In FE Trustnet’s round-up of the best performing funds of last year, those which topped the tables were the ones which were far more cyclically-biased or had a greater degree of risk attributed to them.
Funds such as Guinness Alternative Energy, Legg Mason Opportunity and AXA Framlington Biotech all delivered a return of more than 60 per cent last year, for example.
However, as the last 12 months have been categorised by heightened volatility, the end of quantitative easing in the US, concerns over future interest rates rises and worries over economic growth, the IMA funds which shot the lights out in the rally of 2013 have largely struggled in 2014’s more difficult conditions.
Source: FE Analytics
Out of the list of top-10 performing funds of 2013, five of them – Guinness Alternative Energy, Legg Mason Japan Opportunity, Unicorn UK Smaller Companies, Invesco Perpetual Japanese Smaller Companies and R&M UK Equity Long Term Recovery – have lost money this year, according to FE Analytics.
It’s not just that a high proportion of these funds have posted negative returns – they have also struggled against their peers.
Our data shows out of the eight funds on the list which sit in comparable sectors – therefore excluding AXA Framlington Biotech and CF Wood Street Micro Cap as they are members of the IMA Specialist and Unclassified sectors – six of them have failed to beat their respective sector averages this time around.
On top of that, Invesco Perpetual Japanese Smaller Companies, Guinness Alternative Energy, R&M UK Equity Long Term Recovery, Unicorn UK Smaller Companies and Legg Mason Japan Equity have all been among the bottom 25 per cent IMA funds for this year’s performance.
If you were to put together an equally weighted portfolio of 2013’s top 10 performing funds, it would have generated a return of 58.11 per cent. That portfolio has returned just 4.7 per cent this year and if you were to remove the AXA Framlington Biotech fund – which has defied the odds by shooting the lights out once again – the portfolio has lost 0.2 per cent year to date.
So, why have so many of 2013’s super funds struggled over the past year or so? Put simply, it is because the large majority of them focus on areas of the equity market which have been hurt as investors have looked to take risk off the table over recent months.
Edward Guinness’ $9m Guinness Alternative Energy fund had been the best performing IMA fund in 2013 with returns of 67.42 per cent, but is down 7.57 per cent year to date.
While it has underperformed its Wilderhill New Energy Global Innovation benchmark, the index also largely struggled as it has made just 3.08 per cent.
Two of last year’s top performing funds came from the two Japanese equity sectors – Legg Mason Japan and Invesco Perpetual Japanese Smaller Companies.
Both took full advantage of last year’s rally, which was driven by prime minister Shinzo Abe’s bullish rhetoric, huge amounts of stimulus from the Bank of Japan and a weakening yen. As a result, both were up more than 55 per cent.
However, as money started to flow out of the Japanese equity market, concerns were raised over Abe’s ‘third arrow’ of structural reform and the country moved into recession – the Nikkei has been broadly flat this year.
Both Legg Mason Japan Equity and Invesco Perpetual Japanese Smaller Companies have tended to outperform in strongly rising markets, so it shouldn’t come as a huge surprise that they have been hit hard when Japanese equities have struggled.
UK smaller companies also had a barnstorming year in 2013, with both Simon Moon’s Unicorn UK Smaller Companies fund and the five crown-rated R&M UK Equity Smaller Companies fund featuring on the list.
However, investors began to rotate out of high multiple growth stocks in the spring and into larger companies for their perceived ‘safer’ characteristics, which has meant it has been a difficult time for investors in the lower end of the FTSE All Share.
That being said, while both the R&M and Unicorn funds sit in the bottom quartile of all IMA funds year to date, they have both outperformed their IMA UK Smaller Companies sector which has lost 3.45 per cent.
Performance of funds vs sector in 2014
Source: FE Analytics
Hugh Sergeant’s R&M UK Equity Long Term Recovery fund has struggled 2014 as his portfolio is packed full of highly cyclical companies – such as Lloyds, Rio Tinto and Anglo American – which have all been hit by this year’s risk-off environment.
The same can be said for FE Alpha Manager Douglas Brodie’s five crown-rated Baillie Gifford Global Discovery fund, which turned in a 54.96 per cent return last year.
The portfolio is effectively a small-cap tech fund and both those asset classes were hit hard during the market rotation earlier this year. The fund is up year to date, but its return of 4.24 per cent means it sits in the third quartile of the IMA Global sector.
Bill Miller’s Legg Mason Opportunity fund is another example of a portfolio which has delivered a positive return but struggled relative to the wider market.
It is up 15.45 per cent this year, but the IMA North America sector and S&P 500 index have returned 16.58 per cent and 20.33 per cent respectively. This underperformance could be a reflection of the fact that Miller avoids some of the largest constituents of the index, which have tended to perform well year to date.
One fund on the list which has gone against the grain is Linden Thomson’s five crown-rated AXA Framlington Biotech fund.
It made a substantial 63.65 per cent last year and, unlike any other funds on the list, it is once again up 49.22 per cent in 2014.
Those returns mean it has been the third best performing portfolio in the IMA universe this year, just like it was in 2013. In fact, its returns of 24.3 per cent in 2012 meant it was one of the top 10 performing IMA funds in each of the last three years.
As a point of comparison, it has beaten the FTSE World Pharmaceuticals & Biotechnology index in each of the last three calendar years.
Performance of fund vs index since Jan 2012
Source: FE Analytics
However, given that consistently high performance and as investors who bought units in the fund in January 2012 would be sitting on a return of 207.13 per cent, questions have to be asked as to how much further the fund can rally from here.
