Last November, we published our Consistent 30 selection of funds across 15 leading Investment Association (IA) sectors, that have produced strong and consistent returns over a three-year timeframe.
A year on, 13 of our 2016 funds retain their coveted top spots and a further five still have a place in the top 10% of their respective sectors.
“It’s no surprise that some funds have lost their crowns. It’s very difficult to be that consistent – only the very best are,” says Darius McDermott, managing director at Chelsea Financial Services.
Funds that have fallen down the rankings have largely done so because of changing investment market conditions.
For instance, Lindsell Train UK Equity, managed by the respected investor Nick Train, and its sister fund Lindsell Train Global Equity remain in the top 10%, but they have lost their edge at a time when ‘quality growth’ stocks – the mainstay of Train’s portfolios – have lost some of their shine.
Meanwhile, two Vanguard passive multi-asset funds have dropped down or out of the top 10%, as active managers in the sector have exploited their ability to change their asset allocation to suit the prevailing investment environment.
While it is important to remember that strong past performance is no guarantee of future success, an analysis of consistency can help investors select funds that should afford them a smoother ride.
“Consistency is the most important of all the filters we use when selecting funds,” says Ian Head, director of Ascot-based Fund Management. “A ‘Real Madrid’ squad of funds means the expectation of a positive return can be greater.”
UK equity reshuffle
The Consistent 30 comprises the two most consistent top-performing funds in each of 15 leading IA sectors.
Across the three UK equity sectors, half of last year’s six-strong line-up have retained a place in the top 10%.
However, TB Amati UK Smaller Companies, our leading UK smaller companies fund last year, is the only UK fund to retain its place in the top two of its sector.
This year, it takes second place to Old Mutual UK Smaller Companies Focus – by far the UK smaller companies frontrunner in terms of total returns over the past three years, and boasting a low consistency score of 1.97 and low charges of 0.88%.
The lower the consistency score, the better. A score of around two means a fund has dropped out of the top two deciles of its sector a few times during the past three years, but has been in the first or second decile most of the time.
MOST CONSISTENT EQUITY SECTOR FUNDS Name IA sector 1-yr total return (%) 1-yr decile rank 3-yr total return (%) 3-yr decile rank 3-yr con-sistency score Sha-rpe ratio Ongoing charge (%) Baring Eastern Trust IA Asia Pacific ex Japan 25.1 1 79.1 1 4.40 1.29 1.07 Hermes Asia ex Japan Equity IA Asia Pacific ex Japan 27.1 1 75.3 1 3.30 1.24 0.85 Marl-borough European Multi-Cap IA Europe ex UK 30.8 1 106.3 1 1.13 2.26 0.9 Man GLG Contin-ental Euro
Growth IA Europe ex UK 22.1 4 101 1 3.30 1.90 0.9 Standard Life Global Sm
Cos IA global 25.5 1 87.3 1 2.60 1.82 1.06 Fund-smith Equity IA global 15.6 5 89.1 1 3.10 1.81 1.05 Lindsell Train Global Equity IA global 16.9 3 81.6 1 3.27 1.51 0.75 Hermes Global Emerging Markets IA global emerging mkts 26.6 1 65.9 1 3.27 1.09 1.13 UBS Global Emerging Markets
Equity IA global emerging mkts 24.3 1 63.3 1 3.37 0.92 0.99 Lindsell Train Japanese Equity IA Japan 12.3 5 94.9 1 2.83 1.47 0.85 Fidelity Japan Smaller
Companies IA Japan 20.7 1 77.6 1 4.10 1.27 0.99 VT De Lisle America IA North America 31.6 1 95.6 1 4.30 1.58 1.21 Baillie Gifford American IA North America 20.7 1 87.2 1 3.40 1.44 0.52 Old Mutual North American
Equity IA North America 19.4 1 72 1 3.53 1.31 0.95 Old Mutual UK Dynamic Equity IA UK all cos 31 1 79.2 1 2.27 1.73 1.1 Old Mutual Equity IA UK all cos 29 1 80.2 1 2.57 1.54 1.09 CF Lindsell Train UK Equity IA UK all cos 13.7 4 51.8 1 3.90 1.16 0.72 MI Chel-verton UK Equity Income IA UK equity inc 24 1 46.7 1 3.47 1.32 0.88 Man GLG UK Income IA UK equity inc 25.8 1 47.2 1 3.80 1.24 0.9 Franklin UK Equity Income IA UK equity inc 10.3 6 35.9 1 4.50 0.85 0.54 Old Mutual UK Smaller
Companies Focus IA UK smaller cos 59.6 1 121.3 1 1.97 2.50 0.88 TB Amati UK Smaller Companies IA UK smaller cos 31.4 2 83.9 1 3.23 2.39 0.94 Source: FE analytics, as at 30 September 2017
Liontrust UK Smaller Companies, last year’s second most consistent UK smaller companies fund, has been pushed out of the top 10% altogether, reflecting weaker performance than some of its peers over the past year.
The leading UK equity income funds of 2016, Trojan Income and Franklin UK Equity Income, have also been pushed down the rankings by peers whose recent performance has been vastly superior, though the Franklin fund retains a top 10% spot. MI Chelverton UK Equity Income and Man GLG UK Income replace them as this year’s UK equity income winners, producing the sector’s best returns, driven by outstanding performance over the past year. They also boast lower consistency scores, of 3.47 and 3.8 respectively.
Adrian Lowcock, an investment director at multi-manager Architas, rates Chelverton’s David Taylor and David Horner for their focus on balance sheets and business models, but he warns that the fund’s bias towards small and mid-caps means it could be more volatile than others in its peer group over shorter periods.
“The focus on the lower end of the market should provide plenty of opportunity for dividend growth, though,” he adds.
In the UK all-companies sector, Lindsell Train UK Equity, last year’s number two, has been pushed further down the top 10% ranks, while frontrunner Evenlode Income has fallen out after a difficult year and a ninth-decile performance that has increased its three-year consistency score from 2.5 to 4.37.
Instead, Old Mutual cleans up spectacularly in this sector, with the Old Mutual UK Dynamic Equity and Old Mutual Equity funds taking the top two spots, just pipping Old Mutual UK Mid Cap to the post. The winners boast consistency scores of 2.27 and 2.57 respectively.
The common factor among funds that have slipped down the rankings is a focus on so-called quality stocks.
“Up until last year the trade had been fairly uniform – buy defensive growth and bond proxies – but since then we have seen more rotation into value stocks,” says Lowcock. “They are early signs of a change in style and we could see more of this.”
Global winners and losers
Among global and overseas equity funds, five out of 12 funds maintain one of the top two slots and another two keep a place in the top 10% of their sectors.
Last year’s European victors, Man GLG Continental European Growth and Marlborough European Multi-Cap, are once again the clear winners (although they have switched places).
Their three-year returns are around 30% ahead of the next-best performer, while their consistency ratings have strengthened – 1.13 for the Marlborough fund and 3.3 for the Man GLG fund, compared with 3.27 and 2.77 a year ago.
Little has changed on the Japan front either: Fidelity Japan Smaller Companies and Lindsell Train Japanese Equity keep their top spots (though again they have traded places).
Just like last year, Legg Mason Japan Equity is the standout performer over three years, but it has once again been discounted because of its lack of reliability, having produced bottom-decile performance over the past year.
It is all change in the Asia Pacific excluding Japan, North America and global equity sectors, however. In Asia Pacific, Baring Eastern Trust and Hermes Asia ex Japan Equity have knocked Veritas Asian and Stewart Investors Asia Pacific off the top slots, thanks to stronger performance and greater consistency.
Meanwhile, in North America, VT De Lisle America and Baillie Gifford American have filched the crowns from Old Mutual North American Equity and Fidelity American Special Situations, although the Old Mutual fund remains in the top 10% of its sector over both one and three years.
Hermes Global Emerging Markets and UBS Global Emerging Markets Equity are victorious among emerging markets funds. London based Carrington Investments bought the Hermes fund in October last year on the strength of its experienced team and the importance it places on environmental, social and governance factors.
“The ESG focus has helped it outperform its peers, while only buying businesses at sensible valuations has also helped on the downside,” says Mohsin Bukhari, Carrington’s head of investment research.
The Hermes and UBS funds have knocked out small-cap plays JPM Emerging Markets Small Cap and Templeton Emerging Markets Smaller Companies, after the performance of smaller companies faltered during the past year.
UBS Global Emerging Markets Opportunity performed similarly to UBS Global Emerging Markets Equity (64.1% versus 63.3% over three years) and has an almost identical consistency score (3.3 versus 3.37), but it was ruled out because its charges are almost double (1.92% versus 0.99%).
Among global funds, Fundsmith Equity – a favourite with financial planners and DIY investors alike – retains its title. It is joined by Standard Life Global Smaller Companies, which knocks Lindsell Train Global Equity off its perch.
Out of our 30-strong line-up, the Fundsmith fund is one of only seven equity funds and 10 overall to charge more than 1%.
However, Alan Solomons, a director at Alpha Investments, says: “Charges come after performance. If a fund returns 19% a year over the long term, which Fundsmith has done, who seriously is worried by a 1 or 1.5% charge?”
He continues: “In other cases, where there’s not a huge difference in terms of fund performance and volatility, cost can be very important. The bottom line is value for money.
Passives have low charges and most active fund managers are not worth paying for, but if you can find the handful of consistently good managers worth paying for, passives aren’t in the picture.”
Bond kings keep their crowns
Among the three bond sectors, four of last year’s six winners retain their places in the Consistent 30 line-up. They are Schroder Long Dated Corporate Bond and Pimco GIS UK Long Term Corporate Bond (sterling corporate bonds), GAM Star Credit Opportunities USD (global bonds) and GAM Star Credit Opportunities GBP (sterling strategic bonds).
In the global bonds sector, Pimco GIS Euro Ultra Long Duration – last year’s second-placed fund – is no longer in existence and has been replaced by Schroder ISF Global High Yield. In the sterling strategic bond sector, Pimco GIS Diversified Income drops out of the top 10% and Sanlam Strategic Bond takes a top slot, thanks to its better consistency rating (2.87), higher returns and lower charges.
Bond sectors’ consistency winners Name IA sector 1-yr total return (%) 1-yr decile rank 3-yr total return (%) 3-yr decile rank 3-yr consist-ency score Sharpe ratio On-going charge (%) GAM Star Credit Oppor-tunities
USD IA global bonds 8.3 1 49.3 1 2.97 1.30 1.13 Schroder ISF Global High Yield IA global bonds 5.9 2 42.3 1 4.00 1.01 0.8 Schroder Long Dated Corp-orate
Bond IA sterling corporate bond -2.6 10 30.8 1 3.77 0.91 0.27 Pimco GIS UK Long Term
Corp-orate Bond IA sterling corporate bond -0.2 7 28.5 1 3.83 0.94 0.46 GAM Star Credit Oppor-tunities
GBP IA ster-ling strat-egic bond 10.6 1 30.6 1 2.10 2.91 1.17 Sanlam Strategic Bond IA ster-ling strat-egic bond 11.4 1 29 1 2.87 2.24 0.54 Source: FE Analytics, as at 30 September 2017.
“While there’s been a lot of talk about the bond bull market being over, not much has changed in the bond world,” says McDermott.
“Any changes to interest rates are well-flagged and gradual, and good managers are positioning [their funds] accordingly.” Chelsea Financial Services particularly likes GAM Star Credit Opportunities GBP, which has invested heavily in financial bonds that have done well.
Multi-asset funds stay strong
Three out of six mixed asset funds have retained the superior consistency they showed in 2016. Premier Multi-Asset Global Growth, Artemis Monthly Distribution and Royal London Sustainable World Trust keep their places in the flexible investment, mixed investment 20-60% shares and mixed investment 40-85% shares sectors, with consistency rankings of 2.73, 2.17 and 2.63 respectively.
McDermott particularly rates the stockpicking abilities of Artemis Monthly Distribution fund managers James Foster and Jacob de Tusch-Lec. “They continue to deliver,” he says.
The three new multi-asset funds joining them are Unicorn Master trust, Invesco Perpetual European High Income – a hidden gem with just £34 million under management – and Baillie Gifford Managed, with consistency scores of 2.87, 3.13 and 2.07 respectively.
Newton Multi-Asset Growth has lost its top spot in the flexible investment sector, while Vanguard LifeStrategy 40% Equity drops out of the most consistent funds in the mixed investment 20-60% shares sector.
Elsewhere, Vanguard LifeStrategy 80% Equity fails to make the cut in the mixed investment 40-85% shares sector, but nevertheless retains a top-decile position in its sector.
It is difficult for multi-asset funds to be purely passive – there is no multi-asset index that funds can track – but Vanguard’s LifeStrategy range comes as close as possible, by putting together an asset allocation on a ‘set and forget’ basis and populating it with its own index funds.
In last year’s line up, consistency coupled with lower charges swung it for these funds, given that returns from active peers were only slightly ahead.
This year, however, not only are active rivals further ahead in terms of performance, but their consistency ratings are superior.
In the mixed investment 20-60% shares sector, the top two funds have returned a premium over the Vanguard fund of between 8 and 11% over the three-year period and their consistency ratings are 2.17 and 4.5, versus 5.07 for the Vanguard fund.
In the mixed investment 40-85% shares sector, the performance differential is lower, at 3-8 %, but the consistency rating is significantly higher for the Vanguard fund.
And while the Vanguard funds have ongoing fund charges (OCFs) of 0.22%, some of the active multi-asset funds do not cost much more. Baillie Gifford Managed, for example, has an OCF of 0.45%.
“The Vanguard funds did particularly well before mid-2016, thanks to their exposure to bonds and developed market equities,” says Lowcock.
“But bonds came off their highs as yields hit a bottom in the summer of 2016, and a high allocation to UK and US equities will have harmed them compared with more globally diversified peers.”
Bond sectors’ consistency winners Name IA sector 1-yr total return (%) 1-yr decile rank 3-yr total return (%) 3-yr decile rank 3-yr con-sistency score Sha-rpe ratio On-going charge (%) Premier Multi-Asset Global
Growth IA flexible investment 14.2 3 47.6 1 2.73 1.39 1.81 Unicorn Mastertrust IA flexible investment 20 1 47.5 1 2.87 1.71 0.85 Artemis Monthly Distribution IA mixed inv 20-60% shares 9.9 1 36.9 1 2.17 1.50 0.89 Inv Perp European High Income IA mixed inv 20-60% shares 15 1 31.2 1 3.13 1.17 0.83 Royal London Sustainable World
Trust IA mixed inv 40-85% shares 13.5 1 48.4 1 2.63 1.26 0.77 Baillie Gifford Managed IA mixed inv 40-85% shares 13.9 1 42.4 1 2.07 1.13 0.45 Vanguard Life-Strategy 80% Equity IA mixed inv 40-85% shares 11 3 39.4 1 3.73 1.03 0.22 Source: FE analytics, as at 30 September 2017
Vanguard’s LifeStrategy range nevertheless remains popular. It has dominated inflows into the mixed investment sectors so far this year, with the four LifeStrategy funds that sit in the mixed investment 0-35, 20-60 and 40-85% shares sectors attracting a hefty £2.1 billion over the year to 22 September – one-third of the £6.3 billion that flowed into the 30 most popular funds, data from Morningstar shows.
Fund Management has around 20% of its clients’ assets in passive funds, and it is working towards achieving a more even active/passive split to drive down the overall cost of its portfolios. It uses Vanguard LifeStrategy 40% Equity as a core fund for clients with smaller amounts to invest.
“Having a mix of active and passive not only lowers costs but also gives a wider spread of holdings, reducing risk through diversification,” says Head.
This article was originally published in our sister magazine Money Observer. Click here to subscribe.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.