Funds investing in the pharmaceutical sector and real estate securities have made annual returns of more than 15 per cent in each of the past three years and are on track to deliver the same during 2015 should their performance keep up.
While past performance is no guide to future returns and a strong run can sometimes act as a warning for investors to consider taking profits, it is possible for funds to deliver high returns for a lengthy period before conditions turn against them.
FE Analytics shows that just 14 funds out of the almost 3,500 that make up the Investment Association universe have posted a total return of at least 15 per cent in each of 2012, 2013 and 2014. When these are screened for those that have made in excess of 11.25 per cent over the year to date, which suggests they are on track for 15 per cent this year, only five remain.
Of course, there are plenty of reasons why these funds could fail to make returns of such magnitude across the whole of 2015 – especially as markets have been much more volatile than they have been in the recent past.
But in the interests of satisfying curiosity we take a closer look at these funds below, in the order of their total returns since the start of 2012.
First up is this £749.1m fund, which has made 233.80 per cent since 1 January. It has been managed by Linden Thomson since September 2012 and holds four FE Crowns, although its FE Risk Score may be high for some at 170.
Performance of fund vs benchmark since 1 Jan 2012
Source: FE Analytics
Its returns have been well above 15 per cent a year recently, making 24.30 per cent in 2012, 63.65 per cent in 2013 and 45.50 per cent last year.
Over 2015 so far the fund is up 12.78 per cent. However, as the graph above shows, it had made more than 30 per cent between the start of 2015 and 21 July but the difficult few weeks since then – which saw global stock markets hit by fears over the health of the Chinese economy – led to some of those gains being handed back.
Biotech has been on a strong run over recent years, pushing funds specialising in the sector to the top of the performance charts. However, this has also led to concern that the stocks have entered bubble territory and investors are at risk of being hit by a severe correction.
In her latest investor update, Thomson said: “With the sector testing all-time highs again we would not be surprised to see further volatility.”
“The fund continues to hold a large weighting in the profitable, growth large caps and many of the mid-cap names that have strong commercial businesses and R&D optionality. In our view, the valuations are more compelling here.”
The fund’s largest position is in cancer and inflammatory disorder drug specialist Celgene Corporation, with its 9.6 per cent position an overweight on its NASDAQ Biotechnology Index benchmark. Other top holdings include Gilead Sciences, Biogen Idec and Amgen.
AXA Framlington Biotech has a clean ongoing charges figure (OCF) of 0.83 per cent.
Polar Capital Healthcare Opportunities
This five FE Crown-rated fund, which is managed by Dan Mahony and Gareth Powell, has made a 181.30 per cent total return since the start of 2012. In 2012 it was up 19.24 per cent, which was followed by annual returns of 52.31 per cent and 33.99 per cent, while it’s ahead by 16.22 per cent over 2015 so far.
Performance of fund since 1 Jan 2012
Source: FE Analytics
The fund has a wider remit than the above, taking the MSCI Global Health Care Index (on which we hold no data) as its benchmark and looking across the full healthcare industry for investment opportunities. The largest sector exposure is to pharmaceuticals at 32 per cent, followed by biotechnology at 20.3 per cent, healthcare equipment at 14.9 per cent and healthcare facilities at 10.7 per cent.
Although some argue that the defensive characteristics of healthcare mean it could be a ‘bond proxy’ sector that will suffer when interest rates rise, the managers point out that it is one of the few areas of the market, alongside financials, where top-line results have been better than expected.
Mahony and Powell said in a recent update: “We think the fundamentals for healthcare remain strong – demographics and an accelerating innovation cycle are two critical factors that support our view that we can continue to find investment opportunities across the sector.”
Polar Capital Healthcare Opportunities has a 1.15 per cent clean OCF.
Next up is another biotech portfolio, this time Michael Sjostrom’s two FE Crown-rated Pictet Biotech fund. It’s up 178.08 per cent over the time period in question, which is underperformance against its MSCI World Biotechnology benchmark.
Performance of fund vs index since 1 Jan 2012
Source: FE Analytics
Performance over recent years includes a 20.89 per cent return in 2012, followed by respective gains of 51.42 per cent and 30.73 per cent in the next two years. In addition, it’s up 15.95 per cent over the year to date.
Like AXA Framlington Biotech, it invests in an area that has risen strongly over recent years and tends to be more volatile than many other parts of the market. Sjostrom was mindful of this in his latest update: “The increasing top-line momentum as well as further high-profile regulatory approvals and key clinical data releases leave room for significant upside in the medium to long term."
"Short-term profit taking cannot be excluded given the recent run-up of biotech stocks and the historically high-tech values for small and mid-caps.”
The portfolio’s largest positions are in Gilead Sciences, Celgene Corporation, Biogen, Regeneron Pharmaceuticals and Alexion Pharmaceuticals.
Pictet Biotech has a clean OCF of 1.22 per cent.
Moving away from biotech now and this five FE Crown-rated fund has made a 102.88 per cent total return since the start of 2012, following the huge gains in the property market over recent years. In 2012 it was up 26.13 per cent, with another 17.25 per cent and 21.99 per cent made in the following two years; year to date, it’s ahead by 12.46 per cent.
Performance of fund vs index since 1 Jan 2012
Source: FE Analytics
The fund is managed by Alban Lhonneur and Marcus Phayre-Mudge, with the aim of beating the FTSE EPRA/NAREIT Developed Europe Capped Index – which covers companies active in developed Europe’s real estate industry. Its biggest holdings are British Land, Unibail-Rodamco and Land Securities Group.
It’s also a member of the FE Research team’s Select 100 list of preferred funds. The team said: “The fund has an impressive track record compared with its broader FTSE EPRA/NAREIT Developed Europe Capped Index benchmark. This has predominantly been achieved by protecting capital against losses, aided by its focus on quality managers and underlying assets.”
F&C Real Estate Securities has a clean OCF of 1.45 per cent.
Henderson Horizon Pan European Property Equities
The final fund on the list, which is headed-up by Guy Barnard, also aims to outperform the FTSE EPRA/NAREIT Developed Europe Capped Index. It holds five FE Crowns and has made a 95.22 per cent total return since 2012’s start.
It made 28.70 per cent in 2012, 15.69 per cent in 2013 and 30.07 per cent, while it’s up 15.18 per cent.
Performance of fund vs index since 1 Jan 2012
Source: FE Analytics
Some 47 per cent of the portfolio is held in UK assets, with another 14.2 per cent in Germany, 11 per cent in the Netherlands and 10.5 per cent in France.
Land Securities is the largest individual position, followed by British Land, Unibail-Rodamco, Deutsche Wohnen and Great Portland Estates.
Henderson Horizon Pan European Property Equities, which is a Luxembourg-domiciled SICAV, has a 1.91 per cent OCF.