Backing an underperforming fund takes some serious willpower, despite the well-publicised disclaimer that past performance is no guide to the future. 
That’s because investors will always find some sort of safety in previous strong returns and the belief that if a manager has done it once, they are bound to do it again in the future. Nevertheless, though painful to do, there have been numerous FE Trustnet studies that have shown investors can be better off looking towards the bottom end of a sector performance tables for opportunities.
That is because investment styles and areas of the market do fall in and out of favour throughout the cycle.
Of course, there will always be dog funds (and the UK is home to many of them) that love to stay in bottom quartile whatever the wider market is doing, due to high charges and poor investment strategies.
However, data from FE Trustnet shows there are a number of UK funds that were sitting firmly in the bottom quintile of their respective sectors this time five years ago on a five-year view, but have since rocketed to the top quintile over the past half a decade due to differing market dynamics and new management teams.
Here, we highlight five of them from the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors.
We start off with the four crown-rated Old Mutual UK Equity 1, which was likely to be seen as a dog fund by many this time five years ago.
Over the previous half a decade, the now £129m fund had been the second worst performing member of the IA UK All Companies sector between June 2006 and June 2011 with losses of 11.83 per cent. The sector and FTSE All Share had made 20.47 per cent and 23.78 per cent over that time, as a point of comparison.
The reasons for that performance profile were pretty simple: it posted bottom decile losses in 2007 and 2008 but only copied the wider markets return in the rebound year of 2009.
However, since FE Alpha Manager Richard Watts took over the fund in April 2010, Old Mutual UK Equity 1 has witnessed dramatic reversal in fortunes.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
Over the past five years, the fund has been the fifth best performing portfolio in the peer group and more than doubled the returns of its average peer and the wider UK equity market thanks to Watts’ influence – which includes a far greater weighting to FTSE 250 stocks.
Indeed, Old Mutual Equity 1 has turned in top decile gains in the highly competitive sector in each of the past four calendar years.
Like Old Mutual UK Equity 1, this is another fund that has a big recovery in performance thanks to a new manager.
Invesco Perpetual’s UK Growth fund was seen as a flagship offering under the stewardship of Ed Burke, yet its relative performance during his final few years as manager had seen the portfolio slide down the sector table.
It underperformed in 2006, 2007 and 2008 before Burke retired and Martin Walker took charge. The change in management didn’t have an immediate effect, though, as Invesco Perpetual UK Growth underperformed again in 2009 and 2010.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
However, following five consecutive years of third and fourth quartile returns, Walker’s fund has witnessed a renaissance despite the fact that value (the style he follows) has largely been out of favour.
It has been his decent weighting to mid-caps which has really boosted performance and led Invesco Perpetual UK Growth to the IA UK All Companies sector’s top quintile over five years, with the fund having beaten its benchmark and peer group in four of the last five calendar years.
The fund has had a tough time of late, though, given its high weighting to financials following the Brexit vote.
Next up is Carl Stick’s Rathbone Income fund.
It is one of the IA UK Equity Income exiles which was forced to move the IA UK All Companies sector after failing to meet the desired yield target, but its performance between June 2006 and June 2011 places it in the bottom quintile in both peer groups.
Stick had a very difficult global financial crisis as despite his aim of protecting capital, he was caught out holding too many financials and other highly-leveraged companies during the crash. As such, the fund was bottom quartile in 2007 and 2008 with painful losses and was unable to recover as quickly as the wider market in 2009.
The manager has since learnt from past mistakes (he steered clear of financials for a prolonged period of time), which has led to a significant reversal in performance.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
Ass the graph above, the £1.2bn Rathbone Income fund – with its value tilt – has considerably outperformed both the IA UK All Companies and IA UK Equity Income sectors as well as the FTSE All Share over the past five years.
What’s more impressive, though, is that it has beaten the index in each of the last five calendar years.
A recent FE Trustnet article shows that Stick has regained his capital preservation abilities, as Rathbone Income is one of only 8 UK funds (out of a possible 339) to have been top decile for downside capture ratio, maximum drawdown, risk-adjusted returns, maximum loss, downside risk and annualised volatility over the past five years.
Fidelity MoneyBuilder Dividend
Fidelity MoneyBuilder Dividend is now seen as one of the most respected offerings in the IA UK All Companies sector thanks to its focus on high quality large-caps, yet this time five years ago many investors would have viewed it in a very different light.
It had returned less than half of the sector average over the previous five years. Despite the fact it held up better than the market in 2008 with losses of 24 per cent, it had failed to beat the index in 2006, 2007, 2009 and 2010.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
Michael Clark took over the now £1.1bn Fidelity MoneyBuilder Dividend fund from John Stavis in June 2008 and though his more cautious approach didn’t suit the recovering conditions in 2009 and 2010, the fund topped the sector in 2011 when the index fell 3.5 per cent.
As such, as Clark has been able to generate smooth risk-adjusted returns it now sits firmly in the top quintile of the peer group on a five-year view and, like Rathbone Income, is one of the eight UK funds to be top decile for the six major capital preservation metrics over that time – plus it has grown its dividend in each of those years.
AXA Framlington UK Smaller Companies
The final fund on the list is the only portfolio in the IA UK Smaller Companies sector (and the only one to have had three different managers over the past 10 years).
The AXA Framlington UK Smaller Companies was run by Roger Whiteoak between 2001 and early 2008 before Chris St John took charge. He eventually left the fund in April 2012, with Henry Lowson now at the helm.
Though the fund was actually ahead of its benchmark over the five years between 2006 and 2011, it was bottom quintile in the sector and some 25 percentage points behind the sector average with gains of just 8.91 per cent.
It had a disastrous 2008 as it fell by 50 per cent, but again failed to match the sector’s 50.18 per cent gain in 2009.
Performance of fund, sector and index between June ’06 & June ’11 and June ’06 & June ‘11
Source: FE Analytics
However, the reasons for its underperformance over that period could well have been similar to the drivers of its recent outperformance.
Lowson, for example, takes a growth approach but will only focus on stocks in the FTSE Small Cap index (meaning his average market cap exposure is far smaller than his average peer). This combination drove the fund’s top quartile gains in 2013, 2014 and 2015.
Over the last five years, the fund has beaten the sector by 40 percentage points.
It is worth noting, though, that Lowson is to leave AXA to join Royal London with Dan Harlow, who worked with St John as deputy manager prior to Lowson’s arrival, set to takeover
Following on from this theme, in an article next week FE Trustnet will highlight the five funds that have seen the biggest falls from grace over the past five years.
