Fundsmith Equity, GAM Global Diversified and JOHCM UK Opportunities are among some of the investment professionals’ top fund picks that shouldn’t be ignored because of their higher-than-average ongoing charges figures (OCFs).
This article is the second half of a series. Last week, we looked at five highly-rated funds that are better suited to ‘bargain hunter’ investors, with the likes of Lindsell Train UK Equity, Newton Global Income and Woodford Equity Income being chosen by industry commentators.
However, some of the professionals urged investors to focus on the quality of the fund first and foremost and whether they will make their cash work harder net of fees.
Jason Hollands, managing director of Tilney Group, said: “At the end of the day, what matters is performance net of fees and sometimes it may be worth paying a premium for an exceptional manager, so when it comes to selecting an actively managed fund I would always focus on returns after costs rather than letting costs in themselves drive the decision.”
Given this stance, we have asked Shore Financial Planning’s Ben Yearsley, Premier’s Simon Evan-Cook and Wellian Investment Solutions’ Richard Philbin which funds they hold that are more than worth paying slightly higher OCFs for.
Fundsmith Equity – 1.06% OCF
Chosen by Philbin, FE Alpha Manager Terry Smith’s (pictured below) £9.8bn fund will need no introduction to investors. The manager of the five FE Crown-rated fund is renowned for his focus on quality, large-cap growth stocks based in developed markets, which he aims to hold over the long term.
This has stood the fund in good stead as, since its launch in 2010, it has outperformed its MSCI World index by almost 100 percentage points with a 221.24 per cent total return. This also means it has comfortably doubled the return of its average peer over the same time frame.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics 
“This fund is a star performer that many are suggesting should be avoided as it has had such a great run for such a long time,” the chief investment officer said. “We have owned it across a range of our models for many years and have benefitted tremendously from it being in our portfolios.
“Although the ongoing charges are low (dealing costs for instance are miniscule – the fund doesn’t actively trade the underlying holdings) the AMC [annual management charge] is higher than the peers making this a relatively expensive product.”
The fund’s annual management charge is 1 per cent and, while its OCF of 1.06 per cent is around average for a fund in the IA Global sector, this could be seen as expensive compared to funds that reside in other areas of the market.
That said, it boasts a top-decile Sharpe ratio (which measures risk-adjusted returns) that is more than double its average peer’s and has a top-decile maximum drawdown (which measures most money lost if bought and sold at the worst possible times) of 6.35 per cent, compared to its sector average’s drawdown of 14.85 per cent, since launch.
GAM Global Diversified – 1.09% OCF
Yearsley, who is director of Shore Financial Planning, says FE Alpha Manager Andrew Green’s five FE Crown-rated GAM Global Diversified fund is well worth paying the 1.09 per cent OCF for.
“It has been run by the same manager since 1984,” he said. “This is a value-based fund with defensive characteristics, something that could be useful over the next few years.
“Typically it has a contrarian style. Mr Green isn't afraid to hold cash if he thinks it is necessary, currently there is just over 18 per cent in cash.”
Alongside this cash weighting, the £580.8m fund has 53 global equity holdings, with Citigroup, RBS and BP its top three individual weightings.
Over five years, it has returned 93.56 per cent compared to its MSCI World benchmark and IA Global sector average’s respective returns of 102.22 and 75.08 per cent.
While it may not have shot the lights out in terms of its five-year performance, investors should note that it has done well at protecting investors’ capital during challenging market conditions. During the Taper Tantrum of 2013, for instance, it returned 33.34 per cent and outperformed its benchmark and average peer by approximately 10 percentage points.
Schroder ISF Asian Total Return - 1.32% OCF
Philbin also says Schroder ISF Asian Total Return shouldn’t be overlooked by investors due to its 1.32 per cent OCF.
The Luxembourg-domiciled SICAV is $2.6bn (£2.1bn) in size and has been headed up by FE Alpha Manager Robin Parbrook and King Fuei Lee since its launch in 2007.
“This fairly concentrated portfolio of around 50 stocks has delivered excellent returns over the medium and longer term,” he said.
“Although a large fund, it has also managed to deliver volatility of roughly one-third less than the benchmark over the past three years. We are not unduly concerned about the shorter-term relatively poor performance as we are long-term investors.”
While the five FE Crown-rated fund has outperformed its MSCI AC Asia Pacific ex Japan benchmark by more than 10 percentage points over three and five years with respective returns of 60.53 and 83.8 per cent, it has slightly underperformed it over one, three and six months.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
However, as is evident in its name, the fund aims to participate in rising markets while aiming to mitigate losses in falling markets by using derivatives. As such, investors shouldn’t panic if the fund endures periods of underperformance relative to its benchmark during bull market conditions.
In terms of risk metrics, it has achieved a maximum drawdown of 14.39 per cent compared to its benchmark’s drawdown of 20.9 per cent. It also has a Sharpe ratio of 0.85 compared to the index’s Sharpe ratio of 0.48 per cent.
JOHCM UK Opportunities – 0.82% OCF
John Wood’s five crown-rated JOHCM UK Opportunities has been in the press recently, following the announcement of the FE Alpha Manager’s retirement in September this year.
However, Premier’s Evan-Cook says it is a good example of a fund that still shouldn’t be overlooked for its clean OCF of 0.82 per cent.
“Its OCF certainly isn’t among the lowest, but we think the quality of that manager has made the fund worth holding over time and, sure enough, he’s outperformed the FTSE All Share and has had a very long and distinguished career,” he explained.
The £1.8bn fund has achieved top-quartile returns over three and 10 years relative to its average peer in the IA UK All Companies sector. While it has fallen into the third quartile over five years, investors should take into account that it has delivered strong downside protection during falling markets.
In 2008, for instance, it lost 18.59 per cent while its sector average and benchmark lost 31.96 and 29.93 percentage points respectively. During the European debt crisis of 2011, it achieved a positive return of 4.77 per cent while both its sector average and benchmark made losses.
A particularly distinctive feature of the fund is its highly concentrated portfolio of 28 stocks, which includes the likes of National Grid, Shell and SSE as some of its largest individual holdings.
Artemis Pan-European Absolute Return – 1% OCF
The final fund on the list is Artemis Pan European Absolute Return, which was launched by Paul Casson in July 2014 and is just £97.1m in size.
“A relatively new addition to the Wellian stable of funds, this small fund has added significant value to a couple of our model portfolios already,” Philbin said.
“Paul Casson invests to make returns in good stock market conditions as well as bad, and uses both longs and shorts to achieve his aims.
“The fund is in the IA Targeted Absolute Return sector and has cash as the benchmark, so neither are suitable comparators. We like the fund as it diversifies sources of alpha.”
Since its launch, the fund has returned 21.25 per cent and has done so with a maximum drawdown of 4.5 per cent, a Sharpe ratio of 0.55 and an annualised volatility of 6.39 per cent.
Performance of fund since launch
Source: FE Analytics
Its largest individual holds include Ryanair, Swiss staffing firm Adecco and BMW.