Threadneedle Global Bond, Invesco Perpetual Income and BlackRock UK Equity Tracker are some of the biggest bets in the portfolios of top-rated fettered fund of funds at the moment, according to data from FE Analytics.
Fettered funds of funds, which are only able to invest in other vehicles from the same firm, are sometimes opted for over unfettered funds of funds due to their lower charges. Our data shows that, while the average ongoing charges figure (OCF) for the latter is 1.3 per cent, the average OCF for the former is just 0.7 per cent.
We have also decided to take a look at them to find out which funds the top-rated managers in the space have the highest conviction in within their own firms.
To do this, we discounted all fettered fund of funds that have less than a four crown rating. This resulted in a list of 20 funds and, out of these, we chose the five largest funds and looked at the top holding in their portfolios.
These holdings and the managers that chose them are listed in the below article:
The largest holding in the portfolio of the £8.6bn BlackRock NURS II Consensus 85 fund, BlackRock UK Equity Tracker was launched in 2005 and has a five crown passive rating.
The fund aims to closely track the FTSE All Share index and does so through investing in the same securities as the index. As a firm, BlackRock believes that the best way to track an index is by fully replicating the index, meaning that the fund’s exposure to each holding will also be in line with the weighting of its benchmark.
BlackRock UK Equity Tracker, which has been managed by Kieran Doyle since March this year, is also able to implement stock lending activity (lending securities to others for income) although this is only allowed up to 10 per cent of the fund’s value.
Over Doyle’s tenure, the £8.4bn fund has achieved a tracking error of 0.48 per cent – a tracking error below 2 suggests a passive approach that closely replicates an index and a zero tracking error indicates a perfect replication of its benchmark (this is virtually impossible as the fund will not be fully invested at all times to retain some liquidity and the assumed reinvestment of dividends is not always possible).
While it has slightly underperformed its sector average (which of course consists of both active and passive funds) over five and 10 years, it is in the top quartile for its total returns over one year as well as three and six months given the recent strength of the index.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
BlackRock UK Equity Tracker has a clean OCF of 0.06 per cent and yields 3.15 per cent.
Vanguard FTSE Developed World ex UK Equity Index
This fund is the largest holding in both Vanguard LifeStrategy 60% Equity and Vanguard LifeStrategy 40% Equity, the second and fourth-largest fettered funds of funds with a four crown rating or above.
Vanguard FTSE Developed World ex UK Equity Index is £2.1bn in size and was launched in 2009 by the Europe Equity Index team with the aim of tracking the FTSE Developed ex UK index.
While it aims to achieve a result that is of course consistent with its benchmark, it does so by holding a representative sample of securities that make up the index which are approximate to the proportion of its weighting.
For instance, while the FTSE Developed ex UK index has 1,958 stocks which have a median market cap of £33.1bn, the fund holds 1,967 stocks which have a median market cap of £33.4bn.
Despite minor differences, the fund has the same return on equity (ROE) at 15.6 per cent, the same P/E ratio at 19.6x and the same dividend yield at 2.5 per cent.
Over five years, it has a tracking error versus its benchmark of just 0.15 per cent and has returned 108.62 per cent while the FTSE Developed World ex UK index has returned 114.03 per cent over the same time frame. Its sector average has returned 76.01 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Vanguard FTSE Developed World ex UK Equity Index has a clean OCF of 0.15 per cent.
The third-largest top-rated fettered fund of fund – the £1.2bn Threadneedle Equity & Bond fund – has Threadneedle Global Bond as its largest holding at 18.5 per cent.
The fund has three FE crowns and has been headed up by Dave Chappell and Matthew Cobon since 2010 and 2016 respectively.
The £450m fund has a growth mandate and typically invests in medium quality government bonds or credit from across the globe. Its largest holdings are a combination of long and short-dated US treasuries, New Zealand government bonds, Japanese government bonds and Australian government bonds.
Its portfolio consists of 88 securities which, in total, are denominated into eight currencies – while it is slightly underweight the euro, the yen and the British pound versus its JP Morgan GBI Global Index benchmark, it is overweight the US dollar by 1.2 percentage points at 10.7 per cent.
Over five years, Threadneedle Global Bond has returned 29.91 per cent which is broadly in line with its sector average.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It has done so with an annualised volatility of 8.72 per cent compared to its average peer’s volatility of 5.48 per cent and has a maximum drawdown (which measures the most potential money lost if bought and sold at the worst times) of 10.10 per cent compared to its sector average of 6.68 per cent.
The fund has a clean OCF of 0.63 per cent and yields 1.3 per cent.
Next up is Invesco Perpetual Income, which makes up 15.95 per cent of the four crown-rated Invesco Perpetual Managed Income fund.
The £5.9bn fund has been run by FE Alpha Manager Mark Barnett since star manager Woodford stepped down from its helm in 2014.
The four crown-rated investment vehicle, which resides in the IA UK All Companies sector, aims to achieve a reasonable level of income as well as growth – if an investor has put £10,000 into the fund at the start of Barnett’s tenure, they would have earned an income of £839.40.
In terms of its overall performance, the four crown-rated fund has achieved a total return of 19.7 per cent compared to its sector average’s return of 9.45 per cent, placing it comfortably in the top quartile.
Performance of fund vs sector under Barnett
Source: FE Analytics
It has also fared well with its risk metrics and boasts a top-quartile annualised volatility, risk-adjusted return (as measured by its Sharpe ratio) and maximum drawdown under Barnett.
The fund is vastly different from the FTSE All Share index and holds the likes of Reynolds American, British American Tobacco and AstraZeneca as its top holdings.
The fund is not benchmarked against an index so therefore has an unconstrained approach. Barnett selects stocks using a pragmatic approach whereby he has no style bias and is able to invest in stocks that he has high conviction in as individual companies.
He also adopts a macro overlay which mostly focuses on where trends are going and how they are changing.
Invesco Perpetual Income has a clean OCF of 0.91 per cent and yields 2.93 per cent.
Scottish Widows Corporate Bond
The next biggest top-rated fettered fund of fund is Scottish Widows Managed Income Portfolio, which has Scottish Widows Corporate Bond as its largest holding at 20.11 per cent of its portfolio.
The £3.6bn fund is managed by the firm’s Pan European Credit team and has a 65 per cent weighting in UK fixed income and a 34.6 per cent weighting in overseas fixed income.
In terms of quality bias, almost half the fund is weighted in BBB-rated bonds while 22.8 percent is in A-rated bonds and 13.5 per cent is in AA-rated bonds. It also holds smaller weightings in AAA, BB and non-rated bonds.
A vast majority of these holdings are also fairly long-dated, with 66.8 per cent holding a maturity of between 10 and 15 years.
In total, the portfolio consists of 252 holdings, the largest of these being in UK gilts as well as large-cap corporates such as Imperial Brands and Barclays Bank.
Scottish Widows Corporate Bond has performed broadly in line with its peers since its launch in 2012 and, in terms of its risk metrics, it is in the bottom quartile for its annualised volatility, Sharpe ratio and maximum drawdown over the same time frame.
Performance of fund vs sector since launch
Source: FE Analytics
The two crown-rated fund has a clean OCF of 1.12 per cent and yields 3 per cent.
