Here today, gone tomorrow

A group of ill-matched protagonists with the ability to master a variety of disciplines while delivering outstanding performance may sound like the marketing patter for a reality TV show, says Chris Salih, but it is, in fact, the role of the modern-day fund manager

Anyone remember the TV show Superstars? Patching together groups of badly dressed sportsmen with bad 1970s hairstyles, the athletes were expected to compete in 10 events, ranging from shooting to the steeplechase, with the winners usually those with the ability to compete across the board, as opposed to specialists across two or three disciplines.

Ever heard of Brian Jacks (judo), Kejll Isaksson (pole vaulting) and Ties Kruize (hockey) - at least before they appeared on Superstars? The answer is probably not, but these were the guys who could handle any sport thrown at them, overshadowing the likes of decathlete Olympic gold medallist Daley Thompson or former light-heavyweight boxing world champion John Conteh.

While it may lack the entertainment value of seeing Kevin Keegan fall off his bike, or heavyweight champion boxer Joe Frazier trying to win a 50-metre swimming event having forgotten just one thing - he couldn't swim - the ability to master varying conditions and still provide a strong performance has, in the last few years, also been the role of every single fund manager looking to outdo their peers.

The last five years or so have been a classic example of just how much markets can fluctuate, with every asset class praised and then scorned - sometimes in the same sentence. During the three-year bear market to 2003, advisers had to deal with their clients' investments falling into a hole that in some cases - just ask with-profits policyholders - began to look more like an abyss. Then, just as they'd finally sorted out a client's portfolio, markets bounced back to the point where assertion and later aggression became the order of the day.

So what ever happened to fund management's superstars? Everyone knows they shouldn't just buy funds that have great three-year performance but timing the high and low points of a fund is notoriously difficult. Here we look at the top performers - both overall (Table 1) and in the UK All Companies (Table 2) and multi-manager (Table 3) sectors - over the three-year periods to 31 July 2002, 2003, 2004 and 2005 and analyse whether they were able to keep up the good work or merely disappeared back into the crowd.

Straightaway, we can see a vast array of sectors came to the fore - if only for a while. A case in point is 2002 when the bear market was in full flow and people were keen for something different, resulting in an explosion in the range and popularity of specialist funds, all of which were seen as ideal tools for investing in what were largely uncorrelated asset classes.

Resources funds were one such specialist area and two can be seen among the top 15 funds for the three years to 31 July 2002 - Ian Henderson's JPM Natural Resources and Graham Birch's Merrill Lynch Gold & General.

"People had given up on traditional asset classes and were looking for something safe and different," says Jason Britton, a fund manager at T Bailey Asset Management. "Gold is in the ground and you don't get much safer than that. Furthermore, China was in the midst of a super cycle, with demand for raw materials as strong as it was in the US."

While Birch's fund went on to be the top fund over the next two three-year periods, it was 154th out of 1,342 funds over the three years to 31 July 2005 and stands at 59th out of 1,486 over the three years to 31 July 2006.

However it is JPM Natural Resources that has been the most consistent fund in our charts, never straying from the top 15 across all markets and topping the list with a 224% return over the three years to 31 July 2006. "It also held gold, but it benefited massively from the pick-up of oil pricing off the back of the Russian crisis in 2002," says Tom McGrath, a fund manager at Miton Optimal.

Other former top performers have not fared so well. Gartmore US Bear thrived over the three years to 31 July 2002 to stand at fourth place in that table - three years on it is 1,486th out of 1,486 funds. That said, as Marcus Brookes, deputy head of multi-manager at Gartmore, points out, this is due to the fund "doing exactly what it says on the tin and performing well in a bear market".

Less easily explained is the collapse in the showing of the health funds - notably Axa Framlington Health, which was third in the 2002 all-funds table. The portfolio, run by Antony Milford until March 2005, is 1,428th out of 1,486 over the three years to 31 July 2006. The large pharmaceutical companies may have struggled over the past few years but that is still some fall from grace. "Despite tending to be linked to the UK market to a degree, as a sector the health funds should have done better as people have healthcare needs all the time," says McGrath.

Compare the top 20s of the giant UK All Companies sectors over the three years to 31 July 2002 and 31 July 2006 and they look very different, with only two funds standing the test of time. Anthony Bolton's Fidelity Special Situations was sixth in 2002 and 18th in 2006 while Saracen Growth Alpha, run by Jim Fisher and Julian Fosh and fourth in 2002, is the top UK fund over the three years to 31 July 2006, having grown 123%.

Top of the tree in 2002 was Solus UK Special Situations, whose management was outsourced to Axa Framlington's Nigel Thomas, then of ABN Amro. However, when Thomas quit the fund to run a similar mandate within ABN, his former charge quickly plummeted and, within 12 months, was one of the worst performers in the sector. In truth, despite more than one attempt to repackage it, the fund has never looked like returning to its former glories.

As one might expect over the three years from 2000 to 2003, many of the strongest performing funds tended to be bond vehicles in some shape or form. "At that time, with interest rates as they were and people looking for more risk-averse vehicles, they were the main flavour," says Miton Optimal's McGrath. "They definitely have a time and a place and 2003 was the year when they were the only game in town."

But while the rise of the likes of New Star Monthly Income, Baring Global Bond, Newton Long Corporate and Old Mutual International Bond was rapid, their fall from grace was equally as swift, with the majority outside the top 1,000 funds again over the three years to 31 July 2005. "Any bond fund would have done well in that environment," says Gartmore's Brookes. "When the GDP pick-up finally came, sales quickly came to an end."

While bonds were equally to the fore in 2003 on the multi-manager side, cautious managed funds were also emerging as an alternative proposition. Funds such as Threadneedle Navigator, Jupiter Merlin Income and Marlborough Equity & Bond all fell under the cautious managed banner, returning well until the three-year period to 31 July 2005, by which time investors had become more aggressive.

Of course, multi-managers should be ideally placed to move ahead of such swings in investor sentiment. "We are fortunate enough to have the constant opinion of geniuses such as Buxton, Bolton and Woodford who give us the insight to see things early," sayd Brookes at Gartmore. "A good example is our decision to move to equities before March 2003."

Adds Britton at T Bailey: "One of the reasons why fund of funds tends to outperform manager of managers is that we are lucky enough to sell and switch funds at a rapid rate in order to keep ourselves ahead of the market."

From 2001 onwards, smaller companies began to thrive but it wasn't really until 2004 that the sector was seen to excel. While specialists still topped the bill, the outperformance of smaller companies was highlighted by eight small-cap funds residing in the top 20 for the three years to 31 July 2004.

Small-cap-oriented funds that have done particularly well in recent years are Marlborough Special Situations, run by Giles Hargreave, as well as Axa Framlington UK Smaller Companies, Investec UK Smaller Companies and Old Mutual UK Select Smaller Companies.

Hargreave, whose fund ranked in the top five of all funds over the three-year periods to 31 July 2004 and 2005, says the freedom of the fund's mandate, which allows him to place a portion of the vehicle in any market across capitalisations, is crucial. "We are willing to take a holding in a large-cap stock if we believe somebody is trying to take it over and we also play in the new issue market where we can," he says.

With the small-cap rally coming to a halt, all four funds mentioned have now fallen back in the wider market although all remain strong offerings. "Small caps are something we like," says McGrath at Miton Optimal. "They have more debt on their balance sheets and are sensitive to interest rates - thus performing well when rates fall. The problem is that as interest rates get higher, as they have been recently, then small caps come under more pressure. They have probably had their run, but they haven't collapsed - it's been more of a slow-up."

2004 also saw the UK All Companies sector offering a taste of thing to come, with Ed Burke's Invesco Perpetual UK Aggressive, as well as Schroder Mid250 and JPM UK Dynamic all having stood the test of time to appear in the top 10 UK funds over the three years to 31 July 2006.

2005 saw the focus on growth persist. At that time Unicorn Free Spirit was leading the UK sector, only for its returns to drop markedly in the next 12 months - it is 176th out of 275 funds over the three years to 31 July 2006. The portfolio invests in companies that have the best potential for growth and profit across the whole UK listed market, irrespective of market cap. "Peter Webb, who runs the fund, is a very experienced manager who took advantage of the popularity of small caps," says Gartmore's Brookes. "However, the chances are the portfolio took a hit off them as well."

Another fund from the UK All Companies sector to have suffered in the past 12 months is New Star Select Opportunities. Ninth over the three years to 31 July 2005, it stands 254th out of 275 funds over the next three-year period. Patrick Evershed's portfolio looks principally for recovery situations among UK companies - a trend New Star readily admits is currently out of favour in the UK market.

Continuing the trend of keeping one step ahead of the wider market, multi-manager had become even more aggressive in the wake of the bear market, with Asia a prominent choice for investment. One fund that has consistently produced outstanding returns over the years is New Star Pacific Growth. The fund, now run by Ian Beattie, has almost always been ahead of the curve by feeding off the growth of China, Hong Kong and Taiwan.

The popularity of more risky funds is a trend that is continuing to this day. Once again specialist funds have taken the mantle of being the market favourite - or, as hindsight has too often proved, fad - with Latin American funds from Invesco Perpetual, F&C, Threadneedle and Scottish Widows all showing strong three-year performance figures to 31 July 2006.

"The past few years have seen a complete turnaround in markets and consequently views," says T Bailey's Britton. "Brazil, Argentina and Chile were all seen as bad places for investment in the 1990s - it was either double your money or lose it all. It's all changing though, with the likes of Chile, for example, holding the largest copper mines in the world."

Despite the popularity of Superstars, with different athletes competing in different disciplines every week the only thing that remained constant was the somewhat monotone commentary of David Vine and, once more, there is a parallel with the world of fund management.

Although plenty of managers have had their time in the sun in terms of performance, the truth is that even a broken clock tells the right time twice a day. It is getting things right consistently that counts - bear that in mind the next time you wonder why it is that everyone loves Anthony Bolton.