For big returns, go with the little guys

News analysis: The major fund managers languish among the also- rans in the latest CAPS survey

BIG IS ugly in fund management. That, broadly, is the conclusion to be drawn from the latest CAPS survey, the authoritative study of fund management performance sent out each year to Britain's pension fund trustees.

The 1998 survey, published yesterday by the CAPS consultancy, shows big household names such as Schroders, Mercury and Phillips & Drew languishing near the bottom of the table, while star billing is taken by virtual unknowns.

The best performer in terms of the return on the flagship mixed-with- property fund last year is the little-known Fuji-Lord Abbett fund, 75 per cent owned by Fuji, the Japanese bank, and 25 per cent by Lord Abbett, America's second-biggest independent fund management group. It returned 21.2 per cent, compared with an average of 13 per cent. Second place was taken by Singer & Friedlander at 18 per cent, and third place went to Swiss Life.

Fuji, followed surprisingly by Royal SunAlliance, emerges as the most consistent performer over the past five years.

"The one thing the top five have in common is that they are all small," says CAPS chief executive John Clamp. Fuji manages $1bn globally, but the UK fund tracked by the CAPS survey manages just pounds 26m.

Simon Steele, Fuji's UK fund manager, says: "We do things slightly differently from the competition." The firm's style, he says, is not to pick stocks but to identify which industries have the best growth potential and pricing flexibility globally. "We draw up the ideal characteristics and then go around the world and try and find them."

The result is a list of 800 "best of breed" companies worldwide that are then screened financially and whittled down to a portfolio of 50 to 60 companies in which the fund actually invests.

Clearly in the dunces' class was Phillips & Drew, which came 67 out of 67 in the last quarter, although for the year the dubious distinction of coming bottom goes to Abbey Life.

P&D fund manager Tony Dye's dogged, now legendary determination to stay heavily in cash and bonds, avoid the US equity market altogether and be underweight in UK shares looked very smart in the third quarter, when all gains made by competitors on the stock market in the first half were wiped out. But it looked less clever after the fourth quarter, when major markets staged a spectacular rally to end the year substantially up overall.

But it would be wrong to focus on P&D alone. Over the last 12 months, Schroders came 55th. Mercury came 32nd, while Morgan Grenfell, now recovering from the severe setback it was dealt by the downfall of high-flyer Peter Young three years ago, ended a respectable 20th.

One factor that has hit the performance of many larger British funds is their faith in the UK small and medium-sized company sector, which seriously disappointed last year. David Montgomery, it has been said in the City, may not be the only FTSE 250 chief executive to find his job a casualty of the pressure on asset managers to hasten the process of delivering the value they had expected in these stocks.

While the FTSE 100 rose by 17.5 per cent last year, the FTSE 250 advanced just 4.2 per cent. The unloved small cap index was down 8.1 per cent.

The big funds have also pursued a strategy of concentrating their holdings so that they take fewer, bigger bets on a handful of companies - great when their number comes up, but disastrous if bets go wrong.

Perhaps the most surprising statistic from the survey is that more than half of fund managers underperformed the index: not the first time this point has been made, but worrying still, considering that these people charge whopping fees to manage our pensions.

Even more astonishing is that, judging from the growth of funds under management, underperforming the index, while embarrassing, does the big boys little harm. Everyone acknowledges the importance of performance, but on this score trustees rarely vote with their cash. Mr Clamp says: "Managers get fired, first because they are not doing what they said they would do, and second because of poor administration, like getting portfolio statements wrong. A very poor third comes performance."