Square Mile recently released its “Academy of Funds” – a list of recommended portfolios on its website, which is free for all advisers to use.
Funds with an A, AA or AAA rating all have long track records and are described as the best “investment talent in the UK retail investment industry” by managing director Richard Romer-Lee (pictured). He places a keen emphasis on longevity, favouring managers who have outperformed across a number of different market cycles.
However, Square Mile also highlights a list of “positive prospect” funds, which is a watch list of IMA portfolios that the firm rates highly, but which haven’t yet proven themselves across a full market cycle.One of the eight funds on the list is the £2.9bn Fidelity Special Situations portfolio.
Though it was launched in the late 1970s and is very well-known within the industry, FE Alpha Manager Alex Wright only replaced Sanjeev Shah as manager in January this year.
“Although Wright has been in the industry since 2001 and managing assets since 2008 he is still fairly new to this fund, though clearly not the investment style. This fund is an interesting proposition run by a new, highly motivated and passionate investor, who has already generated some acclaim through his running of a smaller fund,” Square Mile said.
Wright’s five crown-rated Fidelity UK Smaller Companies fund was launched into the UK market in February 2008 and, according to FE Analytics, has been the best performing portfolio in the IMA UK Smaller Companies sector over that time, with returns of 244.85 per cent.
However, the now £286m fund was soft-closed last year due to strong inflows.
Wright’s tenure as manager of Fidelity’s flagship Special Sits fund hasn’t started as successfully; FE data shows it is down against both the IMA UK All Companies sector and its benchmark – the FTSE All Share – year to date.
Performance of fund vs sector and index in 2014
Source: FE Analytics
Square Mile still rate Wright highly, however, and expect him to outperform over the long run.
“It is important to note that given the manager’s contrarian nature, willingness to invest further down the market cap scale and use of derivatives the fund’s performance may, at times, differ greatly from the market,” the team added.
There are a number of IMA Global funds on Square Mile’s watch list. One is Hugh Sergeant’s £200m R&M World Recovery fund, which only launched in March 2013. Though it only has a very short-track record, it has been the performing fund in the sector over that time with returns of 42.66 per cent.
Its MSCI AC World benchmark has returned 11.45 per cent over the period.
Performance of fund vs sector and index since Mar 2013
Source: FE Analytics
The fund’s process is very similar to the one Sergeant uses on his top-performing R&M UK Equity Long Term Recovery fund.
Romer-Lee and his team hold the manager in very high-regard, but they say his World Recovery fund will only suit certain investors.
“This fund is a little like a whisky drinker who prefers his tipple not only neat, but at full cask strength. Investors need either an iron constitution or to recognise that a little may go a long way,” the team said.
“This is a high risk, high return strategy that really needs to be considered over the long term.”
Standard Life Global Smaller Companies is also on the list and like the R&M World Recovery, it’s a global version of a highly successful UK mandate.
Though the fund’s day-to-day management is largely left to Alan Roswell, it is the brain child of FE Alpha Manager Harry Nimmo, who is named as co-manager and has built up an impressive track record as manager of his open and closed-ended UK smaller companies funds.
Launched in January 2012, the £250m Standard Life Global Smaller Companies fund had been one of the leading lights in the sector.
However, it has been hit hard by this year’s rotation out of small-caps and high multiple growth stocks. Its losses of 11 per cent this year mean the fund is now a second quartile performer since launch.
Performance of fund vs sector since Jan 2012
Source: FE Analytics
“This is the first time the investment process has been applied on the global smaller companies' stage, and whilst there are strong indications to suggest it will be as successful as other SLI smaller company strategies, we wish to observe the fund for a little longer before awarding a full rating,” Square Mile said.
The other global funds named as positive prospects are the £50m Artemis Global Select fund and First State Worldwide Sustainability, which is headed up by FE Alpha Manager David Gait.
Gait has been hugely successful running sustainable mandates for First State’s Asia and emerging markets team, with both closing to new money as a result of mass inflows.
Worldwide has a much shorter track record having only been launched in November 2012, and has marginally underperformed its sector over that period.
However, Romer-Lee and his team think Gait is a highly talented manager, and will be watching it closely in the coming years.
Though the outlook for bonds looks uncertain with rising interest rates looming, Square Mile has included a number of fixed income funds in their positive prospects list, believing they still have a place in a diversified portfolio.
They include the Legg Mason Income Optimiser fund, which sits in the IMA Sterling Strategic Bond sector and the Old Mutual Corporate Bond, which is a member of the IMA Sterling Corporate Bond sector.
The Old Mutual fund was launched in 2000, but current manager Christine Johnson only took over in January 2011. The Legg Mason fund, on the other hand, was only launched in December 2011.
Johnson’s fund has been top quartile since she took over and Legg Mason Income Optimiser has also considerably outperformed its sector since inception.
However, Square Mile is keeping them on its watch-list for now, because neither have been tested by a severe downturn.
A more esoteric positive prospect is the sub-£100m Invesco Perpetual Global Financial Capital fund.
It sits in the IMA Specialist sector and purely invests in financial debt. It is currently yield a healthy 5.23 per cent.
The fund is headed up by the highly experienced duo of Paul Causer and Paul Read, but was only launched in January 2012.
Performance of fund since Jan 2012
Source: FE Analytics
It has returned close to 70 per cent over that time and while Square Mile rates Causer and Read highly, Romer-Lee says the fund needs a longer track record before it can be fully analysed.
“The fund is likely to be suitable for investors wishing to take advantage of the opportunity available in the financials sector as institutions look to restructure,” Square Mile said.
“The nature of the investments in the fund means that there may be a substantial degree of capital volatility over the short to medium-term, with the fund likely to perform well in an environment of investor optimism, but to lag in times of weaker market performance.”
