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Four flawless funds from around the world topping FE’s ratings charts

18 November 2015

In the next article of the series, FE Trustnet looks at the international equity funds that have achieved the highest ratings from FE’s analysts.

By Gary Jackson,

Editor, FE Trustnet

The various regional and global sectors are often the first port of call for investors seeking to broaden their exposure out from the UK but it can sometimes be a challenge finding funds that have a consistent track record in delivering good risk-adjusted returns.

Over the years, FE has developed a range of metrics to help investors with this. In a recent article we highlighted some of the UK funds that are topping the charts according to these ratings and now we turn our attention to those investing outside of home shores.

Funds that have shown the best performance in terms of stockpicking, consistency and risk control during the past three years are awarded five FE Crowns while FE Alpha Manager status reflects similarly high standards on an individual manager level. The FE Invest Approved list also reveals the funds held in the highest regard by the FE Research team.

In the following article, we look at four funds from the various international sectors which each hold the maximum of five FE Crowns, is headed by an FE Alpha Manager and won a place on the FE Invest Approved list.

 

Fundsmith Equity

This £4.1bn fund is the only member of the IA Global sector – which is one of the Investment Association’s largest peer groups – meet all three criteria of being headed by an FE Alpha Manager, holding five FE Crowns and featuring on the FE Invest Approved list. It also appears in FE’s aggressive, balanced and cautious AFI portfolios.

Terry Smith has run the fund since launch in November 2010. When announcing the fund, the manager said he wanted it to shake up the asset management world by building a concentrated, long-term portfolio that did not expose its investors to the extra costs created by unnecessary trading.

His approach has paid off, as the fund is currently ranked third out of 203 in the IA Global sector after posting a 115.05 per cent total return since launch. Its average peer has made just 39.93 per cent over this time while the MSCI World benchmark is up 59.89 per cent.

Performance of fund vs sector and index since launch

 

Source: FE Analytics

Smith focus on high quality businesses with strengths that are difficult to replicate, are resilient to change and make a high return on operating capital employed. This results in a highly concentrated portfolio of 20 to 30 stocks, with names such as Microsoft, Imperial Tobacco and Unilever appearing in his top 10.


 

The fund is highly regarded by analysts outside the FE Research team.

Square Mile, for example, said: “This fund has many qualities. It benefits from a charismatic manager who together with Fundsmith's head of research Julian Robins, has developed a product that has a clearly defined philosophy and process, and in our opinion, seeks to deliver an achievable objective. Equally, the types of companies held are those that many investors can relate to, for most will be household brands providing every day goods and services.”

Fundsmith Equity has a clean ongoing charges figure (OCF) of 0.99 per cent.

 

Fidelity Emerging Markets

Most funds in the IA Global sector focus on stocks in the developed world, so the next hunting ground of many investors is the IA Global Emerging Markets sector. One fund from this peer group that ticks all the boxes for this article is Fidelity Emerging Markets, which has been managed by Nick Price since 2010.

Over Price’s time on the fund, it has made an 18.36 per cent total return – which ranks it seventh in the IA Global Emerging Markets where the average return has been a 6.12 per cent loss. The MSCI Emerging Markets benchmark is down 5.05 per cent over this time.

Performance of fund vs sector and index under Price

 

Source: FE Analytics

Price uses a primarily bottom-up process, which looks for quality growth business showing attributes such as shareholder-friendly management, a sustainable return on assets and a strong balance sheet. It is essentially a ‘best ideas’ portfolio built from the stocks in emerging Asia, Latin America and EMEA that the team has the most conviction in.

The portfolio is currently overweight South Africa through holdings like media group Naspers; India through stocks such as HDFC Bank; and Hong Kong through the likes of AIA Group. On a regional basis the largest overweights are to sub-Saharan Africa, Asia Pacific ex Japan and North America.


 

FE Research highlights that the manager is not afraid to make “unpopular and contrarian calls” but the fact that he runs a very different portfolio to his peers means that periods of significant out performance and underperformance can be expected. However, this helped the fund during the ‘taper tantrum’ of 2013 as it was not holding many of the countries that were hit hardest.

Fidelity Emerging Markets has a clean OCF of 1.07 per cent.

 

PFS Somerset Emerging Markets Dividend Growth

Next up is this £931m fund, which Edward Lam has headed since its launch in March 2010. Over this time, PFS Somerset Emerging Markets Dividend Growth has made a 19.92 per cent total return, which makes it the third best performing member of the sector (which has fallen 7.56 per cent). It’s also beaten the MSCI Emerging Markets’ by a wide margin.

 

Performance of fund vs sector and index since launch

 

Source: FE Analytics

As its names suggests, the fund aims for dividend-paying companies with a focus on those that have the potential to grow their payouts to shareholders. Lam also prioritises valuation and balance sheet strength when weighing up investment opportunities, while avoiding ‘value traps’.

This means that the yield on the fund (which is currently 2.30 per cent) is often lower than some of its peers, as Lam will not invest in companies that have a high yield because they are cheap but at risk of further share price falls.

FE Research points out that the fund is one of the more expensive in its sector owing to its dilution levy, but adds that it remains a “good choice” for those willing to investing for at least 10 years and with the ability to withstand short-term losses in pursuit of long-term gains.

PFS Somerset Emerging Markets Dividend Growth has a 1.30 per cent clean OCF.

 

Neptune Japan Opportunities

When it comes to regional funds, no members of the Asian, European or North American sectors hold five FE Crowns, have an FE Alpha Manager in charge and appear on the FE Invest Approved list. However, one IA Japan member – Chris Taylor’s Neptune Japan Opportunities fund – fits the bill.


 

The £486.8m fund – which also appears in the aggressive and balanced AFI portfolios – has been run by Taylor since May 2005 and has been the highest returning member of the peer group by making 191.32 per cent over this time. Its average peer is up just 65.46 per cent while the Topix has gained 83.13 per cent.

Performance of fund vs sector and index under Taylor

 

Source: FE Analytics

As the above graph shows, that outperformance has been supported by the fund’s stellar returns in 2008 – it made 84.26 per cent when its average peer lost 2.39 per cent – after Taylor shorted the Japanese equity market. It has also been one of the sector's best performers over the rally since Shinzo Abe was elected as prime minister in December 2012.

The fund removed exposure to currency movements in the yen in 2009, as the manager believes that Japan need to depreciate its currency if it is keep its economy afloat and prevent the government from going bust.

FE Research points out that the fund is “entirely” built around Taylor’s macro-economic view of Japan, which means that future outperformance largely depends on if his analysis is correct or not. The resultant stance on currency also means that gains made through stock selection can be hurt if the yen strengthens.

Neptune Japan Opportunities has a clean OCF of 0.82 per cent.

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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.