Four of the five best selling funds in the Investment Association universe in 2014 have meaningfully outperformed in 2015, according to research by FE Trustnet.
M&G Optimal Income,CF Woodford Equity Income, Standard Life Investments Global Absolute Return Strategies, Henderson UK Property and Artemis Global Income all saw inflows greater than £1bn in 2014, leading them to top the tables for inflows.
Source: FE Analytics
Huge inflows are of course great news for fund groups, boosting their revenue from their annual charges which potentially can also be used to increase research capabilities.
However, conventional investment wisdom suggests some sceptisim from the point of view of an investor when a fund’s size grows. This is because there is a well-documented relationship of rapid growth in assets often – at some point – hampering performance in many fund sectors.
Nonetheless, for these funds there should be little cause for complaint as with the exception of M&G Optimal Income they have substantially outperformed their peers this year.
Interestingly two of these funds – CF Woodford Equity Income and Standard Life Investments Global Absolute Return Strategies – are also in the top five best sellers this year too.
FE Alpha Manager Richard Woolnough’s hugely popular portfolio M&G Optimal Income, which took in the most cash in 2014, actually lost the most in terms of assets this year and is currently at a smaller size than it was at the start of 2014.
In terms of returns, it clocked up a small loss of 0.78 per cent this year, a bottom quartile performance among peers although the average return in the IA Sterling Strategic Bond sector was not far off as the year has been a broadly tough one for fixed income.
Performance of fund and sector in 2015
Source: FE Analytics
FE Research fund analyst Thomas McMahon says the main reason for the fund underperforming its sector has been the low duration exposure which the manager has maintained through 2015.
“Woolnough is keeping this position as he thinks markets are underestimating the chances of a rise in inflation next year and that wage growth in the US and UK is better than many people realise once inflation is taken into account,” he said.
“If so this suggests central banks may have to raise rates faster than markets expect and duration would underperform.”
“It is also worth noting that 25 per cent of the fund is in government bonds and cash, so highly liquid, which gives the manager an advantage in managing outflows.”
M&G Optimal Income has a clean ongoing charges figure (OCF) of 0.91 per cent and yields 3.14 per cent.
In contrast to M&G Optimal Income fund, FE Alpha Manager Neil Woodford’s CF Woodford Equity Income fund returned 14.52 per cent over the year while inflows continued to be enoromous.
This return was the fourth best out of 82 portfolios in the IA UK Equity Income sector, where the average fund made 4.38 per cent and the FTSE All Share lost 0.93 per cent.
Performance of fund, sector and index in 2015
Source: FE Analytics
Of course, Woodford is used to managing vast sums of investors’ cash. At Invesco Perpetual, he had more than £20bn in his flagship Invesco Perpetual Income and Invesco Perpetual High Income funds.
However, small and micro cap stocks as well as some unquoted investments are an ever growing interest for the star manager as well as defensive mega caps that he used to be associated with his name.
CF Woodford Equity Income has a clean OCF of 0.75 per cent.
FE Alpha Manager Jacob de Tusch-Lec, who tends to invest in global mega caps from the point of view of income generation, continued his strong run with the £2.6bn Artemis Global Income fund scoring a strong relative return in 2015.
The portfolio, which returned 4.33 per cent against an IA Global Equity Income sector average loss of 0.39 per cent, marks the fourth calendar year in a row of de Tusch-Lec’s fund being among the top of his peer group.
Performance of fund and sector in 2015
Source: FE Analytics
But while 2014, 2013 and 2012 saw his fund top decile, in 2015 he was ‘only’ top quartile, being eighth best out of 34 funds. The manager has headed the portfolio since 2010.
Square Mile gives Artemis Global Income an ‘A’ rating, with the analyst team indicating de Tusch-Lec’s strong understanding in finding a diversifed range of income generating stocks.
“This strategy differentiates itself versus many of its peers both by steering away from the more traditional income stalwarts and by combining stock selection with a consideration of the macro backdrop,” the Square Mile Research analysts said.
The behemoth Standard Life Investments Global Absolute Return Strategies fund, or ‘GARS’, is a highly popular vehicle and when viewed across its various mandates it is the largest in the Investment Association universe at around £40bn of assets under management.
However, these figures only take account of funds flows to the main fund. The fact it invests in more than 30 trades in highly liquid currency, derivative and other security markets means size is less of an issue, according to Whitechurch Securities head of research Ben Willis, who is a long-term investor in the portfolio.
“The team were still managing to meet their objectives when they were a bit smaller and I think there’s every chance they can do it at £40bn. We’re not overly concerned at the moment,” he said.
Standard Life Investments Global Absolute Return Strategies has an ongoing charges figure of 0.89 per cent.
Last up is the only property fund on the list. While the performance of commercial property slowed this year following its three-year rally, the Henderson UK Property fund had a strong 2015 returning 7.88 per cent versus a sector average of 3.83 per cent.
Performance of fund and sector in 2015
Source: FE Analytics
The portfolio, co-managed by Marcus Langlands Pearse and Ainslie McLennan, took in another £1.3bn in 2015.
Open-ended property funds seem to have shed their controversial repuation gleaned in the financial crisis era for poor liquidity, although experts point out that the structure is not best suited for property.
Cash is currently 16.1 per cent of the portfolio, having not dipped below 10 per cent for the past 3 years at least, which means that the managers have money on hand should investors decide to exit rather than enter the fund.
The portfolio invests in bricks and mortar property rather than property shares, and is focused on prime locations in order to access good quality, well-managed properties, which means it has a high allocation to the south-east of England.
Henderson UK Property has a 0.84 per cent clean OCF and yields 3.1 per cent.