A lot of investors forget that past performance really is in the past and that there is little predictive power in using quartile rankings to pick a fund, according to Apollo’s Ryan Hughes (pictured). 
The multi-asset fund manager says that, just as easily as a first-quartile fund can move to the fourth quartile, a fourth-quartile fund can move to the top of its sector as its style comes back into favour.
“Even the very best managers over the long term have had periods of underperformance which has seen them tumble down the quartile rankings. Bolton, Woodford and Odey amongst others have all languished in the fourth quartile at various points in their careers and it would have been a terrible investment mistake to write them off at that point,” he pointed out.
“As a fund manager, I'm far more interested in trying to find what is likely to do well in the future than read about what has done well in the past. As a believer in mean reversion and market cycles, I fully expect investment styles to come and go and for managers to have periods of poor performance. Trawling through those managers who are underperforming can prove to be rich picking grounds for future ideas and this is particularly true when looking a sector specific ideas.”
In light of this and as a continuation from Darius McDermott’s underperforming fund picks last week, Hughes tells FE Trustnet the three funds he expects to mean revert.
“The energy sector is horribly out of favour following the collapse in the oil price and Guinness Global Energy has therefore significantly underperformed global equities and other funds in the IA Global sector,” he said.
“While it may be a brave buy at this point, it won't take much of a stabilisation and rally in the oil price to get this fund moving again and it could easily shoot back to the first quartile in the sector, outperforming global equities on the way.”
Co-managed by Tim Guinness and FE Alpha Manager Will Riley, the £165m fund was launched in 2008 and achieved a top-quartile return in 2009, almost doubling the performance of its peer average in the IA Global sector and tripling the performance of its MSCI World/Energy benchmark.
However, the fund has found itself in the bottom decile over one year, three years and five years, as well as over one month, three months and six months.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
While its performance has been weak over these time frames, both managers and deputy manager Jonathan Waghorn all have extensive experience in the fund management industry.
Guinness has served as Guinness Asset Management’s CEO and CIO since 2003 when the firm was founded and has been at Guinness since 1997.
Star manager Riley was at PricewaterhouseCoopers for six years prior to joining Guinness in 2007 and has achieved a consistently high alpha rating since becoming a fund manager, while Waghorn racked up 18 years’ experience in the energy sector before joining Guinness Asset Management in 2013.
The managers choose stocks depending on how much exposure they have to specific sectors such as oil services or production, and combine this with bottom-up stock analysis.
The fund’s portfolio is highly concentrated and, under normal market conditions, invests in 30 equally weighted positions.
A majority of the fund’s top 10 holdings are little-known companies that have low sector weightings such as US integrated oil company Hess Corp Texan crude oil and natural gas company Newfield Exploration Company.
Guinness Global Energy has a clean ongoing charges figure (OCF) of 1.24 per cent.
“This fund has suffered more than most in recent months with the poor performance from emerging markets. But, James Donald is a highly experienced fund manager with a very strong track record and I fully expect him to return to form and pull out of the fourth quartile in the coming months,” Hughes explained.
Investor sentiment towards emerging markets has been particularly weak recently, with more than 90 per cent of funds in the IA Global Emerging Markets sector having made a loss since the start of the year.
However, Lazard Emerging Markets has fared particularly badly over the last year, losing 13.38 per cent over 12 months and almost doubling the negative performance of its sector average.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
A significant contributing factor to the fund’s lacklustre performance is likely to be its 57 per cent weighting in Asia, due to China’s sell-off in recent months and India’s dip in market performance over the last year.
Lead managed by Donald since 2001, the £814m fund has achieved a top-quartile return of 121.99 per cent over 10 years despite its spell of underperformance.
Over the same time period, the fund has achieved a top-decile alpha ratio, a top-decile maximum drawdown, which shows the biggest peak-to-trough dip in performance, and a top-quartile Sharpe ratio, which measures risk-adjusted returns.
Lazard Emerging Markets has been awarded a Square Mile rating of ‘AA’ and has been commended by Square Mile’s research team for its “sensible” investment process and the team’s high level of experience.
“The process identifies favourably valued growth companies with sustainable business models. The fund should perform relatively well in most market environments but may lag in strong liquidity driven market advances,” the Square Mile team said.
“The team have built an impressive long-term track record over the years which has helped validate our confidence in the process. The fundamental research discipline has worked well in uncovering valuation anomalies in the market and helped isolate the managers from the swings in sentiment that can dominate these markets from time to time.”
Lazard Emerging Markets has a clean OCF of 1.08 per cent and yields 2.1 per cent.
Despite the current strength of the UK economy, JO Hambro UK Equity Income has found itself in the bottom quartile over one and three months and third-quartile over one year.
Hughes believes, however, that the £2.7bn fund shouldn’t be discarded because of its short-term dip in performance.
“Clive Beagles has one of the best long-term track records in the IA Equity Income sector but is proof that even the best fund managers have quieter periods when they slip down the rankings,” he said.
“Currently in the third quartile over one year, this is a manager that I wouldn’t have any worries about during such a period. His experience and investment process have been well tested and I expect him to recover in his sector.”
Over the last 12 months, the five FE Crown-rated fund has provided a total return of 8.32 per cent, underperforming its peer average by 2.75 percentage points but managing to outperform its FTSE All Share benchmark by 1.33 percentage points.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
Despite this, the fund has had a stellar run over 10 years, achieving a top-decile return of 150.9 per cent and outperforming its average peer by 55.41 percentage points.
JO Hambro UK Equity Income also boasts impressive ratios, having delivered a top-decile alpha rating and a top-decile Sharpe ratio over the same time period.
The fund is not for the faint-hearted, though, as it is in the bottom decile for its annualised volatility following a particularly weak performance in 2009.
The fund has made its way onto the FE Research Select 100 list for its rigid discipline when it comes to stock selection, which means the manager doesn’t become too emotionally involved in his holdings.
“One possible cause for concern is the fund’s size: the strategy is biased towards medium-sized companies and larger inflows could hurt performance by forcing the managers to change their investment process,” the FE Research Team warned.
“To discourage some inflows and remain free in their decisions a charge is levied on new, direct clients but the fee structure remains the same for investments via platforms. The fund has a performance fee of 15 per cent applied for any excess performance above the benchmark."
In addition to its performance fee, JO Hambro UK Equity Income has a clean OCF of 0.67 per cent and yields 4.29 per cent.