Nigel Thomas’ AXA Framlington UK Select Opportunities, Paul Marriage and John Warren’s Schroder UK Dynamic Smaller Companies and the team-managed Newton Asian Income funds have just been removed from the FE Invest Approved Funds List in its latest review.
While 13 funds were added to the list of recommended portfolios - which until recently was called the FE Select 100 - during the recent biannual rebalancing, some 11 have been taken from it for reasons such as a run of underperformance, a change in management or concerns about their future size.
Many of the funds to be evicted from the FE Invest Approved Funds List were among the larger names of the industry so in this article we’re looking at the reasons why FE Research think these popular products no longer make the grade.
To see which funds have won a coveted place on the list, have another read of yesterday’s story. But now we’ll take a look at the recent evictees, starting with those that invest in the UK.
One of the highest profile removals here is the £4.3bn AXA Framlington UK Select Opportunities fund, which has been managed by UK equity veteran Nigel Thomas since September 2002.
Over this time the fund has made a first-decile 309.98 per cent, compared with 175.96 per cent average gain from the IA UK All Companies sector. Overall, it’s ranked 12th out of 148 funds since Thomas has been manager.
Performance of fund vs sector over Thomas’ tenure
Source: FE Analytics
However, FE Research has downgraded the fund from a ‘buy’ to a ‘sell’ rating on the back of “increasing uncertainty” over the future of its management. While it is clear that Thomas will retire at some point, no clear timeline has been given to investors.
FE’s analysts add that this uncertainty is a reason why the fund has witnessed mounting outflows – our data shows it has suffered net outflows of around £460m over the last 12 months – and say they now believe it is “prudent” to sell the fund.
To be fair to AXA Investment Managers, the group has already disclosed that Chris St John, the support manager on the UK Select Opps fund and manager of the AXA Framlington UK Mid Cap fund, is in line to replace Thomas when he does retire, although it stresses that there are no plan for this to take place in the immediate future.
Speaking to FE Trustnet last year, St John explained that while there are subtle differences between his and Thomas’ investment styles, they essentially run money in the same way.
“Nigel and I have worked together since 2005 and we are part of a wider UK multi cap team. My investment process is very similar to his, that’s probably why I was chosen as support manager on the fund,” he said.
“We are growth investors, but specifically GARP [growth at a reasonable price] investors. I believe valuation does play a part – over an economic cycle a stocks risk-return has to be attractive. Nevertheless, I believe the real value in equities comes from the compounding effect of profit growth.”
Next up is the £7.1bn Artemis Income, which is headed up by the FE Alpha Manager duo of Adrian Frost and Adrian Gosden along with Nick Shenton. The equity income fund has lost its place because of a period of “only average returns”, which led to its being dropped from our AFI indices by FE’s panel of leading financial advisers.
Since Frost was assigned the fund in January 2002, it’s been the second best performer in the IA UK Equity Income sector with a total return of 196.38 per cent. The sector is up 144.82 per cent over this time while its FTSE All Share benchmark is ahead just 114.97 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
But performance has slipped over shorter time frames.
FE Analytics shows Artemis Income is now ranked third quartile over one, three and five years as well as over 2015 so far. When it comes to other metrics, the fund has also slipped into the third quartile in closely-watched areas such as maximum drawdown, risk-adjusted returns as indicated by the Sharpe ratio and annualised volatility.
It’s important to note that the fund has managed to stay ahead of the FTSE All Share over one, three and five years, while protecting capital better than the index over the turbulent recent months. However, FE Research adds that it believes there is little evidence for the fund regaining its previous status anytime soon.
Meanwhile, Schroder UK Dynamic Smaller Companies has been taken off the list due to concerns over its size.
Schroders hard-closed the fund in January 2014 to protect existing investors after its assets swelled to more than £1bn. However, the fund was then re-opened to new money in October of that year after its size fell to around £740m.
The fund is now down to £540m in size, but the FE Research team is “increasingly concerned” that the group has not implemented sufficient steps to offset a repeat of its past problems.
Looking outside of the UK sectors and Randeep Somel’s M&G Global Basics fund is another to lose its FE Invest Approved Funds List place. The fund had already been downgraded to a ‘hold’ rating at the last review but has been put as a ‘sell’ for continued poor performance.
Performance of fund vs sector over Frost’s tenure
Source: FE Analytics
As the above graph makes clear, the fund has drastically underperformed its peers over the past five years and is now just into negative territory while the average IA Global fund has made 42.02 per cent. This is not too surprising when you consider that the M&G fund’s nature means it tends to have a bias to emerging market and basic materials stocks, which have been through a very rough ride.
It has gone through a manager and strategy change in recent years. Former manager Graham French announced his retirement from fund management at the end of 2013 and was replaced by deputy manager Somel, who implemented a strategy of looking for investments higher up the ‘development curve’ such as technology and more high-end consumer names.
However, this new approach has yet to pay off. Since the manager took over in September 2015 the fund has made a tenth-decile loss of 10.43 per cent while its average peer is up 3.92 per cent. It was recently announced that Somel will hand over responsibility for M&G Managed Growth to David Fishwick in order to concentrate his efforts on the Global Basics fund.
But these aren’t the only big names to exit the FE Select 100 in this rebalancing.
The Newton Asian Income fund has been dropped following the departure of Jason Pidcock as manager; the fund is now managed on a team basis but FE’s analysts are not yet convinced the new structure warrants a place on the list.
Evy Hambro and Tom Holl’s five crown-rated BlackRock Gold & General is also off as FE Research does not think the economic environment is supportive of gold and says investors wanting commodity exposure might be better off looking for a fund with a broader approach to the asset class.
Kames High Yield Bond is a departure from the fixed income space, after it was downgraded to just one FE Crown in this rating’s rebalancing. Meanwhile, the team says the outlook for high yield bonds is looking increasingly negative.
Finally, Marcus Brookes and Robin McDonald’s Schroder MM Diversity fund has been cut after its cautious positioning led to a drag on returns. The fund’s high cash weighting has helped it hold up better than its peers in recent times but it is sitting third quartile over three and five years.
Source: FE Analytics
Are there any entrants or exits from the FE Invest Approved Funds List that you’d like use to look at in more detail? Post your suggestions below and we’ll put the fund under the microscope in a coming article.