M&G Global Basics and Newton Asian Income are among the funds worst affected by the latest FE Crown Rating rebalancing.
The two funds, which total £5.5bn in investors’ assets, have fallen from holding four FE Crowns to just one, reflecting a torrid time for them of late as well as more broadly over the past three years.
FE’s Crown Ratings, which evaluate funds according to alpha generation, volatility and the consistency with which they have beaten their benchmarks over three years, have rebalanced today.
In the methodology, the top 10 per cent of funds scored for these metrics are awarded five FE Crowns with the following 15 per cent receiving four. Funds in the next three quartiles are given three, two or one FE Crown depending on their ranking.
Both M&G Global Basics and Newton Asian Income have therefore fallen from having a place in the top quartile to the bottom when it comes to the metrics at the heart of the ratings.
They have also both seen management change over this three-year period, mostly recently with Jason Pidcock leaving the popular Newton Asian Income having managed it since 2005 when it launched.
The fund has now moved to a ‘team-based investment management approach’, according to Newton, with Pidcock’s deputy Caroline Keen still a manager on the portfolio.
According to FE Analytics, the fund has returned 15.23 per cent over the past three years – underperforming both sector and benchmark by about 10 percentage points.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Whitechurch Securities’ Gavin Haynes says Pidcock’s departure prompted him to sell the fund across several different portfolios.
“With a long-term manager leaving the fund that certainly prompted us to sell a fund. It creates uncertainty. One of the key factors that hit the fund is quite a significant weighting in Australia because there has been an ongoing weakening of the Australian dollar which hurt performance,” he said.
“Last year if you look at Newton Asian Income against other Asia funds, one of the reasons they would have struggled was because India was the standout stock market but one of the characteristics of the Indian market is that it doesn't provide high dividends. Because this is an equity income mandate they didn't have much in India.”
“Also they didn't have much in China, which also did well until recent weeks. It has about 11 per cent in Hong Kong but that is in income producing things such as REITS and so wouldn’t have participated in the rally over the 12 months up and until June.”
Australia still represents about 45 per cent of the fund, with 55 per cent in Asia Pacific stocks such as Taiwan Semi-Conductor and Singapore Telecommunications.
Randeep Somel took over as lead manager of the £2.2bn M&G Global Basics fund from the long-serving Graham French back in November 2013.
The manager has overhauled the fund’s portfolio but he says the primary objective of investing in ‘the building blocks’ of the global economy remains unchanged. However, over the past three years investors have seen a return of just 10.83 per cent.
By comparison the IA Global sector average return is 45.52 and the MSCI World index has gained 40.07 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
The FE Research team said: “The aim of the strategy is to identify the companies that will benefit the most from the development of emerging economies. The investment team relies on the economic development curve it built and tries to determine what forces are driving growth.”
“This ranges from studying consumption habits such as the long-term growth in the number of coffee drinkers, to assessing countries’ needs in terms of infrastructure. The next step involves analysing companies’ financial statements to ensure their strategy is reflected in healthy and profitable books.”
The fund has historically had a high weighting to emerging markets and commodity-related equities, two areas of the market which have been particularly out of favour over since Somel took charge.
The manager has been steadily reducing exposure to consumer products over the past years at the same time as upping US equity exposure and to industrials.
Haynes says the fund is still facing the headwinds of slowing growth in emerging markets but believes with further downside likely in the short term, there should be an attractive entry point at some point.
"Over the last two or three years as emerging markets have slowed and commodity prices have fallen this fund has suffered. Somel is still focused on investing in companies that exposed to the growth of emerging markets which have been suffering significant headwinds,” he said.
“For us it is not interesting because of this at the moment we still think the sector is facing severe headwinds. Certainly there will come a time when valuations get so beaten up that there will be opportunities but for now there is too much uncertainty."
Other big fallers in the rebalancing include CF Asset Value Investors Global, CF Purisima PCG, Aberdeen Global Japanese Equity and Aberdeen Property Share.
How Crown Ratings work
FE’s Crown Rating system measures a fund’s alpha by its r-squared value compared to its benchmark, while the Sortino ratio is used to evaluate the remaining unexplained performance of the fund.
FE calculates the alpha generated over the last three years, and then adjusts this for the volatility of the fund. This process makes the alpha of funds more comparable.
FE equates the volatility of a fund over the last three years with that of its chosen benchmark and assigns a score.
For extremely low volatility funds where minuscule volatility can seem proportionately large – Money Market, Gilts, and Index Linked Gilts – the volatility component is ignored.
FE lastly looks at the extent to which a fund consistently manages to outperform its benchmark over successive quarterly periods over the last three years.
