CF Woodford Equity Income, Standard Life Investments Global Absolute Return Strategies (GARS) and Franklin UK Equity Income are among the funds that feature in five of the largest and highest-rated unfettered funds of funds within the Investment Association universe, according to data from FE Analytics.
In an article published last week, FE Trustnet looked at the largest holdings in the portfolios of top-rated fettered funds of funds, which can only hold other investment vehicles from their own firm.
In the second part of the series, we take a look at the five largest four and five crown-rated funds of funds that are able to invest in any vehicle they choose and which holdings they have the highest convictions in.
The top holding in the £2.8bn HL Multi Manager Income & Growth fund is CF Woodford Equity Income, which the vast majority of investors will already be familiar with.
CF Woodford Equity Income, which accounts for 18.42 per cent of the four crown-rated fund’s portfolio, is £9.5bn in size and headed up by star manager Neil Woodford, who left Invesco Perpetual to set up his own firm in 2014.
Woodford adopts a largely contrarian approach based on the belief that markets are inefficient. His stock selection process is therefore based on an estimation of a firm’s future earnings and cash flow as well as whether it is being undervalued by markets.
This has led to a portfolio that looks vastly different to the FTSE All Share benchmark, with the fund holding more than 8 per cent weightings in both AstraZeneca and GlaxoSmithKline – in terms of sector, CF Woodford Equity Income is more than three times overweight healthcare stocks.
In contrast, it holds no oil and gas stocks while the FTSE All Share has an 11.44 per cent weighting in the market area and it is significantly underweight basic materials, consumer services and telecoms.
The manager’s stock selection clearly seems to work as, since its launch, the fund has more than doubled the performance of both its sector average and benchmark with a total return of 30.56 per cent. It has done so with a top-quartile maximum drawdown (which measures the most potential money lost if bought and sold at the worst times) and Sharpe ratio (which measures risk-adjusted returns) but with a higher-than-average annualised volatility.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
If an investor had put £10,000 into the fund over the same time frame, they would have received £644.18 in income.
CF Woodford Equity Income has a clean ongoing charges figure (OCF) of 0.75 per cent and yields 3.33 per cent.
The second-largest highly-rated fund of funds which is unfettered is Jupiter Merlin Growth Portfolio, which – as of February 2016 (this is the most recent data the firm has released on the fund’s exact weightings) – has Findlay Park American and CF Woodford Equity Income as its first and second-largest holdings respectively.
However, seeing as the former isn’t widely available to retail investors and the latter has already been covered, FE Trustnet has opted to look at its third-largest holding – Jupiter UK Special Situations – which accounts for more than one-tenth of its portfolio.
The £1.3bn fund, which has been managed by Ben Whitmore since 2006, has three FE Crowns and adopts a long-term, contrarian approach to investing.
It currently has a portfolio of 52 stocks which are selected using two quantitative screens: the first highlights undervalued assets versus their long-term history and the second aims to find companies that have both low valuations and high returns on capital. Examples of the fund’s largest holdings include BP, AstraZeneca and HSBC.
In terms of its performance, the fund is in the top quartile over one, five and 10 years and in the second quartile over three. Over the last decade, it has returned 138.88 per cent compared to its sector average and benchmark’s returns of 76.77 and 78.21 per cent respectively.
Despite its value approach – which can sometimes result in higher risk holdings – the fund is also in the top quartile for its annualised volatility, Sharpe ratio and maximum drawdown over 10 years.
Jupiter UK Special Situations has a clean OCF of 0.77 per cent and yields 2 per cent.
As with Jupiter UK Special Situations, third-largest top-performer Jupiter Merlin Balanced Portfolio also has Findlay Park American as its largest holding (again, as of February 2016).
Its second-largest holding, however, is FE Alpha Manager Terry Smith’s five crown-rated Fundsmith Equity fund, which is £8.2bn in size and aims to invest in high quality global companies that are trading on at least a small discount to fair value.
Smith is renowned for his staunch investment process, which involves filtering 60,000 listed companies in his investable universe down to around 65.
Out of these, the companies must have attractive free cash flow yields and can't require a significant amount of leverage to generate returns.
The fund has a significantly low portfolio turnover and is highly concentrated, consisting of between 20 to 30 stocks at any one time. Its three largest holdings are currently Bard, Johnson & Johnson and Microsoft.
Since its launch in 2010, the fund has almost doubled the performance of its average peer and benchmark with a total return of 193.62 per cent, which is no mean feat considering many global equity funds struggle to beat the global indices.
Perhaps due to Smith’s focus on quality, the fund also boasts a top-quartile annualised volatility, maximum drawdown and Sharpe ratio over the same time frame.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Fundsmith Equity has a clean OCF of 1.07 per cent and yields 0.74 per cent.
The £1bn five crown-rated Premier Multi-Asset Distribution fund has Colin Morton’s Franklin UK Equity Income fund as its largest non-cash holding, account for 5.03 per cent of its portfolio.
The five crown-rated fund, which is deputy-managed by FE Alpha Manager Ben Russon and Mark Hall, adopts a bottom-up approach to choosing stocks in order to target a rising yield as well as long-term capital growth.
Morton, who has been at the helm of the fund since 1995, has the longest tenure of any manager within the IA UK All Companies sector and his stock selection process has remained unchanged over this time frame.
He will look for valuation anomalies among dividend-paying stocks which also pass the team’s quantitative screening process. Its largest holdings are currently Royal Dutch Shell, British American Tobacco and GlaxoSmithKline, which make up a relatively concentrated portfolio of 53 stocks.
The fund is in the top quartile for its total return over one, three, five and 10 years as well as over three and six months, although its strongest outperformance has been over the last year as it has returned 14.29 per cent compared to its sector average’s return of 5.07 per cent and its benchmark’s return of 8.46 per cent. It has also maintained a better-than average annualised volatility, maximum drawdown and Sharpe ratio over one, three, five and 10 years.
Over the last decade, if an investors had placed £10,000 in the fund they would have made £4,372.78 in income. Franklin UK Equity Income has a clean OCF of 0.55 per cent and yields 3.85 per cent.
Standard Life Investments Global Absolute Return Strategies
Standard Life GARS is the top holding within the fifth-largest highly-rated fund of funds - SLI MyFolio Managed IV.
The £26bn behemoth GARS fund resides in the IA Targeted Absolute Return sector and aims to provide positive returns over rolling three-year periods, irrespective of market conditions.
However, the two crown-rated fund has come under fire recently for its 4.14 per cent loss over the last 12 months – that said, it has still achieved positive returns over three and five years.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
It is managed by Standard Life’s multi-asset investing team, who adopt a range of pair trades and complex risk management tools in order to generate equity-like returns with a volatility that is less than half that of the general market. Over five years, the fund’s annualised volatility is 4.56 per cent compared to the MSCI World’s volatility of 10.72 per cent.
The fund tends to hold between 20 and 30 broad investment strategies at any one time and, as such, the team consists of around 500 investment professionals who divide the tasks of top-down guidance and drawing ideas from investment teams across the firm, which can be selected from any asset class.
Standard Life GARS has a clean OCF of 0.89 per cent and yields 1.3 per cent.