There have been many instances where investors have sold too early, of course, but a principle rule of investing is that the more a fund, asset class or individual stock goes up, the more the downside risk there can be. That is certainly the case for those of you who believe in mean reversion.
Therefore, in this article we ask the experts whether investors should look to take profits from these three funds – all of which focus on different areas of the market – that have delivered huge returns over recent years or whether they can expect the stellar gains to continue.
AXA Framlington Biotech
There is no denying that Linden Thomson’s £520m AXA Framlington Biotech fund has been on a phenomenal run over recent years.
According to FE Analytics, the fund is the only portfolio to feature in the list of the IA universe’s top 10 best performing funds in each of the last three years, gaining 24.3 per cent in 2012, 63.65 per cent in 2013 and 45.5 per cent last year.
On top of that, AXA Framlington Biotech is already up 10.22 per cent so far in 2015.
Performance of fund versus indices since Jan 2012
Source: FE Analytics
It means that if investors bought into the fund in January 2012, they would now be up 226.23 per cent. While those returns are lower than those of the MSCI AC World Biotechnology index, it is hard to imagine many unitholders in the fund have been complaining too much.
In fact, according to data from FE, it’s the third most viewed factsheet on FE Trustnet over the last month with only CF Woodford Equity Income and Invesco Perpetual High Income receiving more hits.
The fund is a relatively concentrated portfolio which invests in companies in the biotechnology, genomic and medical research industries – all areas which have been touted as the major drivers of growth over the coming years.
Nevertheless, when an asset class has such a strong period there is always a feeling of caution among investors and in a recent article Brenda Kelly – IG’s chief market strategist – warned that investors should beware a coming correction in biotech stocks.
However, Charles Stanley Direct’s Rob Morgan says that if investors can stomach the volatility AXA Framlington Biotech is a fund they can afford to hang on to.
“It’s fair to say there have been a lot of innovation and mergers and acquisitions in the biotech space. However, investors kind of mispriced the sector’s growth and that is what has led to such outstanding returns certainly over recent years, but even since 2008 really,” Morgan said.
“I wouldn’t say it is over though. Yes, biotech has come a long, long way but in a world where there is little growth, it is a sector where growth is available. Obviously, the multiples are now very high as biotech companies have re-rated quite significantly, but I think they are deserved as it is an area where growth will be much stronger than the average.”
AXA Framlington Biotech has an ongoing charges figure (OCF) of 0.84 per cent.
Hermes Asia ex Japan
Jonathan Pines’ Hermes Asia ex Japan fund has taken the IA Asia Pacific ex Japan sector by storm since it opened to retail investors in October 2012.
According to FE Analytics, the now $1.3bn fund has been the sector’s best performing portfolio over that time with returns of 61.85 per cent. As a point of comparison, the MSCI Asia ex Japan index and the sector have returned less than half that amount.
Performance of fund versus sector and index since Oct 2012
Source: FE Analytics
The fund was top of the sector in 2013 – returning 25 per cent when sector was up just 2 per cent – top quartile again in 2014 and is among the top 25 per cent of funds in the sector so far in 2015.
The reason why Hermes Asia ex Japan’s returns have been so different to most of its rivals is a result of Pines’ approach, whereby he focuses on value. This means he has steered well clear of highly sought after defensive income paying companies.
That style and the fund’s returns have led to it becoming increasingly popular with investors, with the likes of Old Mutual’s John Ventre tipping it as the fund which will break First State and Aberdeen’s historical dominance of the sector.
However, contrarian instincts do start to kick in when an already outperforming funds starts to be tipped as a future winner.
Premier’s Simon Evan-Cook holds the fund but says he has been scaling back his exposure following the recent strong performance of Asian equities, shifting his capital towards more catch-all global emerging market funds which offer exposure to the bombed markets such as Brazil, Russia and Nigeria.
However, Evan-Cook is still a very big fan of Hermes Asia ex Japan fund and says that though investors may want to lock in some gains, they shouldn’t be looking to sell altogether.
The major reason for that is Evan-Cook thinks Pines’ focus on value will be a far more fruitful strategy over the coming years rather than a quality growth approach – like the one implemented by First State and Aberdeen, which has been so successful over the last decade or so – as those stocks are now expensive and face an uncertain future.
Hermes Asia ex Japan has an OCF of 0.86 per cent.
CF Lindsell Train UK Equity
The final fund in this article is CF Lindsell Train UK Equity, which as regular FE Trustnet readers will no doubt remember has an outstanding track record over recent years.
The five crown-rated fund was launched by FE Alpha Manager Nick Train in July 2006 over which time it has been the fifth best performing fund in the highly competitive IA UK All Companies sector with returns of the 179.53 per cent, nearly trebling the gain of the FTSE All Share in the process.
Performance of fund versus sector and index since July 2006
Source: FE Analytics
Those returns haven’t just been due to one or two good years either, as FE data shows it is the only fund in the sector to be top quartile in 2008, 2009, 2010, 2011, 2012, 2013 and 2014. Also, it is topping the sector so far in 2015 with returns of 6.16 per cent.
In recent FE Trustnet articles, we have praised Train for the consistency of his returns, especially as he runs a highly concentrated portfolio of just 26 companies – which are all high quality franchises generating relatively reliable earnings – and as he barely ever changes his holdings.
However turning it on its head, given that Train has kept turnover so low in his £1.3bn fund, should investors be looking to reduce their holding and lock in profits because CF Lindsell Train UK Equity has been so consistent?
“No, I think this I very much a buy and hold fund,” Morgan said.
“He hardly changes anything within the portfolio and it is remarkable when he ever changes a stock so, even though it has performed very well, this is a buy, hold and forgot type of fund in my opinion. He has had a very good run and there have been some star performers in the portfolio so he is due to have a not so good year at some stage.”
“However, it is one I would be hanging onto because it is a high quality fund.”
CF Lindsell Train has an OCF of 0.77 per cent.
