Neptune UK Mid Cap, Henderson Cautious Managed, GLG Japan Core Alpha and Stewart Investors Asia Pacific Leaders are all funds having undergone tough periods recently but investors should not give up on them, according to industry commentators.
Funds go through periods of out and underperformance over the years for many reasons including, but not limited to, styles coming in and out of favour, sell-offs in certain sectors and shifts in macroeconomic sentiment.
Knowing when to sell out or stick with a fund can be a bane for many investors. As such, FE Trustnet asked analysts which funds they would continue to back despite struggling currently.
The first selection is the £1.8bn Man GLG Japan Core Alpha run by Neil Edwards and Stephen Harker since 2006 and Jeff Atherton joining the pair in 2011 and Adrian Edwards in 2014.
The fund has been a top quartile performer in the IA Japan sector over the last one, three, five and 10 years, beating the Topix index over these periods as well.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Yet it has struggled to keep pace so far this year and is the worst performer in the sector YTD, returning just 4.27 per cent versus the benchmark’s 10.11 per cent.
Premier Asset Management’s multi-asset manager Simon Evan-Cook said despite weak performance investors should stick by the fund and focus on its long-term track record.
“Like a lot of value funds the world over, this fund has struggled to outperform in recent years,” he said.
“Other than a blistering bounce-back in the second half of 2016, the only game in town has been growth investing.
“And as dyed-in-the-wool value investors, Stephen Harker’s team are always likely to struggle when the market moves like that.”
The three crown-rated fund has a yield of 1.51 per cent and a clean ongoing charges figure (OCF) of 0.9 per cent.
Stewart Investors Asia Pacific Leaders
Staying in Asia but away from Japan, AJ Bell Investments head of fund selection Ryan Hughes highlighted another fund not to lose heart with is the £9.4bn Stewart Investors Asia Pacific Leaders.
The fund is run by FE Alpha Manager David Gait, who ran the fund alongside Angus Tulloch from July 2015 before Tulloch stepped back in May last year. Current co-manager Sashi Reddy was subsequently added to the fund in June 2016.
Like the previous fund choice, Stewart Investors Asia Pacific Leaders has a strong long-term track record and is a top decile performer in the IA Asia Pacific ex Japan sector over the past decade.
However, it has been a bottom quartile performer over the last three, six and 12 months, as the below chart shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“For managers who have a pronounced investment style it’s inevitable that they will have periods where their style goes out of favour and their relative performance suffers,” Hughes said.
“At the moment, one such fund is Stewart Investors Asia Pacific Leaders who of course have a fantastic long-term track record.
“However, over the past two years the market has been far more interested in growth stocks resulting in some sharp underperformance.”
He added: “For those that have looked at the fund closely over the years, the underperformance at this moment should not come as a surprise as this fund offers lower beta exposure to Asian equities, however it would be easy to be drawn to a different conclusion if you simply looked at the third and fourth quartile performance over all periods over the past three years.
“This highlights the importance of genuinely understanding a manager’s investment style before you invest so you have a frame of reference as to what constitutes good and bad performance.”
The fund has a yield of 0.9 per cent and an OCF of 0.89 per cent.
In the UK, Thomas Miller Investment analyst Sam Buckingham highlighted Neptune UK Mid Cap as a fund that has struggled more recently but should outperform over the longer term.
The fund focuses on investing in companies that fall into one of the three silos: corporate turnaround, structural growth and economic recovery.
The £586m fund has been a top quartile performer over the last three and five years and has been a top quartile performer in six of the last eight calendar years, as the below shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
However, the fund run by FE Alpha Manager Mark Martin and deputy manager Holly Cassell struggled last year, sitting in the bottom quartile of the IA UK All Companies sector.
“Compared to its longer-term performance, Neptune UK Mid Cap has had a fairly lacklustre 18 months – particularly in 2016 as a whole – compared to both the benchmark [FTSE 250 ex Investment Trusts] and peers,” Buckingham said.
“Most of this relative underperformance has come during the rallying UK equity market since the slump following Brexit.
“Despite recent performance of the fund our conviction in the fund has not changed,” the analyst added. “In fact, we often employ a strategy in our managed portfolios of adding to funds we have a high conviction in long-term, but have had a recent bout of underperformance – this has seen us add to Neptune UK Mid Cap since the end of last year.”
The fund has a yield of 1.75 per cent and an OCF of 0.82 per cent.
From a multi-asset perspective, another fund worth keeping hold of is the £2.2bn Henderson Cautious Managed.
The fund has been managed by Chris Burvill since 2003, joined by FE Alpha Manager Jenna Barnard and John Pattullo in 2012 and most recently Stephen Payne last year.
It has a good long-term track record, sitting in the second quartile over the last decade, but has been a bottom quartile performer over one and three-year periods.
Alex Farlow, head of risk based solutions research at Square Mile, said: “The fund has been managed in the same style since inception and has a relatively simple structure compared to many recently launched multi-asset funds.
“This fund invests predominantly in high-quality bonds and UK equities; the allocation to each is broadly evenly split.”
He added: “The fund's structure and manager's investment style has meant that over the last few years it has struggled compared to many of its peers.”
When looking at equities, the managers have a valuation bias within his investment process and so will generally exclude highly valued, more growth orientated companies.
Yet investors have favoured these growth firms in the lower interest rate environment of the past several years and this has proved a headwind to returns.
“In addition, the manager has a preference for sterling denominated assets, or will hedge any non-GBP exposure back to reduce risk caused by foreign exchange rate movements,” Farlow noted.
This has been particularly detrimental to returns over the last 18 months as sterling plummeted on the back of the Brexit vote last June.
Despite the underperformance, however, the analyst remains confident that the fund should outperform in the long term.
“We continue to hold Burvill in high regard and believe he remains an accomplished investor and expect, over the medium-to-long term, the recent headwinds described above to become tailwinds that will help drive relative performance,” Furlow said.
Henderson Cautious Managed has a yield of 3.1 per cent and an OCF of 0.72 per cent.