The consultancy, which FE entered a strategic partnership with and took a minority stake in earlier this year, has published its list of recommended fund on its website, which is free for all advisers to use.The recommended list comprises 182 funds, rated A, AA, AAA. The list will be reviewed each quarter to ensure that the stated process remains unchanged, to assess performance and to determine the drivers of returns.
As with the FE Select 100, each recommendation will have an accompanying factsheet, which offers a detailed description of the fund using Square Mile’s qualitative research, a breakdown of quantitative data and an overview of the fund’s risk profile.
“In launching the Square Mile Academy of Funds we have set out to create a truly differentiated proposition where all advisers can benefit from the recommendations we make to our clients,” said Richard Romer Lee, managing director at Square Mile.
There are currently 22 funds with the coveted AAA rating, stretching across various IMA sectors.
Romer-Lee and his team tend to favour highly-established managers with strong track records across numerous market conditions.
One of the standout names is FE Alpha Manager Neil Woodford’s £1.6bn CF Woodford Equity Income fund, which launched to great fanfare last month.
Despite its very short track record, it is the only member of the highly popular IMA UK Equity Income sector to receive the AAA rating.
However, Romer Lee and his team say that Woodford is well-positioned to replicate his strong risk-adjusted returns and income generation, which he delivered during his 26 year tenure as manager of the Invesco Perpetual High Income fund.
Performance of fund vs index between Feb 1988 and Mar 2014
Source: FE Analytics
The two other UK large-cap funds which have made the cut are Nick Train’s five crown rated CF Lindsell Train Equity fund and FE Alpha Nigel Thomas’ £4.8bn AXA Framlington UK Select Opportunities fund.
Both are FE Alpha Managers, and the AXA fund also sits in the FE Select 100.
Consistency is key to Square Mile’s process, with Thomas a case in point. According to FE Analytics, UK Select Opps has only underperformed against its IMA UK All Companies sector in one of the last 10 calendar years.
Needless to say, the fund is a top-quartile performer over the past decade, and is also among the best in the sector for information and sharpe ratios over the period.
The £1bn CF Lindsell Train UK Equity fund hasn’t been around as long, but our data shows that it has a strong track record of consistent outperformance. Train’s fund, which was launched in July 2006, has beaten the sector in every calendar year since inception.
It is the only fund in IMA UK All Companies that has delivered top quartile returns, and beaten the FTSE All Share, every year since 2008.
CF Lindsell Train UK Equity has been the sector’s seventh best performing portfolio since launch with returns of 143.38 per cent, beating the index by more than 80 percentage points.
Performance of fund vs sector and index since July 2006
Source: FE Analytics
Schroder UK Dynamic Smaller Companies and Standard Life UK Smaller Companies are the only two UK small-cap funds to have the AAA rating.
The funds are headed up by FE Alpha Managers Paul Marriage and Harry Nimmo, respectively.
The Schroders fund has now closed to new money, but the Standard Life one remains open on certain platforms, despite being well over £1bn in size.
Three IMA Europe ex UK funds – BlackRock European Dynamic, Henderson European Growth and Jupiter European – have received Square Mile’s AAA rating.
All are run by FE Alpha Managers, sit in the FE Select 100 and have delivered top quartile returns over 10 years. Alister Hibbert’s BlackRock fund is soft-closed, though.
Romer Lee and his team have stuck with the most renowned groups for their emerging market exposure, with First State Asia Pacific Leaders, First State Asia Pacific Sustainability, First State Global Emerging Markets Leaders and Aberdeen Emerging Markets Equity all receiving the maximum rating.
All four portfolios are highly-rated by both professional and private investors alike, and for good reason.
First State Asia Pacific Leaders, Global Emerging Market Leaders and Aberdeen Emerging Markets Equity all boast top decile returns in their respective IMA sectors over the past 10 years.
FE Alpha Manager David Gait’s five-crown rated First State Asia Pacific Sustainability fund doesn’t yet have a 10-year track record, but it has been the best performing portfolio in the IMA Asia Pacific ex Japan sector since its launch in December 2005, with returns of 213.72 per cent.
Unlike the other three funds, Gait’s portfolio is still less than £1bn in size.
Despite the currently uncertain outlook for fixed, Square Mile believes the asset class remains crucial for investors, and has rewarded a number of bond funds with the AAA rating.
The highest-profile of these is arguably the £5.5bn Invesco Perpetual Corporate Bond fund, which is headed up by the experienced management team of Paul Causer, Paul Read and FE Alpha Manager Michael Matthews. The fund also features in the FE Select 100.
According to FE Analytics, the fund has been a top quartile performer in the IMA Sterling Corporate Bond sector over 10 years, with returns of 76.33 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
It has also outperformed the sector over one, three and five years, but has fallen into the bottom quartile in 2014.
In an article last month, Causer told FE Trustnet the main reason for the fund’s recent underperformance was due to his and his co-managers’ cautious positioning.
The only multi-asset funds to receive the accolade are portfolios managed by the Jupiter Merlin team of John Chatfeild-Roberts, Algy Smith-Maxwell and Peter Lawery – all three of whom are FE Alpha Managers.
Lawery is set to step down from management in 2014, however.
The trio are commonly regarded as the best fund of funds team in the business, and Square Mile has given their Growth Portfolio, Income Portfolio and Balanced funds the highest rating.
All three have considerably outperformed their respective multi-asset IMA sectors over the long-term, but those relative returns have waned over the last year or so.
Smith-Maxwell told FE Trustnet recently that the major reasons for that underperformance was due to their overweight exposure to emerging market equities and debt, and the surprising resilience of the dollar.
For the full Academy of Funds list, click here.
As well as the recommended list, the Academy of Funds contains a section devoted to risk-targeted fund ranges, categorising them into meaningful peer groups and assessing their ability to add value while remaining within their stated risk parameters.
Recommended risk-targeted fund ranges will carry an “R” rating.
In addition, the Academy’s “Positive Prospects” list pinpoints funds that have “real potential to deliver but where the manager, strategy or process might be new and therefore as yet unproven in all market conditions” .