Our data shows that 60 £1bn+ funds significantly underperformed their peer group in 2013, with combined assets under management (AUM) totalling more than £120bn.
Inevitably, underperformance of certain areas of the market has had an adverse effect on certain funds.
For example, those that prioritise capital protection and that have a natural bias towards defensive stocks – such as Francis Brooke’s £1.4bn Trojan Income fund and James Harries’ £4.1bn Newton Global Higher Income fund – both fell significantly short of their sector average in a year in which cyclical sectors rallied.
Performance of funds and sectors in 2013
Source: FE Analytics
Although it is worthwhile to examine how funds perform on an annual basis, it must be noted that a one-year track record is not a sufficient amount of time to judge a manager – especially since the vast majority of funds that have underperformed this year were still able to generate positive returns.
Newton, which is one of the few groups that incorporates a house view, has two other multi-billion pound funds that were bottom-quartile performers last year: Newton Balanced and Newton Higher Income.
Like the majority of his colleagues, Richard Wilmot, manager of the £2.1bn Higher Income fund, is cautious of the global recovery, which contributed to his fund’s below-par returns over the 12-month period.
“The fund outperformed the FTSE All Share index in three out of four quarters in 2013,” Wilmot explained.
“Underperformance in the third quarter was caused by the strong share price performance of cyclical value stocks, to which the portfolio is under-exposed compared with the FTSE All Share.”
“The peer group is, on average, more exposed to these types of stocks. While I acknowledge that immediate prospects for the UK economy have improved, I am unconvinced about the long-term sustainability of current conditions and believe that a number of share prices are vulnerable to disappointing performance given how much they are now pricing in.”
Aberdeen – known for its emphasis on downside protection and quality companies – had more £1bn+ funds in the fourth quartile than any other group in 2013, with seven.
Head of global equities Hugh Young explained the reasons for Aberdeen’s underperformance in more detail in an exclusive interview with FE Trustnet earlier this week.
Threadneedle was another group that paid the price for focusing on quality firms in 2013, with both David Dudding’s European Select and Philip Dicken’s Pan European Smaller Companies funds delivering bottom-quartile returns last year. This was the first time the £2.2bn European Select portfolio underperformed by such an extent since 2004.
Dudding targets well-established companies with good pricing power, which underperformed more economically sensitive areas of the market last year. His underweight in peripheral Europe also weighed on returns.
Threadneedle says it is unconcerned by the recent dip, insisting longer-term outperformance is its priority.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
Among the other groups with more than one giant underperformer in 2013 was Fidelity, with two: Fidelity European and Fidelity Moneybuilder Income.
A spokesperson for the group said Fidelity accepts the £2.6bn European fund had a poor year, but criticisms of Ian Spreadbury’s £4.3bn Moneybuilder Income portfolio are unjustified.
“Although the [European fund] has delivered absolute gains in the last year, the relative performance of the portfolio has been lacklustre, certainly in comparison to previous years when relative performance was strong,” the spokesperson said.
“This is partly due to an environment in which a rising tide has lifted all boats, with some of the best performers in the short-term being the companies and regions which have, until recently, been most challenged. The fund’s underperformance is also partly because the stockpicking success enjoyed in past years has not been repeated to date in the last year or so.”
The spokesperson for Fidelity says the group is confident that Samuel Morse’s focus on attractively valued dividend payers should see the manager outperform over the long-term. While Fidelity European was bottom quartile in its IMA Europe ex UK sector in 2013 with returns of 17.39 per cent, it has outperformed both its sector and benchmark since Morse (pictured) took over in December 2009.
Fidelity points out that the Moneybuilder Income fund underperformed its benchmark only marginally after fees last year, arguing that it was only Spreadbury’s focus on downside risk that worked against him.
Performance of fund vs sector and benchmark in 2013
Source: FE Analytics
“The fund is managed with the aim of delivering a consistent return above a comparable market index with a low level of absolute volatility and a decent level of income. The fund demonstrates a strong long-term track record of meeting this objective,” the spokesperson explained.
“During 2013, the fund was positioned aggressively to achieve an attractive yield above benchmark and benefit from the manager’s anticipation that credit spreads will narrow.”
“However, consistent with his philosophy, [Spreadbury] also looked to achieve a sensible balance of risk and reward by avoiding over-concentration in riskier, less liquid areas of the market such as financials, limiting off-benchmark exposure to non-investment grade credit to 5 per cent and maintaining duration close to benchmark.”
“This strategy proved beneficial to performance versus benchmark, but the fund lagged peers who took an even more aggressive approach – generally overweighting financials, running a little more off-benchmark exposure in non-investment grade credit and taking larger active duration positions.”
FE data shows that Fidelity Moneybuilder Income is a top-quartile performer in its IMA Sterling Corporate Bond sector over a 10-year period and since Spreadbury started running it in 1995. It also has an above-average yield of 3.7 per cent.
While a rally in many areas of the market was the biggest driver of underperformance in the majority of cases, there are some fund-specific issues that hit certain groups.
M&G had a particularly tough 2013, with two of its flagship funds – M&G Recovery and M&G Global Basics – struggling against their peers.
M&G Global Basics has been hurt by the recent poor performance of commodities and miners in particular, but the fund was also hit by a change in manager in November, following news of Graham French’s retirement.
Incoming manager Randeep Somel insists that the fund’s focus and style will remain unchanged, adding that companies in the basic materials and mining sectors are beginning to rediscover capital discipline.
The poor performance of commodities also hit multi-billion portfolios such as BlackRock Gold & General and JPM Natural Resources last year.
Somel has also taken charge of M&G Managed Growth – another underperforming giant in 2013. The manager has made significant changes since taking over from French, which will be examined in an article later today on FE Trustnet.
The £1.4bn M&G Dividend fund has also seen a change in manager as well as a change in focus and two mergers with other portfolios. However, the group insists that any short-term pain will be fully justified.
“Although the fund has underperformed during this time, Phil Cliff was appointed in July 2013 to bring the portfolio into line with M&G’s successful income franchise,” said an M&G spokesperson.
“Phil Cliff is an FE Alpha Manager who has maintained a consistently high alpha score over a proven track record in rising and falling markets.”
Tom Dobell’s £7.1bn M&G Recovery fund – one of the largest and most established in the IMA universe – also struggled in 2013, underperforming its sector average by 12.07 percentage points.
M&G Recovery featured on the list of giant underperformers in 2012 as well and is now behind its IMA UK All Companies sector over three and five years.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
While UK equities enjoyed a strong year, M&G says that some of the recovery stocks Dobell is backing were either shunned or sold down further, due to the higher perceived risk in such companies.
If the UK recovery continues to gather momentum, as expected, M&G says that many of the manager’s big off-benchmark positions will come good.
A pick up in M&A activity is also expected to benefit the fund.
A spokesperson for M&G did acknowledge that there were some errors regarding stock selection, but insists the group is fully behind Dobell to succeed in the longer term.
“The fund performance was hindered by stock-specific challenges, principally within the mining, technology and oil and gas sectors,” the spokesperson said.
“Furthermore, not owning BT and Vodafone was painful as both are large index constituents that were each up over 60 per cent over the year.”
“The team is keen to see through the investments that have been made and are very encouraged by some of the developments going on in a number of the companies held in the fund.”
M&G American was another multi-billion pound underperformer in 2013, making it four for the group overall.
The fund’s underweight position in biotech and tech is seen as the principal reason for its underperformance, but the team insists it is confident that its overweights in financials, industrials and other traditional cyclical areas will come good in 2013.
Behind Aberdeen, SWIP had the second highest number of multi-billion pound bottom-quartile performers in 2013, with five.
SWIP UK Enhanced Equity, Halifax UK Growth, Scottish Widows UK Growth, Scottish Widows Cautious Growth and Scottish Widows HIFML Corporate Bond all made the list. SWIP insists performance versus a specified benchmark is far more important than performance versus an IMA sector average.
“These funds are managed against specific benchmarks, not against the wider IMA peer group,” said a spokesperson for the group.
“Measurement of the success of these funds should therefore take into consideration the funds' actual objectives rather than a ‘simple’ peer comparison, as the sectors are broad with many types of funds with different objectives.”
FE data shows that SWIP UK Enhanced Equity and Halifax UK Growth underperformed their respective benchmarks last year, though Scottish Widows UK Growth and Scottish Widows HIFML Corporate Bond outperformed. The £1.1bn Cautious Managed fund doesn’t list a specified benchmark.
For the full list of multi-billion pound funds that were bottom quartile in 2013, click here. Please note that the list includes funds in the IMA Specialist sector.
