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Revealed: The best performing funds in Q3 2015

01 October 2015

FE Trustnet looks at the open-ended funds that have managed to deliver strong returns in what has turned out to be one of the worst quarters for global markets since the dark days of 2008.

By Alex Paget,

News Editor, FE Trustnet

An odd mix of absolute return, long-dated bond and UK smaller companies funds dominate the list of best performing portfolios in the Investment Association universe over 2015’s very difficult third quarter, according to the latest FE Trustnet study.

Q3 in 2015 has been one of the toughest on record for global markets as a whole host of macroeconomic headwinds have caused equities to tumble with the likes of the FTSE All Share, S&P 500 and Nikkei 225 down more than 6 per cent while global emerging markets and Asian stocks have posted double-digit losses.

Performance of indices in Q3 2015

 

Source: FE Analytics

It means that the MSCI AC World index has fallen further in 2015’s third quarter than during the corresponding quarter in 2008 – a three-month period which included the collapse of Lehman Brothers.

The catalysts for these losses have been well-documented, with slowing growth in China and fears of a ‘hard-landing’ in the world’s second largest economy sparking huge falls in commodity prices and a distinct loss of appetite for risk among investors.

The fact that equities have delivered stellar returns over previous years and therefore led to inevitable concerns about valuations has also not helped the situation.

Of course, the question at the forefront of every investor’s mind is whether these falls have created a buying opportunity or whether they are a precursor to a far more sinister event. However, in this article, we look at the funds which have delivered the best returns over the past three months.

According to FE Analytics, just 500 of the 3,476 funds (14 per cent) in the Investment Association universe have managed to generate a positive return over the past three months, but as the table below shows, certain portfolios have flourished during the recent volatility.

 

Source: FE Analytics

As you can see, the standout performer has been the five crown-rated City Financial Absolute Return Equity fund, which is headed-up by David Crawford and has managed to deliver a gain of 18.29 per cent over the last three months.

The fund sits in the IA Targeted Absolute Return sector and is a long/short equity fund. FE Trustnet spoke to the manager earlier in the year and he expected his short book to play an integral part within his portfolio over the rest of the 2015.

“We would say, because the market is pretty bullish, there is more opportunity on the short side as some companies aren’t as good as the market thinks they are,” Crawford said in May.


 

There have been a number of drivers behind the fund’s stellar gains in Q3. Firstly, the manager has been short the commodity sector which has had a torrid time of late thanks to China’s woes and has also had puts on the UK and US indices.

On the other hand, Crawford’s longs have been concentrated within the UK small and mid-cap space which has performed far better than the FTSE 100 as those companies tend to be more directly linked to the improving domestic economy.

All told, it means the £160m fund has had a negative correlation the wider UK equity market over the past three months.

City Financial Absolute Return Equity has a strong-long term track record as well. According to FE data, while it has tended to be far more volatile than many of its peers, the fund has beaten the FTSE All Share by five times since its launch in March 2008 with returns of 255.98 per cent.

Performance of fund versus index since launch

 

Source: FE Analytics

It has also been a third less volatile than the UK index over that time and its maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – has been 50 per cent lower than that of the FTSE All Share since inception.

While City Financial Absolute Return Equity has been benefitted the most, it seems to have been a fruitful period for long/short funds as Polar Capital UK Absolute Return Equity and FP Argonaut Absolute Return (which follow a similar strategy, albeit the Argonaut fund invests in Europe ex UK equities) also feature on the list of the top 10 performers in Q3 with gains of 9.01 per cent and 6.96 per cent, respectively.

The Natixis H20 Multi Returns fund is also on the list, though while it is similarly a member of the IA Targeted Absolute Return sector, it is a multi-asset portfolio.

Out of the 14 per cent of Investment Association universe’s funds that made money in Q3, FE data shows that close to half of them reside in the various fixed income sectors – despite concerns that bonds would offer very little in terms of protection due to the low yields on offer.

As the table shows, it is bond funds that focus on long-duration debt which have fared the best over the past quarter with PIMCO GIS Euro Long Average Duration, PIMCO GIS Euro Ultra Long Duration and Vanguard UK Long Duration Gilt Index among the top 10 performers with an average return of 8.8 per cent.

This is an interesting turn of events, as long-duration funds were among the universe’s worst performers in the first six months of the year as they were hit hard by the sharp rise in US treasury, UK gilts and German bund yields during March and April.

However, the ultra-cautious stigma surrounding long-dated bonds attracted a lot of investors to the asset class during the recent volatility and as a result yields have fallen once again – catching out many multi-asset managers in the process.

In fact, no funds in the IA Mixed Investment 20%-60% Shares sector made money in Q3 while just one IA Flexible Investment fund, two IA Mixed Investment 0%-35% Shares funds and two IA Mixed Investment 40%-85% Shares funds ended the quarter in the black.


 

Nevertheless, as the graph below shows, only one of the three long-dated funds mentioned in this article has made a positive return in 2015 despite their rally over recent months.

Performance of funds in 2015

 

Source: FE Analytics

While investors could be forgiven for thinking it has been a market where only ‘defensive’ funds have thrived given the list of top 10 performers is largely made up of government bond and absolute return funds, two UK small-cap orientated funds also feature; namely Unicorn UK Growth and TB Amati UK Smaller Companies.

Despite their apparent ‘riskiness’, UK small and mid-caps have performed well over recent months as the UK economy (which they are usually biased towards) has been improving while the FTSE 100 index, which is dominated by international facing companies, has posted large losses.

Nearly half of the funds in the IA UK Smaller Companies sector generated a positive return in Q3 and the £20m TB Amati UK Smaller Companies fund has been the pick of the bunch with gains of 6.46 per cent.

Fraser Mackersie’s Unicorn UK Growth fund sits in the IA UK All Companies sector and is benchmarked against the FTSE All Share, but is heavily biased to small and mid-caps (particularly those related to technology).

The fact the manager holds 10 per cent in cash will have also helped the fund’s recent outperformance.

At the other end of the performance tables, it is no surprise that as the sell-off has been sparked by fears out of China (which is one of the world’s largest importers of natural resources) funds with high exposure to commodities have fared the worst in Q3

The three worst performers in the universe, for example, all focus on Brazilian equities which – given the nature of its economy – are massively biased towards oil and mining companies.

 

Source: FE Analytics

HSBC GIF Brazil Equity, JPM Brazil Equity and Allianz Brazil have posted an average loss of 31.51 per cent over the past three months. Other funds to feature on the list of the 10 worst performers in Q3 include MFM Junior Oils, JPM Natural Resources and BlackRock GF World Mining

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.