The FE Crown Fund Ratings system measures the risk-adjusted performance and consistency of funds, awarding the very best portfolios a score of five, and the very worst a score of one.
Given the frequency of manager moves these days, it is also important to know that the manager running a fund is of a high calibre.
This is where the FE Alpha Manager rating comes in – it looks at the individual’s ability to add value to their benchmark in both rising and falling markets throughout their entire career.
The Adviser Fund Indices are model portfolios, made up of funds recommended by leading industry experts.
There are three portfolios: AFI Cautious, Balanced and Aggressive. Given that all of the other FE ratings are quant-led, this gives the system a useful qualitative overlay.
All three FE ratings have been rebalanced within the last two months. With this in mind, FE Trustnet will highlight funds that excel across all three measures, starting with the popular IMA UK Equity Income sector:
Invesco Perpetual UK Strategic Income
- FE Crowns: 5
- FE Alpha Manager: Yes
- AFI Indices: Cautious, Balanced, Aggressive
Unlike the other two – Invesco Perpetual Income and High Income – Barnett’s fund is relatively small and has the flexibility to invest across the market cap spectrum. At the moment, the manager has a defensive, large cap bias, but crucially he can move down the scale if he sees opportunities elsewhere.
Invesco Perpetual UK Strategic Income has had a very strong run since Barnet took charge in January 2006.
According to FE data, it is a top-quartile performer over the period, with returns of 75.13 per cent. The fund has significantly outperformed its FTSE All Share benchmark in the process.
Performance of fund vs sector and index since Jan 2006
Source: FE Analytics
The fund is also a top-quartile performer – and has beaten its benchmark – over one, three and five years.
It has consistently been one of the least volatile portfolios in IMA UK Equity Income as well, and has the sixth-lowest max drawdown over five years [29.38 per cent].
The fund has significantly outperformed both of Neil Woodford’s income portfolios over all three time periods, with only marginally more volatility.
Performance of funds, sector and index
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Invesco Perp - UK Strategic Income | 24.83 | 51.71 | 65.33 | 221.08 |
| Invesco Perp - High Income | 16.52 | 42.09 | 51.99 | 258.04 |
| Invesco Perp - Income | 16.17 | 39.37 | 50.62 | 253.98 |
| FTSE All Share | 13.74 | 29.96 | 43.25 | 165.87 |
| IMA UK Equity Income | 16.47 | 33.96 | 41.69 | 152.46 |
Source: FE Analytics
The only place Invesco Perpetual UK Strategic Income really falls down is in terms of its yield; according to FE data, it is currently paying out 3.11 per cent, which is a bottom-quartile figure for its sector.
Barnett runs a concentrated portfolio of around 50 holdings, with close to 50 per cent of assets invested in the top-10.
He lists health care and consumer products as his two favourite sectors, with major holdings in AstraZeneca, GlaxoSmithKline and Imperial Tobacco.
Like fellow FE Alpha Manager Woodford, Barnett is not jumping on the equity rally bandwagon.
"The stock market’s recent rise has occurred despite reductions in forecasts of company earnings," he said in a recent note to investors. "Equity valuations therefore no longer look as compellingly cheap as they did to us a year ago."
The FE Research team say investors concerned by the size of Woodford’s funds may want to take a closer look at Invesco Perpetual UK Strategic Income.
"It differs from Invesco’s Income and High Income funds in that the manager is not limited by the fund’s size and can therefore invest in some small- and medium-sized companies if he believes they offer a compelling opportunity," said the team.
The fund requires a minimum investment of £500 and has an ongoing charges fee (OCF) of 1.2 per cent.
However, this figure rises for anyone investing through a platform; the charge for Bestinvest, for example, is 1.7 per cent.
Threadneedle UK Equity Income
- FE Crowns: 5
- FE Alpha Manager: Yes
- AFI Indices: Cautious
It has delivered 65.39 per cent over the period, making it easily a top-quartile performer. This is just a touch less than Invesco Perpetual UK Strategic Income, which has returned 72.84 per cent.
The Threadneedle fund does have a better yield than Barnett's though, at 3.8 per cent.
The FE Research team say income distribution is Harrison’s priority. According to FE data, over five years an initial investment of £1,000 would have resulted in dividends of £234.
The Invesco fund has produced £214 for investors over the same period.
The £1.8bn portfolio is less reliant on defensive sectors than Barnett’s, which goes some way to explaining why it has outperformed in rising markets.
It holds financials Legal & General and RSA Insurance Group in its top-10, and has significantly more in industrials.
The FE Research team points out that Harrison is more optimistic than Barnett with regard to equity valuations, but adds that the fund is a good cautious option.
"The managers believe the UK equity market is relatively cheap and that the race for yield will make the type of stocks they invest in rise in value," it said.
Threadneedle UK Equity Income requires a minimum investment of £2,000 and has an OCF of 1.62 per cent. It is a constituent of the AFI Cautious index.
JOHCM UK Equity Income
- FE Crowns: 4
- FE Alpha Manager: No
- AFI Indices: Cautious, Balanced, Aggressive
It offers something different to the two other funds featured here, in that it has a high degree of exposure to mid caps, as well as companies at the bottom end of the FTSE 100.
The managers’ biggest overweight stock positions are 3i, David S Smith, TUI Travel and Segro, which all make up 2 per cent of the fund.
This greater emphasis on mid caps means that the fund has greater potential to deliver capital growth.
According to FE data, it has significantly outperformed its sector and All Share benchmark – as well as the Threadneedle and Invesco portfolios – over five years, with returns 89.92 of per cent.
Performance of funds, sector and index over 5yrs
Source: FE Analytics
Only one fund – Unicorn UK Income – has returned more.
Although the JOHCM fund has been more volatile, it still comes out on top on a risk-adjusted return basis; our data shows it has a Sharpe ratio of 0.49 over five years, compared with 0.46 per cent from the Invesco fund, and 0.3 from the Threadneedle fund.
With a yield of 4.6 per cent, JOHCM UK Equity Income is also by far the highest yielder of the three featured funds.
Lowen and Beagles are currently bullish about the prospects of UK equities, saying in a recent note to investors: "We are increasingly convinced that the ‘great rotation’ out of low-yielding bonds into equities – and, within equities, out of highly valued defensives and into the rest of the stock market – has begun and is likely to continue during 2013."
The FE Research team like the fund as an alternative UK Equity Income play, and say it could be used to complement a core holding. They also like the management’s strict income strategy.
"The managers will visit and extensively research individual companies to identify good stocks, but will only buy those that distribute a level of income that is higher than the market average," they said.
"Regardless of how they feel towards a particular holding, they will sell it as soon as it is expected to pay out less than the market."
The four-crown rated JOHCM UK Equity Income fund requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.28 per cent.
However, it charges a performance fee on top.
To find other funds that excel across a number of FE performance measures, click here.