a while still avoid; and those who have bought into the story recently will buy up or sell  down depending on which bit of the argument they believe.

Property position

UK property follows the same trend as Japan in that the FTSE Real Estate index has been flat over the past three, six and 12 months when the funds – in the IMA Property sector at least – have lost money over the same periods, down by 5.82%, 4.22% and 5.43% respectively.

Rather than being an argument for or against index investing, and far from trying to predict Japan and UK property as the places to put your money now, the lesson is to think long term.

All of the major indices that have performed so poorly in the past quarter have to varying degrees been well into positive territory over the past year, three and five years. The spread of returns ranges from, for example, from 4% in BRIC over the past year to 21% in UK small cap; and from 31% in UK small cap over ten years to 400% in BRIC.

Every professional investor understands that past performance is no guide to future returns though and present performance is even less of a guide given the volatility in the markets right now. Thankfully we are investors not traders or market timers.


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