Over the next couple of weeks, articles like this will proliferate wildly, so, not to be left out, here is an explanation of how I’ve chosen my fund of the year.The one clear trend from 2012 has been the distinct lack of any clear trend.
False starts and premature green shoots have been major features of almost every global economy, as have numerous near-catastrophes.
Europe has been saved from, and returned to, the brink maybe half a dozen times in the last six months; the FTSE Europe ex UK index gained almost 15 per cent in the first three months of the year, only to go through June in negative territory, before rallying away to year-end, but not without numerous wobbles that have seen it drop 5 per cent or more time and time again.
Could that have been forecasted? Unlikely.
Performance of indices in 2012
Source: FE Analytics
The US has also been equally erratic. The uncertainty surrounding the US election has given way to yet more uncertainty thanks to the improbable but still attention-grabbing fiscal cliff.
Here in the UK we have abandoned our disinterest in anything anyone in officialdom has to say on any topic.
In my view this has always been our greatest quality; however, we have recently become a nation of Robert Pestons, poring over even the most mundane and statistically insignificant economic data and surveys, looking for some sign that things are getting either better or worse.
I fully expect to have seen a "quadruple dip" headline before the end of the year.
What this year has reinforced to me, a lesson I somehow seem to need to re-learn repeatedly, is that the best strategy is to ignore all this noise.
Uncertainty puts people on edge; we can cope with recession or recovery, but it’s the not-knowing that is making us all so neurotic.
The same applies to funds and fund managers. Market timing and sector rotation are important tools for a fund manager to have, but constantly trying to second-guess market movements over this last year has been a fool’s errand.
There are plenty of funds that have been led astray, constantly changing tack to take advantage of an outlook or forecast that proves to be incredibly short-lived.
The funds that have impressed me this year have been those that have been unaffected by this market noise, and continued to pursue their investment philosophy despite the short-term impact on performance.
Trojan Income has weathered the year very well. It has stuck to its guns of selecting high-quality businesses and avoided any unnecessary risk, which has seen it tame the wild ride the world’s markets have been on.
Although the late rally at the end of the year will likely see it finish a little behind its sector, the fund has been far more stable than many of its peers which, in a year like we’ve just had, is a worthy achievement.
The fund misses out on my nod, however, because it hasn’t done anything out of the ordinary; it’s just followed its standard process, which is a good one, but it’s no better this year than it has been in any other.
Other funds that I wanted to pick but couldn’t quite justify were Standard Life Global Absolute Return Strategies and Insight Absolute Insight.
In a year that has featured as many ups and downs as 2012, funds that have continued to produce positive returns are strong contenders.
While both of these absolute return funds put in strong efforts, they were caught out by the market falls over the summer.
The Standard Life GARS fund lost money in three consecutive months, and while it limited losses to a fraction of those felt by the market, it’s just enough to keep it from claiming my fund of the year award; although the stability of its returns over the last 12 months is a testament to its process.
Likewise, Insight Absolute Insight managed to produce a positive return for 10 of the last 11 months and is up again for December at the time of writing.
While it seems harsh to penalise a fund for losing 0.5 per cent just once, in my opinion the bar is different for absolute return funds, and by the slimmest of margins this one hasn’t produced an absolute return all year long.
Performance of funds vs index in 2012
Source: FE Analytics
Given the harsh criteria applied above, the fund I’ve settled on may look like an odd choice, especially as it seems set to end the year in the bottom quartile.
I’ve chosen Fidelity Enhanced Income – not because it’s had a particularly good year, but because it is an innovative solution to a well-known problem.
Investors have a strong desire for income, but there are fewer and fewer reliable income stocks to choose from. As a result, there has been a convergence among income funds, with most of them now heavily reliant on the same five or six stocks.
While the fund has a fairly conventional line-up of stocks, with plenty of large cap stalwarts represented, its derivatives strategy of writing covered call options that provide an additional income stream into the portfolio means it doesn’t have to just stick to the few high yielding companies in order to provide a decent level of income to investors.
This gives FE Alpha Manager Michael Clark, who runs the fund in conjunction with David Jehan, more freedom to pursue interesting stock ideas.
Admittedly this isn’t new for 2012, but at less than three years old it is still an infant in fund terms and this year has been another opportunity for it to prove the strength of its strategy.
Its year-to-date return of 9.86 per cent looks meager, but it has managed to provide a yield of more than 7 per cent over the last 12 months. This is the second-highest in the sector.
Income is arguably the most important quality in an income fund, and this one’s innovative approach to increasing the amount it pays out and the stability of its yield, despite really changeable market conditions, makes it my fund of the year.
Performance of fund vs sector and index in 2012
Source: FE Analytics
While stubbornness and a failure to adapt are negative qualities in a fund manager, I’d say that my picks for fund of the year all have a strong backbone and conviction in what they’re doing.
Ignoring market noise has been an important component in success this year, and I have been impressed by funds and managers who have been willing to innovate, recognising that we’re entering a new world for investors, with its own challenges, and that new and innovative solutions will likely be required.