"Above-average returns with below-average volatility" is the tag-line for a whole host of fund houses, but it seems that few have managed to deliver on this promise as well as Aberdeen. Across its open- and closed-ended ranges, Aberdeen’s funds have consistently beaten their peers in down periods without giving too much away when markets rally.
In 2008, for example, the flagship Aberdeen Emerging Markets fund lost 13.04 per cent less than its Global Emerging Markets sector, and followed this up with outperformance in the rebound of 2009.
Bruce Stout’s Murray International trust lost a full 20 per cent less than its IT Global Growth & Income sector in 2008 and also beat its peer group in the rising markets of 2009 and 2010. A similar trend is seen across Aberdeen’s UK and Asia Pacific ranges.
Year-on-year performance of funds vs sectors
| Name | 2011 returns (%) | 2010 returns (%) | 2009 returns (%) | 2008 returns (%) | 2007 returns (%) |
| Aberdeen Emerging Markets | -11.82 | 31.64 | 61.17 | -23.63 | 29.89 |
| IMA Global Emerging Markets | -19.02 | 23.55 | 57.22 | -36.67 | 34.05 |
| Murray International Trust | 1.3 | 26.54 | 35.87 | -8.1 | 10.49 |
| IT Global Growth & Income | -5.49 | 22.84 | 30.52 | -28.29 | 1.4 |
| Murray Income IT | 2.95 | 25.93 | 23.68 | -26.19 | -6.14 |
| IT UK Growth & Income | -1.69 | 16.91 | 25.98 | -36.49 | -6.58 |
| Aberdeen Asian Smaller Companies IT | -5.08 | 67.12 | 64.54 | -22.26 | -0.79 |
| IT Asia Pacific ex Japan Equities | -15.03 | 29.87 | 66.05 | -36.33 | 44.62 |
Source: FE Analytics
Aberdeen managers explain it is the firm’s diligent screening process that enables them to find stocks that hold their own in all market conditions.
"Our process is identical across every market, whether it be emerging markets, the UK or Europe," explained Fiona Manning, portfolio manager on Aberdeen’s highly rated emerging markets team.
"While it is our fundamental belief that, in general, markets are efficient, in the long-term we think they recognise the superiority of high-quality businesses with strong balance sheets."
"We use short-term inefficiencies in the market and volatility to buy these companies at the right price."
Manning explains that every single stock in any Aberdeen portfolio has to go through a stringent screening process before it can even be considered for inclusion.
"We look at a huge number of areas, but the most important is the balance sheet and earnings," she said.
"We look for companies with sustainable earnings and cash flow and low levels of leverage. We’re always very conservative in our forecasts for earnings, so we tend to take a figure 10 per cent below the consensus."
"We only take into account what we know – we don’t try to second-guess exchange rates, for example."
Manning’s use of "we" is exhaustive but also very necessary, since all Aberdeen portfolios are team-run. While each regional team has an individual who can veto certain decisions, she says this is almost unheard of.
"Every decision is discussed together as a team and we always aim for a consensus," she explained. "If we’re undecided, we’d simply meet the management again and try and come to a team agreement."
Once the company gets through this stage, a management meeting follows very quickly. However, the team doesn’t only meet with those included in the portfolio.
"Across both the MSCI Emerging Market and Latin America indices, we have met 99 per cent of all management and hundreds of off-benchmark names," said Manning.
"As long-term owners, we want to know the management’s other investment interests, exactly what they own, because it’s important the owners act in the interests of their shareholders."
While Manning (pictured) says valuations are taken into account, she explains Aberdeen would never buy a stock just because it is cheap.
"We look to buy during market sell-offs, but only if they’ve made it through the process, regardless of how cheap it’s perceived to be," she continued. Given this very long process, it is unsurprising that all of Aberdeen’s investment portfolios have such a low turnover.
Manning says the emerging market funds tend to have an annual turnover of between 5 and 15 per cent, while the UK and global funds tend to hover around the 15 per cent mark.
Indeed, the process is similarly stringent when it comes to selling a position.
Manning commented: "If a stock performs well, we look to trim the position, but for us to remove it completely we’d have to see a gradual deterioration in valuation."
"When a stock is expensive in absolute terms, whether the share price has gone up or down, then we’d have a discussion."
"We’d also look for fundamental structural shifts. Take fixed-line telecoms, for example, which have lost out to mobile."
All Aberdeen managers invest on a five- to 10-year view and therefore resist the temptation to chase returns during up periods.
"We’re not going to sacrifice our quality because we think the markets might rally though," explained Charles Luke, who manages the £462m Murray Income trust.
"We appreciate and hopefully so do our clients, that we will go through periods of underperformance. We invest on a five- to 10-year basis and believe our focus on quality is best suited to this time horizon."
In the UK market, Luke believes UK large caps provide greater stability than those lower down the spectrum, which he says is particularly important given the numerous macro headwinds at the moment.
"Previously we have had a greater exposure to the FTSE 250, but we believe that larger companies, with typically globally diversified revenues and strong balance sheets are better positioned to address this challenging environment.”
He currently has 80 per cent of his assets in the FTSE 100, 10 per cent in the FTSE 250 and 10 per cent in large caps not domiciled in the UK.