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Index funds replace heavyweights such as Blue Whale in latest AFI rebalance

18 February 2021

In a series looking at the funds added to and removed from the Adviser Fund Index, Trustnet starts with the Aggressive portfolio.

By Rory Palmer,

Reporter, Trustnet

The AFI Aggressive portfolio has seen an influx of passive funds following its most recent rebalance, reflecting the growing appetite for these vehicles across the industry.

This trend was complemented by the addition of more income-focused funds in anticipation of the resumption of dividend payments, with hopes that the vaccine rollout will allow a return to normality this year.

Meanwhile, the LF Blue Whale Growth and Premier Miton UK Multi Cap Income funds were two notable casualties in the rebalance.

The Adviser Fund Index (AFI) is made up of the portfolios used by a panel of leading UK financial advisers, based entirely on the funds recommended to clients.

The AFI Aggressive portfolio is designed to suit the risk profile of a person in their late 20s, whereas the AFI Balanced and AFI Cautious portfolios are more risk-averse.

Twenty-nine funds were removed from the portfolio in the latest rebalance. Of their 29 replacements, eight are index funds, with five run by Vanguard.

“It’s clearly a long-term structural trend,” said Charles Younes, research manager at FE fundinfo. “Although I’m surprised considering some of those markets have the capacity for an active manager to outperform.

“Maybe active managers are a less compelling solution than they used to be.”

Among the income funds that were added to the portfolio in this re-balance are Fidelity Global DividendM&G North American Dividend and Rathbone Ethical Bond.

The £2.2bn Rathbone Ethical Bond fund has been managed by Bryn Jones since 2004.

To assess the creditworthiness of prospective bonds, Jones and the fund’s analysts consider the ‘four Cs’ – character, capacity, collateral and covenants. Character considers the quality of management, capacity assesses company cashflow and liquidity, collateral is the quality of the underlying assets and covenants refer to restrictions included in the bond contract.

“Jones is definitely one of the best ethical bond managers we have in the UK,” noted Younes.

“The fund has shown that you can have great performance whilst being an ethical fund. There doesn’t have to be a trade-off.”

The funds added to the AFI Aggressive index

 

Source: FE Analytics

The £2.1bn Fidelity Global Dividend fund is run without a strict dividend criteria although manager Daniel Roberts believes that each holding should contribute to the growth in income.

“While it was a tough year for dividends as a whole, the manager avoided a lot of the big companies that cut their dividends,” Younes said.

“Going forward, if you need a good income solution, then this fund is a good call.”

Other notable additions include Ninety One Global Gold and JOHCM UK Opportunities.

The JO Hambro vehicle has a strong value tilt. Younes said he was surprised to see it included in aggressive portfolios, considering its defensive properties and historically high allocation to cash.

But if value enjoys a resurgence, the fund would represent a good choice for any risk appetite.

The £723.69m LF Blue Whale Growth fund, managed by Stephen Yiu and Daniel Allcock, is a notable casualty.

The five FE fundinfo Crown-rated fund celebrated its three-year anniversary in September 2020. While it has shot towards the top of its IA Global sector over this time, it has fallen into the fourth quartile over six months.

“It’s surprising because usually the three-year track record mark is when you wait to see if the manager can do what they set out to do,” said Younes.

The largest fund to be removed was the £4.8bn Pictet Clean Energy fund, managed by Xavier Chollet and Christian Roessing. Younes believes its size may have led to its removal.

“It has become one of the largest funds, something which maybe has concerned some of the panellists,” he said. “Nevertheless, clean energy is still an aggressive sector.”

Poor performance seems to have cost other funds a place in the portfolio, including value-based strategies that many analysts are now tipping for a resurgence after a difficult decade.

The Dodge & Cox US Stock and Man GLG Income funds are two such value strategies.

“A strong economic recovery, supported by the success of the vaccination programme, should mean that these value managers are perfectly positioned for an increase in inflation and a re-opening of the economy,” Younes added.

The funds removed from the AFI Aggressive index

 

Source: FE Analytics

“Maybe they were too aggressive before, but now could be a decent bet.”

Similarly, the timing to remove Premier Miton UK Multi Cap Income and Unicorn UK Income is strange considering that UK valuations are at their most attractive level in five years and these strategies have an additional tailwind following the agreement of a Brexit trade deal.

“The decision to remove these value funds now may be a performance call rather than a style decision – because value may be back in favour,” Younes added.

Performance of index over 10yrs

 

Source: FE Analytics

Over 10 years, the AFI Aggressive index has made a total return of 114.53 per cent, while the FTSE UK Private Investor Growth index made 121.73 per cent. The average fund in the IA Flexible Investment sector achieved a total return of 85.32 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.