Headlines have moved away from rate hikes this week and have been dominated by Volkswagen, after it was revealed that the German car manufacturer had thwarted emission tests through a bit of software trickery.
Some 11 million vehicles were programmed to slip into ‘clean mode’ while being tested for emissions, and many of these could well be recalled following the £5bn scandal, which led to the resignation of CEO Martin Winterkorn.
As you can imagine the stock value of the firm has since plummeted, although people are now waiting with bated breath to see whether Matthias Müller, the man widely expected to become VW’s new chief executive, will be able to turn things around for the company.
Hopefully, there aren’t too many of you who are exposed to specific stocks and have managed to side-step the impacts of the blunder through investing in funds and investment trusts (naturally).
From the FE Trustnet team, here are our favourite fund stories from this week – have a great weekend.
Bought an absolute return fund three years ago? You might have done better in cash
Senior reporter Daniel Lanyon looked at the absolute return sector this week. Our research and data revealed that over the past three years the return from the best fixed three-year Individual Savings Account (ISA) available in 2012 smashed the return of two-thirds of funds in the sector.
The best three-year fixed rate cash ISA back in 2012 was the Halifax ISA Saver Fixed, where its 4.25 per cent per year would have resulted in a 13.29 per cent total return today if you’d put the cash in in September 2012. It had a minimum of £500 deposit, about the same as a typical retail fund.
Source: FE Analytics
Ben Willis (pictured), head of research at Whitechurch Securities, suggested a few reasons for the underperformance. 
“Although it is a mixed bag of a sector, what you tend to find is some of the market neutral funds find it difficult when there has been a lack of volatility, especially if market movements have been driven by investor sentiment. This have very much been the case over the past three years,” he said.
Click through to see some of the best (and worst) performers.
The bombed out areas of the UK market Alex Savvides is buying
Reporter Lauren Mason spoke to FE Alpha Manager Alex Savvides on Monday, who explained why he has been reducing his exposure to popular UK mid-caps and buying into banks and oil mega-caps instead.
The manager, who runs the five FE Crown-rated JOHCM UK Dynamic fund, said that many bombed-out companies in the FTSE 100 index are paying attractive dividends, which suggests high cash levels, and have strong balance sheets.
“In the case of these companies, Royal Dutch Shell, HSBC and BP among others, all of these mega-cap companies that the market doesn’t like at the moment, they are all being managed in a way underneath the surface that is much more attractive to an investor like me that focuses on change investing, that focuses on trying to improve returns on capital,” he explained.
Savvides’ penchant for oil and banks is a far cry from how his portfolio looked 18 months ago, when he was very much underweight oil and held no banks at all.
“There are two things that are going to happen when a company like Shell or any other company hits a yield of around 7 per cent as it is today. Either they’re going to cut their dividend or they’re going to keep paying their dividend and the share price is going to revert to a price that brings that yield down,” he added.
“I firmly believe that they will continue to pay a dividend and, as a result of that, either shareholders will get their yield if they choose to take it or they will grow their profits.”
Can your funds keep yielding more than 4%? Advisers think not
Income is a persistently popular theme in investment but a survey by Aviva Investors this week found that most advisers and their clients have doubts about how achievable a high yield is in the current conditions.
The survey discovered that 84 per cent of financial intermediaries and 60 per cent of private investors think a yield of more than 4 per cent is not sustainable or realistic. However, 71 per cent of investors said they would find an investment offering this level of yield to be attractive.
Euan Munro, chief executive at Aviva Investors, said: “Before the global financial crisis, achieving a 5 per cent target was not an unrealistic income goal. Our research shows both advisers and investors recognise that this is not an obtainable level of return without jeopardising capital, and is unlikely to be sustainable.”
The poll also discovered that around half of intermediaries and investors view multi-asset and multi-strategy funds to have the best potential to achieve sustainable income, given that most clients are unwilling to move up the risk spectrum in pursuit of higher yields.
Munro added: “Investors are increasingly seeking out multi-strategy funds as a result, and our research shows their popularity is set to increase. They have a crucial role to play for today’s investors who need solutions that will achieve their objectives, regardless of market movement, and within a risk parameters where they are comfortable.”
How yield has played a major part in picking outperforming funds
New editor Alex Paget conducted a study to find out whether there is a significant correlation between the yield and the subsequent performance of a fund.
Using the IA UK Equity Income sector and excluding funds that boost their income via call options, it transpired from data that a composite of high yield funds outperformed a composite of low yield funds, although both outperformed their sector average.
Performance of composite portfolios vs sector
Source: FE Analytics
A major reason for the outperformance was that a lot of the high-yielders were in the small- and mid-cap space while the low-yielders were in the large- and mega-cap space, and smaller companies have significantly outperformed relative to FTSE 100 companies.
“You just have to be very, very careful. You can’t just blindly pick funds because of their yield, you need to compare to a whole host of other metrics,” Ben Conway, fund manager at Hawksmoor, said.
