August tends to be a quieter month for financial markets as trading flows fall and news slows – but that hasn’t been the case at all this week.
Again this week, it has been the two major talking points of the summer that have given investors further food for thought. Firstly, Greece has seemingly come to an agreement over their next bailout deal while China has taken the bold step of devaluing the yuan to support its slowing economy and plummeting equity market.
Could this be another example of the powers that be just “kicking the can down the road?” Well, to use another unnecessary staple fund manager phrase, many feel markets could still “surprise to the upside.”
Largely as a result of the Chinese authorities’ decision, though, the FTSE 100 has ended the week in negative territory.
Elsewhere, strong US data has led many to believe the Federal Reserve will finally raise interest rates next month. All told, it means investors could be in for an interesting time when everyone returns from their holidays.
With all these goings on, fund manager interviews and our access to shed loads of data, we at FE Trustnet have had plenty to write about this week. Here is a selection of our favourites.
From everyone here on the editorial team, have a cracking weekend.
Trusts with performance fees smash rivals over long-term
One of the standout articles this week was a study conducted by reporter Lauren Mason, who decided to tackle the issue of performance fees head on.
They have, of course, become a major sticking point within the industry as while many believe they incentivise the manager to outperform, others view them as further evidence of fund manager greed.
To take a closer look at the debate, FE Trustnet built equally weighted portfolios of all the trusts that are at least 10 years old and charge a performance fee and all the trusts that don’t within the IT UK Smaller Companies, UK Equity Income and UK All Companies sectors.
Source: FE Analytics
Of course, while the past is no guide to the future, FE data shows that investors have been better off owning trusts which implement the added fee and many of the experts she spoke to believed that the idea behind performance fee is beneficial to all, it’s just how they are put together which has been the problem.
How Woodford has put your cash to work in the Patient Capital Trust
Another major talking point this week was the unveiling of Neil Woodford’s holdings in his new Patient Capital trust, which was the largest ever closed-ended fund IPO with £800m raised at launch earlier this year.
Senior reporter Daniel Lanyon took a closer look at the portfolio with the help of analysts at Numis Securities and he found that the star manager had been true to his word as he has high exposure to small, often unquoted companies and ‘early stage’ businesses.
The three largest holdings Prothena, Verseon and Northwest Biotherapeutics, making a collective 12.73 per cent, are all US biotech firms listed on the NASDAQ index. The next largest Proton Beam Partners is a scheme to launch three proton-beam cancer treatment centres in England and Wales and is the largest unquoted holding in the portfolio.
“Placings in Circassia and Oxford Pharmascience also allowed us to quickly scale up our exposure to these other exciting businesses,” Woodford explained.
“Positions in smaller, less liquid securities, such as Vernalis, 4D Pharma and Xeros, took longer to build but, by being patient and disciplined, we have been able to build the positions that we sought.”
Investors take hit from piling into UK trackers
Staying with Lanyon as he wrote another in depth piece this morning tracking the flow of money in the UK equity market.
He found that, surprisingly, the three best-selling funds in the IA UK All Companies sector are all trackers which, due to their nature, have underperformed the average active fund in the peer group over that time as the index’s largest constituents (miners, oil & gas stocks and banks) have all had a terrible time of it over recent months.
These findings have inevitably sparked the active versus passive debate within the comments section. While it is no guide to the future, these results seem to be an example of investors getting their timings all wrong.
Murphy: Why Schroder Income & Schroder Recovery have struggled in 2015
Here we have one of big name fund manager interviews, namely FE Alpha Manager Kevin Murphy who (despite his long-term record of outperformance) has gone through a tough period year to date.
According to FE Analytics, his Schroder Income fund has been the fourth worst performer in the IA UK All Companies sector in 2015, while Schroder Recovery is currently sitting bottom of the 272-strong sector year to date with losses of 1.03 per cent. The peer group average and index are up 8 per cent and 5 per cent, respectively.
Performance of funds versus sector and index in 2015
Source: FE Analytics
However Murphy, who heads up both five crown-rated funds with fellow FE Alpha Manager Nick Kirrage, isn’t overly concerned by those lacklustre returns as he says it is because his ‘deep value’ style (which has worked so well in the past) has simply fallen out of favour.
“This market environment has not been conducive to a value strategy,” Murphy told FE Trustnet.
“We very much have value philosophy and it has delivered extremely good results over the longer term. However, on a year of six month basis, the fund can underperform because it looks very different to the benchmark.”
“If you look like the benchmark, you are not going to outperform and so do to so you have to make active decisions.”
Thomson: China will be the source of the next financial crisis
We also spoke to FE Alpha Manager James Thomson, who heads up the Rathbone Global Opportunities fund, this week.
While he admitted he has more ideas than money at the moment, he warned investors about the possible outcome of China’s increasing woes.
The Chinese equity market has been in free fall over recent months and with growth slowing, the country’s authorities have stepped in with a number of measures such as added stimulus and currency debasement.
Nevertheless, Thomson warned that the country was a “lethal cocktail” of over-capacity, excessive leverage and economic imbalances which, at some stage, could well plunge the global economy into a financial crisis.
“There has been a number of emerging market ‘canary in the coal mine’ warnings about their dangerous imbalances, particular in China, over recent years. Worryingly, they seem to be getting worse,” Thomson said.
“In my opinion, China will be the source of the next financial crisis. Slowing economic growth, over-capacity and excessive leverage is a lethal cocktail. I can’t say when a crisis would start, but all investors need to tread with caution when it comes to China.”
