Though we are constantly told not to, investors will often take into account past performance when deciding on which fund they are going to buy.
This process can be very nervy, however, as it takes a brave investor to pile into a fund they rate that is currently underperforming while there is always the concern that after buying a portfolio that is well ahead of its index and peers, it will revert back to average as investment styles fall in and out of favour.
FE Trustnet has written a number of articles on this subject. Firstly, we highlighted the UK funds that investors may have kicked themselves for buying this time five years ago as having previously occupied the top quintile in their respective sectors, they have since fallen to the bottom quintile.
After that, we highlighted the once underperforming funds have seen the biggest reversal of fortunes and therefore rewarded investors who took the plunge to back them.
This time, though, we highlight the funds from the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors that were sitting right at the top of their respective peer groups this time five years ago on a five-year view and have managed to repeat that relative performance since July 2011.
To narrow the list down further than usual, however, we have only looked at the funds that were top decile and have stayed top decile over the two periods in question (unlike top quintile in past articles).
This leaves us with only five funds out of a possible 271 with a long enough track record.
CF Lindsell Train UK Equity
We start off with FE Alpha Manager Nick Train’s five crown-rated CF Lindsell Train UK Equity fund, which as regular FE Trustnet readers will know, has been a serial outperformer over recent times.
Thanks to the managers concentrated, long-term approach and focus on high quality companies with reliable earnings and strong franchises, the £2.4bn fund has beaten both the IA UK All Companies sector and its FTSE All Share benchmark in each of the past five calendar years and is outperforming 2016’s so far volatile conditions.
However, investors looking at the fund in July 2011 will have also seen that it was firmly top decile over the previous five years.
Though it immediately struggled after its launch in July 20006 relative to the index thanks to Train’s decision to avoid commodity-related companies at all costs, it managed to protect its investors against the 2008 crash far more effectively than the wider market but was still able to rebound harder in 2009.
Performance of fund versus sector and index between July 2006 and July 2011
Source: FE Analytics
Of course, there are concerns about the future performance of the fund. Indeed, CF Lindsell Train UK Equity has certainly benefitted from the low rate and quantitative easing environment and the manager has only bought one stock in the past four years.
Therefore, it may be somewhat of a stretch for Train to repeat his performance since the fund’s launch: CF Lindsell Train UK Equity has beaten its peers in every calendar year.
Liontrust Special Situations
Though this £1.7bn fund has a different approach to CF Lindsell Train UK Equity, both portfolios prioritise quality.
That is because the managers of Liontrust Special Situations (FE Alpha Managers Anthony Cross and Julian Fosh) have a process called the ‘economic advantage’, by which they look for companies with durable characteristics such as ownership of intellectual property, recurring revenue streams and strong distribution channels.
The fact the managers have historically had a high weighting to mid-caps has also meant the £1.8bn fund has been able to take part in rallying markets, while its focus on quality has meant it has protected against the downside in falling ones.
As such, not only was Liontrust Special Situations firmly top decile over the five years between July 2006 and July 2011 (having outperformed in four out of five calendar years), it is also once again top decile over five years and has more than doubled the returns of the FTSE All Share in process.
Performance of fund versus sector and index
Source: FE Analytics
The fund therefore top decile for the likes of maximum drawdown, Sharpe ratio and other capital preservation metrics over 10 years, but it has beaten the index in nine out of the last 10 calendar years and is outperforming once again in 2016.
Old Mutual UK Mid Cap
The consensual view is that mid-caps outperform larger companies over the medium to long term as they offer better growth potential.
Interestingly, though, Old Mutual UK Mid Cap is the only FTSE 250-orientated portfolio to feature on this list.
Between July 2006 and July 2011, the now £1.9bn fund more than doubled the returns of IA UK All Companies sector and beat its benchmark by 7 percentage points with gains of 55.64 per cent.
That was because, despite its focus on perceived higher risk companies, it protected capital better than most of its peers during the crash years as well as outperforming the sector immediately after the crisis.
Since July 2011, it has once again doubled the returns of the sector and is well ahead of the FTSE 250 ex IT index with its gains of 89.41 per cent, having beaten its benchmark in each of the past five calendar years.
Old Mutual UK Mid Cap, unlike the other funds mentioned so far, has had a change of manager over the past 10 years.
Performance of fund versus sector and index under Watts
Source: FE Analytics
FE Alpha Manager Richard Watts took over the portfolio from Aston Bradbury in December 2008, and though it has outperformed the sector under his stewardship, his decision to remain relatively defensive during 2009 snap rally and its bottom decile losses so far in 2016 means the fund is underperforming against its benchmark since he has been at the helm.
Trojan Income
Turning to the IA UK Equity Income sector now and only two from the peer group have managed to make it onto the list.
First up is FE Alpha Manager Francis Brooke’s Trojan Income fund, which is renowned for its focus on capital preservation and income generation. Like Train, Brooke tends to own high quality stocks with safe dividends and the fund will usually be biased towards mega-caps.
Brooke’s aim to protect capital has helped him generate strong total returns for investors.
Not only was his now £2.2bn fund the second best performer in its sector in the first five-year period looked at in this study (after losing less than half than its average peer and the index during 2008), its focus on quality dividend paying stocks means it is the third best performing portfolio in the sector and more than doubled the market’s return over the past five years.
It has also had the lowest maximum drawdown and best risk-adjusted returns in the sector over the past 10 years. However, one of the major drivers behind its popularity is the five crown-rated fund’s income credentials.
Trojan Income’s dividend history
Source: FE Analytics
Though its yield has dropped recently to 3.45 per cent thanks to decent unit price performance, it has paid out more than the average peer in total dividends since its inception September 2004 and is the only member to have grown its net distributions in each of the last 11 calendar years.
Threadneedle UK Equity Alpha Income
The final portfolio on the list is FE Alpha Manager Leigh Harrison’s Threadneedle UK Equity Alpha Income, which has been co-managed by Richard Colwell since September 2009.
The £754m fund is a more concentrated version of the groups’ core Threadneedle UK Equity Income portfolio, but takes a similar contrarian-like approach to the market as shown by its high weighting to financials and oil companies.
This time five years ago, it was sitting in the top decile of its total returns and well ahead of the index thanks to its strong performances during the crisis years of 2007 and 2008.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
However, its relative performance has only improved since Colwell has been a named manager. FE data shows Threadneedle UK Equity Alpha Income has beaten the index in each of the past five calendar years and the peer group average in four of them.
As such (and thanks to its outperformance so far in 2016), the fund – which yields 4.6 per cent, has grown its dividend in four of the past five years and been one of the best performers in the sector for total income generation – is more than 25 percentage points ahead of the FTSE All Share over five years.
It is worth noting, though, that Harrison will retire at the end of the month and Colwell will assume full responsibility for the portfolio.