While 2014 was a surprising year for many assets – at the start of the year, for example, few were predicting that bonds would outperform stocks – some parts of the equity market surged.
India was one, where the election of pro-business reformist Narendra Modi as prime minister boosted investor sentiment towards the previously unloved market. The US was another, as a steadily improving economic climate and the strengthening dollar caused investors to ignore concerns about valuation and snap up American equities.
The list of the top 10 highest returning funds of 2014 is entirely made up of Indian portfolios, although only two of these have assets under management (AUM) of more than £1bn. The smallest portfolio - the £4.6m Matthews Asia India fund - was the best performer of the year with a 62.97 per cent gain.
When the year’s best performers are re-run to include only those funds with AUM over £1bn, FE Analytics shows that around 75 funds achieved a double-digit return in 2014. It must be remembered that past performance is no guide to future returns.
As the table below shows, Indian equity funds occupy the top four spots while US funds are also well represented.
Source: FE Analytics
Stephen Dover and Sukumar Rajah’s £2bn Franklin India leads the pack of giant funds with its 50.23 per cent return for 2014, compared with a 31.58 per cent rise in its MSCI India benchmark. It achieved this with less volatility and maximum drawdown, which shows the loss an investor would have faced if they bought and sold at the worst times, than the index.
The fund takes a largely bottom-up approach, building a high conviction portfolio that typically comprises 40 to 60 names, mostly drawn from the large-cap space. Its largest overweights are to financials and industrials, with ICICI Bank and HDFC Bank being its two biggest holdings.
Its long-term numbers are also good, with the fund significantly outperforming the MSCI Index over three and five years. Since launch in October 2005 it’s up 265.80 while the benchmark has risen 189.30 per cent.
Of the other three giant Indian outperformers, Aberdeen Global Indian Equity is the highest rated under the FE Crown system, winning five crowns for superior stockpicking, consistency of outperformance against a credible benchmark and achievement of results at a relatively low risk over recent years.
Managed by Aberdeen’s Asian equities team, headed by FE Alpha Manager Hugh Young, the fund is up 157.35 per since launch in March 2006 while the MSCI India has risen 101.15 per cent. It’s also been far less volatile than the index and at 46.42 per cent its maximum drawdown is about 16 percentage points lower.
Performance of funds vs index over 2014
Source: FE Analytics
In fifth place, Fundsmith Equity is also one of the most popular with FE Trustnet readers as its fact sheet has been the third most popular over the past month. The £3bn fund achieved its 22.71 per cent return in 2014 with less volatility than the average IA Global fund and the MSCI World, while its maximum drawdown was about half that of its typical peer.
Terry Smith (pictured) runs a concentrated buy-and-hold portfolio, mirroring his belief that most managers trade too frequently and hit investors which fees that are too high. The approach has worked: since launch in November 2010 its up 95.85 per cent, compared with a 56.23 per cent rise in the index and an average return of just 38.47 per cent in the sector.
More than 60 per cent of Fundsmith Equity’s portfolio is in US stocks, with another 26 per cent in the UK and 13 per cent in continental Europe. Smith looks to own companies that are already winning in their respective field, with his top 10 holdings including Microsoft, Unilever, Domino’s Pizza and Imperial Tobacco.
The next five of the giant outperformers also focus US equities. It’s well known that the US is a difficult market for managers to outperform in and last year was no exception; while the S&P 500 was up 20.02 per cent in sterling terms the average fund in the IA North America sector made just 17.79 per cent.
However, all five of the portfolios on the above table beat the S&P’s return. One of the highest regarded in the sector is Clare Hart’s £2.8bn JPM US Equity Income fund, which appears in the FE Research Select 100 list of preferred funds and Square Mile’s Academy of Funds.
Since launch in December 2008, the fund has returned 143.40 per cent, while better than the sector average of 137.34 per cent but below the S&P 500’s 155.89 per cent. The FE Research team said: “This fund’s investment process is an interesting one. Even though its track record is quite short to assess its true effectiveness, the stock-picking method it employs is tried and tested and has worked well elsewhere.”
Performance of fund vs sector and index over 2014
Source: FE Analytics
We have to move down to thirteenth place to find a fund other than Fundsmith Equity that doesn’t specialise in Indian or US equities - FE Alpha Manager Angus Tulloch’s £7.8bn First State Asia Pacific Leaders fund.
The five FE Crown-rated fund outperformed the IA Asia Pacific ex Japan average return and the rise in the MSCI AC Asia Pacific ex Japan index by close 10 percentage points last year after making 19.07 per cent. Its 24 per cent weighting to India no doubt helped.
Within the full list of giant funds making double-digit 2014 returns are a host of familiar names, including Jacob de Tusch-Lec's £1.6bn Artemis Global Income, Peter Meany and Andrew Greenup's £1.1bn First State Global Listed Infrastructure and Evan Bauman and Richie Freeman's £2.6bn Legg Mason ClearBridge US Aggressive Growth funds.