Sometimes this strategy can be a successful one, as there are many managers who have proved they can consistently achieve top-quartile returns over the short-, medium- and long-term.
The five crown-rated Jupiter European fund, for example, run by FE Alpha Manager Alexander Darwall, has been one of the highest-ranking portfolios in the IMA Europe ex UK sector over three, five and 10 years.
Performance of fund vs sector over 10yrs
| Name | 1m returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Jupiter - European |
-4.75 | 50.93 | 71.1 | 265.66 |
| IMA Europe Excluding UK | -5.5 | 31.22 | 22.31 | 137.27 |
Source: FE Analytics
Darwall’s strategy of ignoring market noise and taking a pure bottom-up stockpicking approach – only investing in top-quality business with proven business models – has stood him in good stead and should mean the fund will continue to perform well.
This type of consistency is rare, however, and often some of the best-performing fund managers over the long-term will find their style falls out-of-favour from time to time.
There are a number of reasons why taking a long-term view on a fund that is currently underperforming can prove to be successful further down the line.
The first of these is that the manager's style or thoughts on market trends could be at odds with with the rest of their peers'. Some may remember the time when industry legend and FE Alpha Manager Neil Woodford was languishing down the performance tables.
He had no exposure to the tech sector in the run-up to the dotcom bubble in the late 1990s because he felt it was a crash waiting to happen. At the time, this had a detrimental impact on his relative performance and rumour has it that he was close to losing his job. Between January 1997 and January 2000, Woodford’s Invesco Perpetual High Income fund underperformed the FTSE All Share by more than 20 percentage points.
Thankfully for Woodford (pictured), his prediction proved accurate and the inflated prices of tech stocks came plummeting down, leaving many investors out of pocket.
Looking at the five crown-rated Invesco Perpetual High Income fund today, that period of underperformance is a mere blip – it has returned nearly 400 per cent since January 1997 to the FTSE All Share’s 171.41 per cent.
Performance of fund vs sector and index since Jan 1997
Source: FE Analytics
There have been more recent situations where this has been the case as well.
Sanjeev Shah, manager of Fidelity Special Situations, has a high weighting to unloved financial stocks, which came under increasing pressure; however the sector has since re-bounded, making his longer term numbers much more impressive.
Out-of-favour funds worth looking at
One of the funds that is currently underperforming is the £7.3bn M&G Recovery fund, which is headed up by FE Alpha Manager Tom Dobell.
Although it is a top-quartile performer in the IMA UK All Companies sector over 10 years, with returns of 186.84 per cent, its recent performance has waned and it is now third quartile over five years and bottom quartile over one and three.
Dobell’s mantra is that good things come to those who wait: he aims to buy stocks that no-one else likes and sell them on when they return to favour. However, his recent underperformance caused him to publicly apologise to investors.
He says that his high exposure to the currently unloved basic materials, oil and gas and industrial sectors has been the main reason for the fund's low returns; however he believes his approach will deliver higher numbers when M&A activity eventually picks up.
M&G Recovery requires a minimum investment of £500 and has an ongoing charges figure (OCF) of 1.65 per cent.
Mining stocks have been out of favour among investors in recent times, which has of course led to heavy losses from a number commodity and basic materials-focused funds.
It is impossible to predict when mining stocks will regain the losses sustained since the financial crisis, especially as commodity prices remain volatile and there is a changing supply and demand dynamic as China shifts to a consumer-driven economy.
There are a number of funds such as BlackRock Gold & General and First State Global Resources that are run by highly experienced managers that would be well placed to benefit from a revival in this sector.
Both funds have incurred double-digit losses over one, three and five years. However, this has little to do with the managers' ability and more to do with the slowdown of the supposed commodities super-cycle.
Of course, an out-of-favour style is not always the cause of a fund's underperformance.
Another reason could be a change in leadership whereby a new manager has come in to turn the performance around. One example of this is FE Alpha Manager Jeremy Podger.
Having proven his capabilities at both Investec and Threadneedle, he took over the ailing Fidelity Global Special Situations fund in March 2012.
Investors will almost certainly be wary of the fund given the fact it is a bottom-quartile performer in the IMA Global sector over five years and third quartile over three. However, that has changed since Podger has taken over.
The fund is now a top-quartile performer since March 2012, returning 20.88 per cent and beating its benchmark – the MSCI AC World index – by more than 7 percentage points.
Performance of fund vs sector and index since Mar 2012
Source: FE Analytics
Fidelity Global Special Situations has an OCF of 1.71 per cent and requires a minimum investment of £1,000.
Then there is the £29.6m Franklin UK Smaller Companies fund. Richard Bullas and FE Alpha Manager Paul Spencer took over the fund from the long-serving Stuart Sharpe in June 2012.
The fund has sat in the bottom quartile of the IMA UK Smaller Companies sector over three, five and 10 years.
However, the duo have radically altered the portfolio they inherited. Bullas recently told FE Trustnet that they chopped the fund’s high oil and gas exposure and have exited their illiquid micro-cap holdings.
Obviously it is early days, but the fund is a top-quartile performer over six months, with returns of 21.55 per cent, and has nearly doubled the returns of its Numis Smaller Companies ex IT benchmark over this time.
Performance of fund vs sector and index over 6 months
Source: FE Analytics
Again, half a year is not enough time to judge a fund’s long-term performance but for those who are willing to back Spencer and Bullas’s record, Franklin UK Smaller Companies has an OCF of 1.7 per cent and requires a minimum investment of £1,000.
