Investors are running the risk of missing out on investment opportunities if they avoid funds that are in the fourth quartile, according to AXA Wealth’s Adrian Lowcock (pictured) and SG Wealth Management’s Neil Shillito. 
Company director Shillito believes that, while he does not actively avoid top-quartile funds, there are great ‘buy’ opportunities to be had lower down the performance scale that could provide promising investment opportunities over the longer term.
“I’m sure it’s true that there are investment opportunities that are missed out on because they are in the fourth quartile. The industry is slavish in following fads and fashions but, then again, it’s human nature to want to pick the top performers and to factor in past performance to an investment decision,” he said.
“The way some investors' brains work is, if you’re at the races, you’ll put your money on the reigning champion thorough-bred horse, and not the donkey at the back with three legs, it’s a natural thing. That’s why it is up to your advisor to do their fundamental research and really look under the bonnet of a fund.”
Lowcock, head of investing at AXA Wealth, adopts a more cautious approach to looking at underperforming funds but doesn’t believe they should be completely ruled out of the equation if they have slipped to the bottom quartile.
“I think we have to be careful of comparing fourth quartile fund performance with value investing,” he pointed out.
“Managers themselves might not be value investors and therefore the reasons they are fourth quartile could be down to other factors such as style or poor stock selection itself or even change in management.”
Following on from Ryan Hughes’ underperforming fund picks last week, FE Trustnet reveals the bottom-quartile funds that Shillito and Lowcock think investors could be missing out on if they focus solely on past performance.
Managed by Tom Dobell, the one FE Crown-rated fund has delivered bottom-decile returns over one, three and five years and has fared particularly badly each year since 2012.
However, the fund beat both its peer average in the IA UK All Companies sector and its FTSE All Share benchmark in each of Dobell’s first 10 years as manager (he took charge in March 2000), meaning it has still significantly outperformed over Dobell’s tenure.
Performance of fund vs sector and benchmark over tenure
Source: FE Analytics
A number of reasons have been given for Dobell’s recent underperformance – one of which being his approach (which revolves around stocks that he believes will pick up over the longer term) as it hasn’t been conducive to the recent market backdrop.
In an article last week, Equilibrium’s Mike Deverell told FE Trustnet that the manager’s historically high weighting to miners and oil & gas stocks has boosted his performance in the past, but has hurt the fund in today’s slow-growth environment where the price of oil and iron ore has plummeted.
“In essence I therefore think past outperformance and recent underperform is at least partly down to his views on commodities,” Deverell explained.
Another potential reason for the underperformance could be the fund’s large size. While it currently has an AUM of £4.5bn, it has shrunk by 40 per cent over the last few years after suffering outflows of more than £3.1bn.
However, Shillito praises Dobell on his consistent investment technique and the fact that he continues to invest in value stocks despite being burned by them over the last few years.
“He’s an outstanding manager and has remained consistent in his investment style – it just seems that the last few years haven’t been kind to him,” he said.
M&G Recovery has a clean ongoing charges figure (OCF) of 0.91 per cent and yields 1.46 per cent.
This one FE Crown-rated fund has been one of the leading lights in the sector, due to its highly-rated management team and its focus on high quality companies with reliable earnings.
However, though its long-term outperformance is still very much intact, it has gone through a much tougher time over recent years possibly as a result of its increased size, its style falling out of favour and the fund’s historical underweight to the (up until recently) roaring Chinese market.
Those factors have landed Aberdeen Asia Pacific in the fourth quartile over three and five years, having delivered a total return that is less than a third of its peer average in the IA Asia Pacific ex Japan sector over three years.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Despite this, Lowcock says the unpopularity of Asia and emerging markets has dented the fund’s performance and it will need some time to recover, so would therefore recommend drip-feeding money into the portfolio for now.
“The fund is run by the experienced Aberdeen team lead by Hugh Young. They invest in companies that are well managed that the fund managers can understand and value correctly,” he said.
“They run a strict discipline of buying at the right price though which means buying companies which may be out favour. Because attention is paid to the longer term it means that the fund is likely to have periods of short-term underperformance.”
The £1.6bn fund is primarily invested in the Pacific Basin at the moment, but also holds a 14. 2 per cent weighting in Asia Pacific, 12 per cent in Australasia, 0.7 per cent in other regions and holds 1.2 per cent in cash.
It has made its way onto the FE Research Select 100 list despite its one crown rating because Aberdeen is “highly commended” for Asian equities and the FE Research team rate the team behind the fund.
“The fund makes the most of Aberdeen’s team-based philosophy and investment in local resources, by putting good stock-picking at the core of its approach. The key to this is using its extensive analyst resources to gain a greater understanding of Asian companies than anyone else and putting this informational advantage to good use,” the team said.
Aberdeen Asia Pacific Equity has a clean OCF of 1.18 per cent and yields 1.4 per cent.
Schroder UK Dynamic Smaller Companies
Managed by FE Alpha Manager duo of Paul Marriage and John Warren, the four FE Crown-rated fund has delivered a strong performance over the long term, returning 267.78 per cent over Marriage’s tenure and comfortably doubling the performance of its sector average in the process.
Performance of fund vs sector and benchmark over management tenure
Source: FE Analytics
This is because the fund achieved a stellar performance from Marriage’s tenure in 2006 to the end of 2013, having achieved a return of 245.6 per cent in this time alone.
However, because of the strong performance, there was a drastic increase in the fund’s inflows and, between the end of January 2013 and the end of January 2014, it increased in size by more than 72 per cent from £366m to £1.3bn.
As a result, the fund was hard-closed last January and money poured out of the fund as investors were forced to remove the fund from their ‘buy’ lists – currently, the fund is just £544m in size.
In an article last month, Premier’s Simon Evan-Cook told FE Trustnet: “We sold out at the point [it grew past £1bn] and went into a smaller fund. Since then that fund has struggled as money came out of that fund and money came out of the type of stock it invested in, but to me it seems like the worst has passed.”
This led to huge underperformance as Marriage and Warren had to sell into a falling market, leading the fund to lose close to 10 per cent in 2014. It means Schroder UK Dynamic Smaller Companies is bottom quartile over 12 months.
Nevertheless, the fund – which has since re-opened –FE Research Select 100 list for Marriage’s passionate and robust approach to investing, but is currently ‘on hold’ as the team continues to monitor asset flows.
Shillito said: “Paul Marriage is a true bottom-up stock-picker, and he’s been working in the UK Smaller Companies sector for many years. Of course when Schroders decided to hard-close the fund he had to sell at a low price, but he is an outstanding manager.”
Schroder UK Dynamic Smaller Companies has a clean OCF of 0.91 per cent.
