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The bond sector topping the tables for consistent outperformance

28 November 2014

F&C’s Gary Potter and Rob Burdett have published research showing that strategic bond funds have been highly successful at achieving consistent outperformance over recent years.

By Gary Jackson,

News Editor, FE Trustnet

Strategic bond funds became the most consistent performers on a three-year view during the third quarter of 2014, according to research by F&C multi-manager duo Gary Potter and Rob Burdett, while Japanese equities achieved the worst results out of the main sectors.

F&C Investments’ quarterly Multi-Manager FundWatch survey found that 49 out of 1,099 funds in 12 major sectors made top-quartile returns over the three previous consecutive years at the end of 2014’s third quarter.

At 4.5 per cent of funds – up from 2.3 per cent in the previous quarter – this is near the top end of the 2 to 5 per cent historic average for the survey.

Potter and Burdett, co-heads of multi-manager at F&C, attribute the improvement in consistent funds to a “remarkable turnaround” in the IMA Sterling Strategic Bond sector, where 9.4 per cent of funds were first quartile over the three years.

Performance of sectors over 3yrs to 30 Sep 2014


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Source: FE Analytics

This makes IMA Sterling Strategic Bond the most consistent sector in the study, in stark contrast to the previous three FundWatch survey when none of its members made the grade.

A major reason for the turnaround was the poor performance data of 2011, which came in the wake of the Greek debt crisis, falling out of the analysis.

ALT_TAG Burdett (pictured) said: “With the time period now moving on from the eye of the Greek crisis storm and into the window of a prolonged period where risk assets outperformed, we saw some stark changes last quarter with a rotation in the consistency winners.”

“The IMA Sterling Strategic Bond sector was the clear winner in Q3 2014. Not only did it top the charts for top quartile returns over three years, it also secured the most funds achieving median returns over the same period, with nearly a third achieving this feat.”

“In contrast, the IMA Japan experienced a change in fortunes, featuring near to the bottom of top quartile and median returns consistency tables.”

FE Analytics shows the £137.8m GAM Star Credit Opportunities fund, run by FE Alpha Manager Anthony Smouha, sits in the first quartile in each of the three years to 30 September 2014 and has made the highest cumulative return out of the consistent performers highlighted in F&C’s FundWatch.


The fund has returned 60.76 per cent over the three years to the end of the third quarter, returning more than twice the gain of the average sector member in the process.

Its return of 16.78 per cent in the most recent discrete 12-month period followed gains of 20.30 per cent and 14.44 per cent in the preceding two.

Performance of fund vs sector over 3yrs to 30 Sep 2014

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Source: FE Analytics

While the fund is more volatile than the average strategic bond portfolio – its annualised volatility over the three years in question is 3.87 per cent against the peer group’s 2.80 per cent – it has lower maximum drawdown and significantly more positive periods.

GAM Star Credit Opportunities has a total expense ratio of 1.59 per cent and has a distribution yield of 4.69 per cent.

FE Analytics also shows that funds such as Adrian Gosden and FE Alpha Manager Adrian Frost’s £1bn Artemis High Income, Stephen Rodger and Torcail Stewart's £417.1m Baillie Gifford Corporate Bond and £590.9m PFS TwentyFour Dynamic Bond, managed by Eoin Walsh, Gary Kirk, Felipe Villarroel and Pierre Beniguel, are consistently top quartile over three years.

All hold five FE Crowns, meaning they are in the top 10 per cent for superior performance in terms of stock-picking, consistency and risk control.

The IMA UK All Companies and IMA UK Equity Income sector were close behind strategic bonds, with 6.3 per cent of each peer group making consistent top-quartile returns.

Big UK All Companies names achieving this feat include Nick Train’s CF Lindsell Train UK Equity, Richard Watts’ Old Mutual UK Mid Cap and James Henderson’s Henderson UK Equity Income & Growth, according to FE Analytics.

In the equity income sector, Martin Cholwill’s Royal London UK Equity Income, Siddarth Chand Lall's Marlborough Multi Cap Income and Jeremy Lang and William Pattisson’s Ardevora UK Income funds are among those consistently outperforming.

In contrast to strategic bond funds, the IMA Japan sector failed to have any funds that sit in the first quartile during each of the three years in question.

Japanese equities have faced a rapidly changing environment over recent years, after the election of Shinzo Abe as prime minister brought in a wide reaching stimulus drive that devalued the yen.

Meanwhile, the IMA Asia Pacific ex-Japan, Europe ex-UK, Global Emerging Markets and UK Smaller Companies sectors each only had two funds that were able to stay in the first quartile in all three years.

When the performance hurdle is lowered to cover just the funds beating the median returns of their sector, IMA Sterling Strategic Bond remains the most consistent with 32.1 per cent making the cut, followed by IMA Global Bond at 28.6 per cent and IMA Global Emerging Markets at 26.6 per cent.


The least consistent was the IMA Europe ex-UK sector while IMA Japan – which had previously been the most consistent sector on a number of previous occasions – was close behind in second place.

Consistent outperformance is seen a ‘holy grail’ of investing and a topic that FE Trustnet returns to again and again.

This week we started a new series on the funds that stay in the top quartile over rolling five-year periods and will put the equity income sectors under the spotlight next week.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.