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The top-rated funds advisers are looking to buy in 2016

08 December 2015

Using FE’s Analytics Market Intel tool and the results of Schroders’ annual adviser survey, we take a look at the highly rated funds that intermediaries are researching to buy for 2016.

By Gary Jackson,

Editor, FE Trustnet

Invesco Perpetual Distribution, CF Woodford Equity Income and AXA Framlington UK Select Opportunities have been some of the most heavily researched funds on FE Analytics from the sectors financial intermediaries are looking to pour money into next year.

The results of the recent 2015 Schroders Adviser Survey show that the top sector intermediaries expect to recommend to clients in the coming year is IA Mixed Investment 20%-60% Shares, followed by IA UK Equity Income and IA UK All Companies.

Using the FE Analytics Market Intel tool, we can drill down further into these sectors to see which funds have been researched the most frequently by the professional investors that use FE Analytics over the past three months, to give a hint at the particular portfolios they may be likely to recommend.

And finally, the 2015 Schroders Adviser Survey – which polled 575 investment-focused advisers – found that FE was the favourite rating agency of the intermediary community after being voted ‘number one’ by 54 per cent of respondents. With this in mind, we’ll look at how FE rates the funds mentioned in the article.

 

IA Mixed Investment 20%-60% Shares

The survey found that 11 per cent of the advisers polled say this will be one of the top three sectors they expect to recommend in 2016. As the table below show, FE Analytics Market Intel reveals that Invesco Perpetual Distribution has been the most researched fund by intermediaries over the past three months by a quite a margin.

 

Source: FE Analytics Market Intel

Invesco Perpetual Distribution, which is run by Paul Causer, Paul Read and Ciaran Mallon, is the third highest returning portfolio in the sector since its launch in January 2004 with a 129.60 per cent gain. Over the same time frame, its average peer has made 72.38 per cent.

The fund holds the maximum of five FE Crowns and appears on the FE Invest Approved list, which indicates the favourite funds of the FE Research team. Our data shows it is first quartile when it comes to maximum gain, number of positive periods since inception and risk-adjusted returns as measured by the Sharpe ratio; however, it has also been more volatile than its average peer and has posted a higher maximum drawdown.

FE Research says the bond portion of the £3.3bn portfolio, which is looked after by Causer and Reed, has the greatest influence on its performance. The fixed income veterans currently have a gloomy outlook for the bond market, reflected in an 8.12 per cent allocation to cash and a preference for lower-risk securities, which could be an attractive element for those worried about the impact of potential rate hikes.

Jupiter Merlin Income is the largest member of the sector with assets of just under £4bn. It is headed by the FE Alpha Manager duo of John Chatfeild-Roberts and Algy Smith-Maxwell and is an FE Invest Approved member, despite only holding one FE Crown.

Since launch in 1992 it is the best performing member of its sector with a 450.96 per cent return. It did slip into the third quartile during 2013 and 2014, however, which means that the portfolio is bottom quartile on a three-year view. It has outperformed its average peer over the challenging conditions of 2015 to date though with a 1.91 per cent gain. 

The FE Research team says the strong returns of the fund have been generated mainly through good manager selection, although the analysts add that its strategy of looking at how to profit from long-term investment themes has also been effective over the years.


 

The third fund on the list – David Hambidge, Ian Rees, Simon Evan-Cook and David Thornton's Premier Multi-Asset Distribution – does not appear on the FE Invest Approved list but does hold five FE Crowns. It’s currently one of the top 10 highest returning members of the sector over one, three and five years. 

However, the £734.8m fund does have an ‘AA’ rating from Square Mile, one of FE’s strategic partners. The investment research consultancy said: “We have a high regard for this focused and stable team that is led by the experienced David Hambidge. They have an excellent appreciation of the outcomes that investors seek and this well diversified portfolio has historically generated performance that has met its objectives.”

The managers aim to buy funds that they perceive are trading at a discount to the current market value, which offers the potential for appreciation as well as downside protection thanks to a lower entry point. Investments must also offer the portfolio a stable and repeatable income stream.

Invesco Perpetual Distribution has a clean ongoing charges figure (OCF) of 0.82 per cent and yields 4.78 per cent; Jupiter Merlin Income has a 1.54 per cent OCF with a 3.10 per cent yield; and Premier Multi-Asset Distribution charges 1.42 per cent and yields 4.02 per cent.

 

IA UK Equity Income

By far the most researched fund in this popular sector, which 9 per cent of advisers say they will be tipping in 2016, over the three-month period has been CF Woodford Equity Income.

 

Source: FE Analytics Market Intel

Managed by FE Alpha Manager Neil Woodford, this £8.1bn fund launched in June 2014 to record inflows but still has too short a track record to hold an FE Crown rating. That said, its 24.06 per cent total return makes it the highest returning member of the competitive sector since inception, while the fund also scores the highest alpha generation and is first decile for its Sharpe ratio.

This strong return profile is not wholly surprising, given the strong track record Woodford built while running Invesco Perpetual’s flagship UK equity income funds. The manager has a preference for blue-chip defensive stocks such as healthcare and tobacco, although he has been active in entering the small-cap space in pursuit of innovative companies with the potential for strong growth.

Square Mile gives the fund its top ‘AAA’ rating and said: “This is a compelling investment proposition and one most worthy of consideration by long-term investors. Mr Woodford's investment track record is extremely impressive and though his contrarian nature can lead to periods where investors may require a dash of patience, he has proved time and again that this patience is ultimately a well­rewarded virtue.”

Next up is the £6.9bn Artemis Income fund, which is headed by the FE Alpha Manager duo of Adrian Frost and Adrian Gosden. The managers focus on cash-generative companies and use Artemis’ proprietary stock-screening model SmartGARP along with cash flow and dividend screens to identify them.


 

The fund’s 295.20 per cent total return since launch in June 2000 means it has outperformed its average peer by almost double, although it has slipped into the second quartile over five years and into the third quartile over one and three years.

Part of the reason for this could be its preference for large-cap value stocks, which have struggled in the market conditions of recent years. However, many commentators have recently said they expect value to start to outperform, especially if interest rates start to rise. 

Richard Colwell’s Threadneedle UK Equity Income fund holds three FE Crowns and is a member of the FE Invest Approved list. It has made top quartile returns over five years but is in the third quartile over one year.

Colwell has a differentiated approach to equity income investing, which involves looking for stocks that are unloved by other investors but showing the potential for strong medium to long-term dividend growth. He will even own stocks paying low or no dividends if he judges their future prospects to be rosy enough.

FE Research said: “Investors must be aware that this contrarian style of investing often involves buying more of poorly performing companies, providing the manager’s investment case still holds; therefore some of the fund’s holdings can often be suffering uncomfortably negative news flows.”

CF Woodford Equity Income has a 0.75 per cent OCF and yields 4 per cent; Artemis Income charges 0.79 per cent and yields 3.70 per cent; and Threadneedle UK Equity Income’s OCF is 0.82 per cent with a 4.10 per cent yield.

 

IA UK All Companies

This is the largest sector in the Investment Association universe and the most researched offering over recent months has been FE Alpha Manager Mark Barnett’s Invesco Perpetual High Income fund.

 

Source: FE Analytics Market Intel

This £12.5bn fund is followed by the £6.4bn Invesco Perpetual Income fund, which is also run by Barnett. Both portfolios need little introduction, having been managed by Neil Woodford for more than 25 years until he departed Invesco Perpetual in 2014 to launch Woodford Investment Management.


 

Since Barnett took over in March 2014, Invesco Perpetual High Income has returned 15.30 per cent while Invesco Perpetual Income is up 14.13 per cent. This is significantly ahead of the 2.20 per cent made by their average peer and well over the 6.27 per cent return from the IA UK Equity Income sector, where they used to reside.

Both hold four FE Crowns and Invesco Perpetual Income is a FE Invest Approved fund. FE Research said: “Under Barnett the fund should continue to do well in falling markets and reasonably well in rising markets, given the manager’s cautious approach. The fund remains a good option for income investors and those with a more cautious outlook and attitude to investing.”

AXA Framlington UK Select Opportunities has been managed by UK equity veteran Nigel Thomas since September 2002 and has made a top decile total return of 329.59 per cent over this time. Thomas is one of the most respected fund managers in the business and has more than 30 years of stock-picking experience.

The three FE Crown-rated fund has made an 11.62 per cent annualised total return over the past 10 years, beating the 8.14 per cent posted by the average IA UK All Companies fund and the 7.95 per cent from the FTSE All Share. Square Mile says this fact could be “one of the rare occasions” where past performance is indicative of the skills of a fund manager.

Invesco Perpetual High Income has a 0.92 per cent OCF and yields 2.96 per cent; Invesco Perpetual Income has a 0.91 per cent OCF with a 2.84 per cent yield; and AXA Framlington UK Select Opportunities has an OCF of 0.83 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.