No fund can be expected to outperform year in, year out despite investors having an innate wish to always be holding top-quartile portfolios, but sticking with an underperforming fund can be a difficult decision.
However, there are plenty of examples of funds that have moved from the bottom quartile to the top in a short space of time with explanations behind this ranging from markets coming round to the fund’s positioning to a new manager coming in and overhauling the portfolio.
With this in mind, FE Trustnet has looked through the Investment Association universe for funds that are fourth quartile over three and five years, but have jumped into the top quartile more recently and offer the potential for a turnaround.
This fund is currently ranked 20th in the IA Mixed Investment 20%-60% Shares sector after its fall of 1.51 per cent bested the average decline of 3.30 per cent and pushed it into the top quartile. Over three and five years, however, it has posted fourth-quartile returns of 5.57 per cent and 9.75 per cent respectively.
CF Miton Cautious Multi Asset has been managed by David Jane since June 2014, having previously been headed up by Martin Gray and James Sullivan. Gray and Sullivan’s bearish stance – which stemmed from their view that most risk assets had been distorted by ultra-loose monetary policy – and resultant cautious positioning led to the fund lagging when markets were rising strongly.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Since Jane took over the portfolio, it has moved from being a fund of funds product to one that invests in direct securities and has adopted a more “pragmatic” approach to investing, while keeping a firm eye on capital preservation.
In his latest update, the manager said: “As ever, we focus our efforts on portfolio construction and trying to ensure portfolios perform across a range of scenarios. This means risk is spread across a range of investment views, rather than focusing on a conviction outcome. We believe this is the best way to achieve our performance and risk targets.”
While the fund is in the sector’s bottom quartile for volatility over the past year, it has a better than average maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – and is top quartile for risk-adjusted returns as measured by the Sharpe, Sortino and Treynor ratios.
The £343.2m portfolio’s largest asset allocation call is to UK equities at 16.9 per cent, followed by UK government bonds at 13.6 per cent and Japanese equities at 11.8 per cent. There’s also 16.9 per cent in cash.
CF Miton Cautious Multi Asset has a clean ongoing charges figure (OCF) of 0.79 per cent.
Fidelity European Opportunities
This £411m fund was taken over by Alberto Chiandetti in October 2014 after Colin Stone stepped down to focus on running several European smaller companies portfolios. Chiandetti’s approach looks for companies where the market is underestimating earnings growth potential, whereas Stone tends to invest in high-quality businesses.
On a 12-month view the fund has made 7.09 per cent, while its average peer is up just 4.02 per cent. This comes after bottom-quartile returns of 35.66 per cent over three years and 39.21 per cent over five years.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The portfolio’s largest geographical overweight is to the UK, which makes up 14.1 per cent of assets, and is also overweight France, the Netherlands, Ireland and Italy. Top holdings include Roche, Novartis, Sanofi Bank of Ireland and Danone.
Chiandetti also used the Greek-induced volatility within European market to add to some less favoured areas.
“I’m starting to find opportunities in the sector which is today looking the cheapest after the recent drop in the oil price, which is the energy sector,” he said in a recent update.
“A second sector where I’m starting to find new ideas to add to the fund, and where I’m underweight, is financials. I’m finding ideas with internal drivers for their recovery and earnings appreciation, rather than just a cyclical angle.”
Fidelity European Opportunities has a 1.20 per cent clean OCF.
Neptune Global Special Situations
Robin Geffen’s £3.4m fund, which resides in the IA Global sector, has made fourth-quartile gains of 23.96 per cent and 17.37 per cent over three and five years respectively but is now in the top quartile over one year. Its 12-month loss of 1.95 per cent is significantly ahead of the sector’s 6.48 per cent fall while it’s made 4.44 per cent over 2015 so far when its average peer is down 2.11 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
As its name suggests, the fund focuses on undervalued stocks that are out of favour, misunderstood or where management changes or takeovers are expected. Its largest holding is US wines and spirits business Brown-Forman, followed by sports clothing firm Under Armour and entertainment company Lionsgate.
The portfolio is heavily tilted towards just two markets – there’s 57 per cent in Japanese equities, which have been some of the strongest performing stocks over the past year on the back of the country’s ambitious stimulus package, and 40.6 per cent in US companies.
Total returns have slipped into the second quartile over the more turbulent last three months after global markets were hit by the China crisis, but Geffen says this volatility – and the prospect of interest rate rises in the US – has not altered his positioning.
“We find in the United States an economy which both can and will sustain the first Federal Reserve rate rise this year without damaging corporate health. In China, we find an economy with real challenges but with a unique ability to meet those challenges in the form of the breadth of policy tools at its disposal,” the manager recently said.
“We do not believe there is evidence of ‘freefall’ in any real economic sense and therefore we focus on the buying opportunities we find in our favoured markets of Japan and the United States.”
Neptune Global Special Situations has a 1.13 per cent total return.
