The start of April means fund managers should now being issuing their latest quarterly reports. Normally that wouldn’t be anything out of the ordinary, yet these reports will contain the first insight into how many funds have coped with the global market sell-off in late February and most of March.

Some funds and investment trusts have already issued commentary on their state of affairs. Others will have waited until the end of the first quarter before quantifying events.

WHAT TO LOOK FOR

Firstly, look for evidence of style drift. This is where a fund manager is doing something different to their usual approach in order to avoid being hit too hard or perhaps to chase a short-term opportunity to make up some lost ground.

Managers should really be sticking to one investment process, regardless of market conditions. Just look at Neil Woodford who was guilty of style drift and it cost him his business.

Really horrible market conditions typically cause investors to panic and make irrational decisions which they may come to regret later on. Fund managers can also succumb to fear, yet they
should be sticking to their investment mandate.

Scottish Investment Trust (SCIN) looks as if it has drifted from its usual value focus. As we reveal in this article, fund manager Alasdair McKinnon has made significant changes to his portfolio, moving from many value stocks into expensive defensives.

On one hand he is trying to protect shareholders in a very difficult time for the markets. On the other hand, by reducing exposure to retailers and banks, among others, he is putting the investment trust in a weaker place to benefit from any market rebound as the stuff he’s sold could be first to bounce back and the defensives he now owns might be left behind.

BEING TOO AGGRESSIVE

The second thing investors should seek in the latest batch of fund manager reports is evidence that portfolios might have been too aggressively positioned going into the market sell-off.

Witan Investment Trust (WTAN) had 12% gearing (borrowing) going into February’s market crash. The higher the gearing, the greater the chance of underperforming in a market downturn, which Witan has found out. Its net asset value fell by 24% over the sell-off versus a 15% fall in its global benchmark.

We reveal in this article how Temple Bar (TMPL) paid the price for having large stakes in companies experiencing big problems such as outsourcing provider Capita (CPI) and building materials group SIG (SHI) or ones which the market believes will struggle this year, such as Marks & Spencer (MKS).

After discussion with the trust’s board, fund manager Alastair Mundy sold more defensive holdings – seemingly the opposite approach to Scottish Investment Trust – to reduce borrowing levels. But he cannot be accused of style drift as the portfolio restructuring maintains his contrarian approach with a heavy focus on value and a recovery in UK domestics, having sold the least cyclical positions.

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