Testing multi-sector funds

THE table on page 20 (MM: 30/6/05), and the graphs, summarise the results of all the funds considered.

The two scenarios tested the returns of the 38 multi-sector balanced and growth funds in the Mercer IS survey over varying time periods to April 30, 2005, and therefore market conditions.

Three-year rolling returns

The rolling average one-month, three-month, and one-year returns over the three years to April 30, 2005, were calculated for each fund.

Funds without full data were eliminated from the analysis, hence there is some survivorship bias to the results of this scenario (see below).

According to Keown, by focusing on the past three years only, the returns achieved in the more benign 1990s environment are removed.

“The past three years were not an easy time for multi-sector fund managers, as can be seen from the contraction in the range of 1-month, 3-month and 1-year returns,” she adds.

Nonetheless, the minimum returns achieved actually improved compared to inception returns — the minimum one-month return rose from -0.24 per cent to 0.22 per cent, the minimum 3-month return rose from -0.42 per cent to 0.80 per cent and the minimum one-year return improved from 0.97 per cent to 5.91 per cent.

There are a number of possible interpretations.

“The younger funds had poorer returns or the quality of the multi-sector fund universe has improved over time, as funds have dropped out of it — this is more likely,” Keown explains.

“The contraction in the maximum return is considerable also, and could reflect the more difficult market conditions in which funds were operating. The maximum rolling average one-year return was only just in the double-digit range.”

Five-year rolling returns

The rolling average one-month, three-month, and one-year returns over the five years to April 30, 2005, were calculated for each fund.

“Here again, we see further contraction of the minimum and maximum rolling average returns. This five-year period commenced April 1, 2000, and so includes the difficult turn-of-the-century market environment, only part of which is represented in the results focuses on the most recent three years,” Keown says.

Nonetheless, the minimum rolling average one-year return was a positive 2.10 per cent, while the maximum was 7.35 per cent, with an average of 4.26 per cent.

“Again, you need to consider that these are post tax and management fee returns, and therefore some funds were competitive with a bank term deposit,” Keown says.

“The scenarios reinforce that the past five years and three years have been a particularly testing time for multi-sector funds, but that there are funds that have consistently achieved very respectable returns nonetheless. It also highlights that the past five years and three years have been atypical.”

— Larissa Tuohy