Investors should steer clear of top-quartile funds and instead look for opportunities in the bottom quartile, according to Sarasin & Partners’ Lucy Walker. 
The co-manager of Sarasin Fund of Funds Global Strategic Growth (pictured) says that basing a fund’s worth on whether it is top-quartile is futile, as performance will inevitably fluctuate over different periods of time.
Walker also stresses that selling a fund because it has sat in the bottom quartile could result in missing out on future gains and says she has found numerous great opportunities in the bottom quartile.
“My biggest piece of advice would be to stay away from the funds in the top charts. I think the most important thing for investors to think about is that investment is cyclical and markets are cyclical. Japan will go in and out of favour, India will go in and out of favour, equities will go in and out of favour, and that’s a much bigger force than any one fund manager can contend with,” she said.
“It’s why we have a balanced portfolio – that gives me comfort because if I’m not 100 per cent on my base case, which I never am because that would make me arrogant, it makes it more important than ever to have that balance.”
What’s more, Walker explains that holding a mix of underperforming and outperforming funds is a sign of a healthy portfolio, as it should be able to deliver returns in a variety of markets.
An example of a fund that has flitted between quartiles is Paul Chesson’s Invesco Japanese Equity Core, which Walker holds as part of her 35-stock portfolio.
When Walker first bought the fund, it was bottom-quartile. Over the last three years, however, it has achieved a total return of 159.14 per cent, outperforming its peer average in the FO Equity Japan sector by 61.12 percentage points and moving to the top quartile.
Performance of fund vs sector over 3yrs
Source: FE Analytics
“No manager will be able to be at the top of the pops for ever – obviously there is the odd one that does manage it but I’m afraid I think that’s more luck than judgement necessarily, although of course there’s a huge amount of skill in there as well,” Walker said.
“Anybody that suggests there isn’t a bit of luck in it would be a bit misguided, really. My main piece of advice would be not to buy what is at the top of the charts, because it could well fall to the bottom the next time the investor checks its performance. A fund’s success is never a sure thing.”
Instead, the manager recommends choosing a fund based on its investment aims, stock selection and principles.
One fund in the Sarasin Fund of Funds Global Strategic Growth portfolio that she particularly likes is Vulcan Value Equity, a US large-cap fund managed by C.T Fitzpatrick.
The $1.1bn fund has outperformed its sector average by 1.47 percentage points since its launch in 2013 and is currently in the bottom quartile year-to-date.
Performance of fund vs sector since launch
Source: FE Analytics
“The Vulcan Value team are very disciplined when it comes to finding quality companies that are trading at risks they deem as appropriate,” Walker explained.
“I will always think they’re fantastic as long as their investment style doesn’t change, but they will go in and out of favour. If I was looking at Vulcan and they were first-quartile, I would be less inclined to add to that position than if they were at fourth-quartile.”
“For our fund, the whole point is we’re offsetting that risk by adding to Vulcan when it’s cheap and selling when it’s expensive, and conversely adding to the opposite of that which is cheap at that time.”
“We’re long-term investors but we’re active on a week-by-week basis to ensure that we’re constantly balancing the portfolio with what’s done well versus what hasn’t done well. I think that contrarian trading style is what will help us to retain good performance because we don’t have that extreme style bias.”
As part of her contrarian investment selection process, Walker also believes that the length of time a manager has been at the helm of a fund doesn’t always correlate with the fund’s success, and can in fact be a hindrance if the manager has become complacent.
However, she accepts that it is often preferable to choose a manager who has weathered multiple cycles rather than one who hasn’t experienced a range of market conditions.
“We do think experience is really important, but there is evidence that maybe the guys that have been running the same fund for 50 years have potentially become quite set in their ways – this is clearly not always the case though, and there are exceptions to the rule,” she said.
“There was a piece of research that found that those guys can be stuck in their ways, so if you were to look at their portfolio and maybe there’s a stock in there that has had a profit warning, it should ring alarm bells if they haven’t done anything about it.”
“Do they retain their conviction because the profit warning is a one-off event that they’re not concerned about? If so, they should be adding. If the profit warning is actually something they are quite nervous about and they think it’s a sign of things to come, they should be cutting [their exposure].”
“If they did nothing, that makes me wonder whether it’s because they’re sitting on the same portfolio and not doing anything to it. In the worst case scenario, they just never make any changes because they’ve invested in the same set of stocks for so many decades that they’re just happy with it.”
Walker and co-manager Sam Jeffries’ approach has led to Sarasin Fund of Funds Global Strategic Growth being recently awarded a five FE Crown rating, as soon as it had a long enough track record.
Since its launch in 2012, the £16m fund has returned 32.2 per cent, outperforming its benchmark by 6.36 percentage points.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund has a clean ongoing charges figure (OCF) of 1.35 per cent and yields 1.18 per cent.
