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Hughes: Five genuinely active funds for your portfolio

08 May 2015

Apollo Multi-Asset’s Ryan Hughes highlights five top-performing funds which are genuinely active and benchmark agnostic.

By Lauren Mason,

Reporter, FE Trustnet

The active-versus-passive debate has intensified in recent years and fund managers, more and more, have to justify their often higher ongoing charges.


However, this focus isn’t just because of the amount of money that investors are paying. In recent months, there has been an emphasis on funds’ active shares to give investors greater transparency about exactly what they’re buying into.

Ryan Hughes (pictured), fund manager at Apollo Multi Asset Management, particularly likes funds that have a high active share and managers who genuinely make off-benchmark calls to outperform.

However, he says this is an increasingly important strategy in the current market as, given that valuations on broader market indices are near or at historic highs, investors need high quality managers who can scout out value opportunities.

Therefore, for investors who want genuine active exposure, Hughes gives FE Trustnet five of his favourite top-performing which aren’t afraid to stray from the benchmark.


GVO UK Focus

“One of the funds we like is GVO UK Focus – they’re benchmark agnostic, they’ve got a private equity approach and they value businesses based on what someone would be prepared to pay for it,” he said. “It’s very much market-cap agnostic, style agnostic and benchmark agnostic.”

Over the last five years, the five FE Crown-rated fund has almost doubled the performance of the FTSE All Share index, achieving total returns of 130.12 per cent.

Performance of fund vs sector and benchmark over 5yrs

 
Source: FE Analytics

FE Alpha Manager Jamie Seaton invests in up to 35 publically-traded companies that have been identified as undervalued using private equity-based valuations.

He expects the stocks that he picks to earn at least 15 per cent compounded over the lifetime of the investment, and roughly allocates a third of assets each to large-, medium and small-caps. The fund also refuses to buy banks, oil & gas companies or miners.

Hughes added: “It’s off the radar but it’s got a very, very strong track record. People might not have heard of it.”

GVO Focus, which is also on the FE Research Select 100 list, has a clean ongoing charges figure (OCF) of 1.45 per cent and yields 1.86 per cent.

 

FP Argonaut European Alpha

This £290m fund is also on the Select 100 list and is managed by FE Alpha Manager “hall of famer” Barry Norris, who analyses a company’s profits from several different angles.

“What he’s looking at is change, so earnings upgrades on stocks. For instance, why is that company going to do better than the market thinks?” Hughes said.

Norris aims to profit from the market’s overreaction to any piece of geopolitical news by buying economically-sensitive companies who earn their profits domestically.

An example of this investment process is the fish farming story, which has returned to Norris’ portfolio following a share price dive based on economic sanctions in Russia.

His investment process has worked so far as the fund has made total returns of 208.74 per cent since its launch in 2005, which is 85.16 percentage points more than its peer average and 94.57 percentage points more than its MSCI Europe index.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

Hughes explained: “He’ll go anywhere and he doesn’t worry about the country – he’s very well-known for having big positions in Greece 18 months ago. He also prepared to look away from the large-cap part of the market.”

FP Argonaut European Alpha has a clean OCF of 0.91 per cent and yields 0.4 per cent.


 Legg Mason Japan Equity

As shown in the graph below, Hideo Shiozumi’s Legg Mason Japan Equity fund has remained consistently divergent from its peers since launch in 1996.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

“The fund is very volatile, down-the-cap, and when the manager’s style is in favour, he’s a massive outperformer,” Hughes continued.

“When he’s out of favour he’s quite a big under-performer – he’s either top or bottom in the sectors typically. But, if you want someone who doesn’t look like the benchmark, he’s exactly that.”

Shiozumi seeks to exploit structural changes in Japan as a means of identifying high-growth companies.

He chooses stocks that have an annual earnings growth of at least 20 per cent but are also, in the manager’s opinion, valued attractively. As the graph above shows, the fund has been one of the sector’s best performers in rising markets due to it small-cap bias, but has fallen considerably more than its average peer in more turbulent conditions.

Nevertheless, the fund has been the sector’s best performer for its alpha generation relative to its benchmark. However, as to be expected, it also has had one of the highest annualised volatility scores in the sector, so is perhaps not the best for more cautious investors.

Our data shows, for example, has a had a the worst maximum drawdown – which measures the most an investor could have lost if they bought and sold at the worst possible times –in the sector over 10 years of more than 80 per cent.

Legg Mason Japan Equity, which is hedged, has a clean OCF of 1.12 per cent.

 

Prusik Asia

This £59m fund, which is managed by Heather Manners, aims to preserve capital and generate absolute return by investing in key themes within the Pacific region.

“They’re a boutique management team that only do Asian equities,” Hughes said.

“[Manners] visits Asia a lot and gets on the ground, looking at buyer behaviour and what people are actually doing – what their social trends are, what they buy, where they go to the cinema, where they eat out.”

“Again, she’s perfectly happy to look away from the benchmark.”

Manners uses her vast knowledge of the region to choose themes independent from macroeconomic trends and instead uses bottom-up analysis when building her portfolio.

At the moment, the fund’s largest holding is in the telecom, media and technology sector at almost 50 per cent.

As well as being a fairly contrarian investor, the manager also aims to maintain a low level of volatility in her portfolio. Over the last five years, the fund has been top-decile for its annualised of 11.79 per cent, which is 1.48 percentage points less than the MSCI AC Asia Pacific Ex Japan index and 2.96 percentage points less than its peer group composite average.

While the fund hasn’t managed to outperform its index over the last three years, it has achieved total returns of 31.53 per cent, beating its peer average by 4.74 percentage points.

Performance of fund vs sector and performance over 3yrs

 

Source: FE Analytics

Prusik Asia has an annual management fee of 1.5 per cent, excluding a performance fee.


 

Kames Absolute Return Bond

Bonds are far from popular at the moment. However, Hughes believes that Kame’s five FE Crown-rated Absolute Return Bond fund will add a good level of diversification to an investor’s portfolio.

“Regardless of what’s happening in the bond market, Kames are looking to deliver a positive return. All the tools are available to them – they could go long, they could go short. They can go for government bonds, investment grade, high yield – the full universe.”

The £1.25bn fund, co-managed by Colin Finlayson and Stephen Snowden, aims to outperform the three-month GBP LIBOR index by 2 to 3 per cent per annum net of fees over a rolling three-year period.

They appear to have been successful as, over the last three years, the fund has outperformed the index by 3.89 percentage points, delivering total returns of 5.62 per cent.

Performance of fund vs sector and benchmark

 

Source: FE Analytics

“They don’t really care what’s happening in the market, they’re looking to make money regardless. Which, we like to think all managers do, but they don’t,” Hughes added.

Kames Absolute Return Bond has a clean OCF of 0.69 per cent. 

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