This month marks 10 years since the nadir of what was then being called the ‘credit crunch’, subsequently graduating into the global financial crisis.
A dubious ‘bull’ market over the past decade (questionably so-called for the fact it has been artificially stimulated through quantitative easing), plus a fund universe that is now comprised of a significantly larger proportion of passive and algorithmic investment strategies, it is clear investors are dealing with quite different market conditions today.
Some active managers are seasoned enough to have lived through that change. The veterans; the Neil Woodfords, the Job Curtises of the world and one such self-proclaimed veteran, Tony Yarrow.
A fund manager since 1988, Yarrow is co-portfolio manager on the TB Wise Multi-Asset Income and TB Wise Multi-Asset Growth funds.
He favours experienced managers as he will have gone through the same peaks and troughs alongside many of them and he refutes suggestions of a bullish past decade.
“It is difficult to find anything that has had consistently positive conditions over the period,” he says. “US technology was about as good as anyone was going to get, until last year.”
Importance of downside protection
One fund that arguably launched with the right style at the right time was the Evenlode Income fund, run by Hugh Yarrow (pictured) and Ben Peters, Hugh being Tony’s son, according to Nathan Sweeney, senior investment manager at Architas.
Sweeney, who looks for upside capture and information ratio but also stresses the importance of downside protection, says Yarrow has been one of the standout young managers with the income fund since it launched in October 2009, although he had been running equity income funds at Rathbone Unit Trust Management since 2002.
“Downside protection is one of the main metrics where we would want a fund to score highly. Very few managers have been tested with regard to drawdown and we are very aware of that,” said Sweeney.
Taking the Q4 sell-off last year, he describes the concern if a manager has not lived through a downturn, because it could result in Architas putting funds into a portfolio with an expectation of good downside protection but then when you do get a sell-off, their theory gets tested.
Tested at different times
Sweeney explains that while Hugh Yarrow is one of the standout performers in the past 10 years, conditions have been supportive to his style.
Sweeney warns with growth set to slow after such a prolonged period of stimulus, leading to global tensions and increased threat of protectionism over global trade, the likelihood of drawdown is higher.
So, have the theories of many of Architas’s underlying funds been tested
“We did a bit of an autopsy on our performance on Q4 and some of our funds did not perform as we would have hoped.”
Risk reduces with age
Believing that younger investors will likely not have factored in the need for a more defensive tilt to their portfolio construction, Sweeney also believes appetite for risk reduces with age in fund management.
“Managers tend to build their investment thesis over time, and it will change due to events.”
The nimble approach of one of its US holdings, River Road, for noting its exposure to more leveraged companies and trimming accordingly was lauded by Sweeney.
“They looked at their portfolio, realised they were invested in companies that had never witnessed a material drawdown, admitted they were in a different environment and did something about it.”
Humility is admired
Humility seems to be a common desirable trait for fund selectors.
Fidelity’s Riccardo Muscio, assistant portfolio manager in the multi-manager team, says making mistakes and learning from them is one of the most important paths towards outperformance.
“While there has not a global recession over the last decade or so, there have been economic growth slowdowns that were characterised by a higher level of market volatility that tested less experienced fund managers.
“Therefore, we apply the same standards in terms of judging their investment process and their mental resilience to stick to it in order to minimise all the major behavioural traps.”
Stick to your knitting
But where Sweeney favours the light-footed approach, given the new normal environment, AJ Bell head of active portfolios Ryan Hughes says conviction and managers “sticking to their knitting” are vital, especially where unproven track records come into play.
Also naming Yarrow – whose Evenlode Income fund sits on AJ Bell’s favourite funds list – alongside Fundsmith’s Terry Smith, possibly one of the higher profile managers that has not been going a full decade, Hughes says while they both have experience, it was of a different type.
“Hugh ran money at Rathbones before the crisis, but he was investing in a different manner, and similarly Terry Smith [whose global equity fund launched in November 2010] is also an experienced investor but he didn’t have a fund before.”
Hughes explains that Smith has not made it to AJ Bell’s buylist because while the team understands its thesis, it has yet to see it behave through “tricky” markets, plus Hughes “cannot ignore that 30% of his portfolio is in tech, so if there’s a big rotation he may get left behind”.
“We look very carefully at a manager’s philosophy and process and if it is clearly articulated – as is the case with both of those two – it gives you a lot more confidence that when things get more difficult, they are unlikely to change what they do.”
He says otherwise, if they have no track record, and the process is unclear or inconsistent, it becomes “a bit of a leap of faith”.
