Although Becket still rates the abilities of both Tulloch and Woodford – who are both FE Alpha Managers – and had held their funds for the last decade or so, he says that investors should sell out of them as he says that they are likely to underperform due to their size and because their styles are now out of favour.“Our respect for these managers has not changed and it would be churlish to ever imagine a time that it would, but our recommendations have,” Becket said.
Woodford is commonly viewed as the best UK manager in the business, having run his five crown-rated Invesco Perpetual High Income fund for more than a quarter of a century, and his decision to leave the group came as a real shock to the industry.
According to FE Analytics, the Invesco Perpetual fund has returned 2,354.12 per cent since Invesco launched it in February 1988 and has beaten the FTSE All Share by a staggering 1,378.12 per cent in the process.
Performance of fund vs index since Feb 1988
Source: FE Analytics
It is also the best performing portfolio in the IMA UK Equity Income sector over 10 years.
However, its performance has waned recently and it has failed to beat the sector in three of the last five calendar years. Becket says this comes as no real surprise as he is concerned about the £13bn fund’s size and its current positioning.
“We took the announcement of his departure as an immediate cause to back up a number of underlying reasons to sell what had been building in recent years,” Becket said.
“The immediate cause was that we were worried about the potential impact upon performance that his departure might bring, due to illiquidity issues from his behemoth funds.”
“However, we were also worried about the valuations of a number of his companies, despite sharing his preference for big pharmaceutical companies. The ultimate decision was based upon valuations, but Woodford's scheduled departure accelerated our decision.”
“I said at the time that this was 'the wrong fund at the wrong time in the wrong situation' and stand by those views today,” he added.
Becket has chosen Nick Kirrage and Kevin Murphy’s five crown-rated Schroder Income fund as his replacement.
While the make-up of the two portfolios is very different, he is a fan of the Schroders offering as he sees the managers as stars of the future and thinks their recovery and high quality barbell approach will deliver good returns over the long run.
The £1.4bn fund has returned 49.96 per cent over three years, meaning it is a top-quartile performer and has beaten its FTSE All Share benchmark by more than 20 percentage points.
It has a yield of 3.96 per cent, an ongoing charges figure (OCF) of 1.66 per cent and requires a minimum investment of £1,000.
Becket has also replaced Tulloch’s First State Asia Pacific funds, despite the fact they have been some of the sector’s best performers over the long term.
Our data shows that Tulloch’s flagship Asia Pacific fund – which he has managed since June 1988 – is the best performer in the IMA Asia Pacific ex Japan sector over 10 years with returns of 282.4 per cent and has beaten its benchmark – the MSCI AC Asia Pacific ex Japan index – by more than 100 percentage points.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The five crown-rated fund has also beaten the sector and index over one, three and five years.
However, Becket says that although it has been one of his most successful holdings, he questions whether it will continue to outperform.
“This fund has been the cornerstone of our emerging market equity allocation of the last decade and the returns that the fund has provided for our clients have been sensational,” Becket said.
“However, our view is that the process and the philosophy of the team are now less suitable for the market environment that we forecast. Our view is that if you believe in the long term economic future of Asia then it is right to sell the defensive equities in the region and buy cyclical exposure.”
“Never before have economically sensitive stocks traded at such a discount to the wider market and that is where long term investors should be focusing. It might seem sacrilegious to suggest that the First State team might underperform in the years ahead, but that is what we believe.”
Like Premier’s Simon-Evan Cook's worries over Aberdeen’s emerging markets funds, Becket is also concerned about the size of the First State product.
While the First State Asia Pacific fund is only £734m, the more focused First State Asia Pacific Leaders fund which is invested in the majority of the same companies is a hefty £5bn.
On top of that, First State’s three global emerging markets funds have combined AUM of £4.6bn.
“We also harbour concerns about the size of First State's emerging markets franchise,” Becket said.
“We wonder whether their's and Aberdeen's mutual success in raising assets has led to a positive feedback loop for their common stocks, aiding performance and driving such company valuations to expensive levels,” he added.
While he says it is difficult to find an alternative to Tulloch, he is using BlackRock’s Asian funds.
“We believe that Andrew Swan of BlackRock will use his balanced approach and renewed focus upon cyclical companies to power returns in the years ahead,” he said.
Swan only launched the BlackRock Asia fund in July 2013. While still very early days, it has made a positive return while both the sector and its benchmark have lost money.
Performance of fund vs sector and index since July 2013
Source: FE Analytics
The £30m fund has an OCF of 1.68 per cent and requires a minimum investment of £1,000.
Becket has also moved the £3.3bn M&G Global Basics fund on to his sell list. It had been headed up by star manager Graham French between 2000 and 2013.
While French’s long term record had been very strong, the manager stepped down and handed over responsibility to Randeep Somel after a period of relatively poor performance.
“It was also a leaving announcement that triggered our selling of M&G Global Basics,” Becket said.
“Having invested with French since 2004 and ridden the crest of his wave for nine mostly fruitful years, we were disappointed to hear of his retirement.”
“The last few years of his reign were highly challenging, as the emerging markets theme fell heavily from favour and his geological expertise counted for nothing in a world that shunned mining sector risk,” he added.
