The Sharpe ratio, which measures risk-adjusted returns, is one of the most popular metrics used by professionals when judging an active fund manager’s ability.
Instead of showing which ones have performed best from a total return point of view, it measures the return a manager has generated per unit of risk taken on. A higher Sharpe ratio implies that the manager has done a better job of turning the volatility of the fund into positive returns.
Of course, like any ratio, it is backward-looking and certainly shouldn’t be used in isolation, but its importance is demonstrated in the fact that it is one of the main calculations used when the FE Research team draws up its list of FE Alpha Managers.
In an article published last week, FE Trustnet used the ratio to show which UK fund managers have delivered the most consistent risk-adjusted returns in each of the past five calendar years.
This time, however, we have expanded the study to look at which funds have achieved the impressive feat of delivering first or second quartile Sharpe ratios in each year between 2010 and 2014 from the different IA Global and regional equity sectors.
Global
For whatever reason, the IA Global and Global Equity Income sectors have proved to be a very difficult hunting ground for active managers.
Indeed, a recent FE Trustnet study showed just 31 per cent of portfolios from the two sectors have managed to beat their benchmark over the past 10 years. Those results are compounded by our latest research, which shows that not a single fund from the IA Global Equity Income sector has achieved sector-beating risk-adjusted returns on a consistent basis over the past five years.
However, there are a number of funds that have done so within the larger IA Global sector. Two of the standout performers in that respect are Old Mutual Global Equity and Newton Global Opportunities.
The £234m Old Mutual fund, which is headed-up by the management trio of Ian Heslop, Mike Servent and Amadeo Alentorn, was top quartile for its Sharpe ratio in 2011, 2013 and 2014, but second quartile in 2010 and 2012.
However, FE data shows it is the only fund within the IA Global sector to have beaten both its peers and its benchmark in each of the last five calendar years – which includes both rising and falling markets.
Source: FE Analytics
Cumulatively, it is among the top five in its sector for total and risk-adjusted returns over the past five years.
FE Alpha Manager Robert Hay’s £525m Newton Global Opportunities fund was a top quartile performer for its Sharpe ratio in two out of the last five years. Like the Old Mutual fund, it has outperformed the sector average in each of the last five calendar years, but underperformed against its benchmark in 2011 and 2012.
Europe
While the global sectors don’t have a high proportion of consistently outperforming active managers, it is a very different story in the IA Europe sector. FE data shows that 70 per cent of its members have outperformed the MSCI Europe ex UK index over three, five and 10 years.
It is also home to a number of top performing funds on a risk-adjusted return basis: seven offerings have delivered first or second quartile Sharpe ratios in each of the past five calendar years.
They include Schroder European, FF&P European All Cap Equity and FE Alpha Manager Alexander Darwall’s Jupiter European fund.
However, the standout performer has been the five crown-rated Henderson European Focus fund, which is the only one in the sector to have delivered top-quartile risk-adjusted returns in every full calendar year since 2010.
FE Alpha Manager John Bennett took charge of the £450m fund in February 2010, over which time it has been the fourth best performing fund in the 89-strong sector, with returns of 98.41 per cent. This means it has nearly doubled the gains of its FTSE Europe ex UK benchmark.
Performance of fund versus sector and index since Feb 2010
Source: FE Analytics
Those returns have been consistent as well, given that Henderson European Focus is among the select few to have beaten both its sector and benchmark in each of the last five years – a period which includes some strongly rebounding markets and years such as 2011 when the sovereign debt crisis almost broke up the eurozone.
Japan
Investors haven’t had a great time of it in Japanese equities over the medium to long term as economic woes such as a deflationary spiral and an ageing population have weighed on potential returns.
Also, while the Nikkei shot the lights out in 2013 and is doing so in 2015 thanks to money-printing from the Bank of Japan and prime minister Shinzo Abe’s desire to drive down the value of the yen, Japan has been one of the worst performing developed markets over the past five years.
Nevertheless, while it has been a rocky road and many active managers have struggled, a number of funds have consistently delivered market-beating risk-adjusted returns over the period.
Two of these are Baring Japan Growth and Pictet Japanese Equity Opportunities. However, the standout performer in this regard is Baillie Gifford Japanese, which delivered a top quartile Sharpe ratio in 2011, 2012 and 2013.
That means it has the fourth highest risk-adjusted returns in the sector over a rolling five-year period. It has consistently outperformed both the IA Japan sector and its Topix benchmark over this time as well.
The £970m fund is managed by Sarah Whitley and Matthew Brett.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
This means Baillie Gifford is among the top three funds in the sector for both its total return and maximum drawdown, which shows the most an investor would have lost if they had bought and sold at the worst possible times, over five years.
Global emerging markets
Investor sentiment towards emerging markets has been poor for a number of years now, as not only have headwinds such as slowing economic growth and currency weakening affected the asset class, but it has also been very difficult to find top quality active managers within the IA Global Emerging Markets sector – especially now the highly popular First State and Aberdeen funds are either nearing or at capacity.
FE data shows that just 20 per cent of funds within the sector have beaten the MSCI Emerging Markets index over 10 years.
Given that information, it isn’t surprising that very few have managed to deliver consistent risk-adjusted returns over recent years. In fact, the little-known McInroy & Wood Emerging Markets fund is the only one in the sector to have a top or second quartile Sharpe ratio in each of the last five years.
The nimble £60m fund, which almost completely ignores the index, has been a standout performer in more ways than one: it has been a top quartile performer in all but one calendar year since its launch in March 2007.
Performance of fund versus sector and index since Mar 2007
Source: FE Analytics
If investors had bought into the fund at launch, they would have outperformed all but two funds in the sector and seen a return that is 40 percentage points greater than the average emerging markets tracker.
Unfortunately, though, McInroy & Wood Emerging Markets isn’t widely available to retail investors.
Asia Pacific ex Japan
While the broad-based Global Emerging Markets sector has been poor for active managers, it is a much brighter picture in the more targeted IA Asia Pacific ex Japan sector.
FE Analytics data shows that 56 per cent of active funds in the sector have beaten the index over five years and our most recent piece of research shows that four portfolios have delivered consistent risk-adjusted returns since 2010.
The likes of First State Asia Pacific, Investec Asia ex Japan and Schroder Asian Income have all outperformed the sector average in terms of their Sharpe ratio in each of the last five years, but First State Asia Pacific Sustainability is the only one to have been top quartile every time.
The five crown-rated fund, which has been run by FE Alpha Manager David Gait since its launch in December 2005, has also been top quartile and beaten its benchmark in every calendar year over the last half a decade, thanks to the manager’s focus on companies that manage sustainability risks and opportunities and those with a positive sustainability impact.
Source: FE Analytics
The £344m First State fund has also topped the sector from a total return point of view and has had the highest Sharpe ratio and alpha generation score, relative to its benchmark, over the last five years.
Unfortunately, due to the amount of money within the First State Asia Pacific range, Gait’s fund is now closed to new investors.