While past performance is of course no guide to future performance, the system aims to identify funds that have not only done well on a total return basis, but in terms of alpha generation, downside risk and volatility, and the consistency with which they have beaten their benchmark.
Funds are then ranked within their relevant peer groups.
Here are five of the higher-profile funds that have been boosted by an FE upgrade.
Rathbone Income – 2 FE Crowns to 5 FE Crowns
Carl Stick’s £564m fund had a torrid time during the financial crisis, but seems to have turned things around strongly since then, earning the fund five FE Crowns in the recent rebalancing. It previously only had two.
Our data shows Stick (pictured) lost 34.49 per cent in 2008, putting the fund in the bottom quartile of his sector. He explained the reasons for this underperformance in a recent article on FE Trustnet, and also revealed what he had learnt from the experience – namely that it is wrong to chase returns in a rising market.
This helped the fund considerably in the down market of 2011 and has contributed to its outperformance versus its sector and benchmark over three and five years.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Rathbone Income, which is currently yielding 3.75 per cent, has also been less volatile than both its sector and the index. Our data shows it has an annualised volatility of 9.97 per cent over three years, compared with 11.32 per cent from the IMA UK Equity Income sector average, and 12.55 per cent from the FTSE All Share.
The £564m fund is invested predominantly in large caps, but has notable exposure to mid caps as well. Restaurant Group, Cineworld and William Hill – which has recently been promoted to the FTSE 100 – are all top-10 holdings.
Stick’s portfolio requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.56 per cent.
CF Ruffer Japanese – 1 FE Crown to 5 FE Crowns
Japan is finally starting to turn heads, thanks to its stellar run in recent months. The government’s monetary easing programme has been credited with the change in sentiment and many experts are now tipping the corporate sector to provide a further driver for performance.
One fund that has taken full advantage of the upswing in markets is CF Ruffer Japanese, which is one of the best-performing funds in the IMA universe so far this year, with returns of more than 30 per cent.
Investors could be forgiven for not knowing much about the £476m fund, given that it sits in the IMA Flexible Investment sector, rather than IMA Japan. It invests almost exclusively in equities, but it can take significant positions in cash and bonds from time to time, which is why it must sit in the multi-asset sector.
Our data shows it has significantly beaten both the IMA Flexible Investment and IMA Japan sector averages over one and three years. It has also beaten its Topix benchmark over both periods.
Performance of fund vs sector and index over 3yrs
| Name | 1yr returns (%) |
3yr returns (%) |
|---|---|---|
| CF Ruffer - Japanese | 49.69 | 39.61 |
| IMA Japan | 26.56 | 27.26 |
| TSE TOPIX | 21.58 | 22.96 |
| IMA Flexible Investment | 16.04 | 23.94 |
Source: FE Analytics
Unusually for a Ruffer fund, it has been more volatile than its benchmark.
Manager Kentaro Nishida had a tough couple of years following the launch of the fund in May 2009, but he has since steadied the ship.
He currently has 18 per cent in cash and lists industrials and financials as his two biggest sector weightings. Car manufacturer Mazda is his biggest holding.
CF Ruffer Japanese requires a minimum investment of £1,000 and has an OCF of 1.54 per cent.
JOHCM UK Dynamic – 1 FE Crown to 4 FE Crowns
Alex Savvides’ £51m fund is being tipped as a potential star of the future by many industry professionals, thanks to his original process and strong performance record.
The fund has above-average volatility and tends to underperform during falling markets; however, Savvides – an FE Alpha Manager – has built a good medium-term record since launching the vehicle back in 2008.
Our data shows the fund has made 78.2 per cent since then, beating its sector and benchmark by more than 40 percentage points.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund has also outperformed over one, three and five years, but its high volatility score means that it just misses out on the maximum FE Crown rating.
Savvides is a value manager, focusing on undervalued stocks that he thinks are underestimated by the market at large. Unusually, he only invests in stocks that pay a dividend or that are forecast to do so within a year, which he believes gives his portfolio an effective "insurance policy".
As a handy by-product, the fund has a competitive yield of 2.83 per cent, even though it sits in the UK All Companies sector.
It is predominantly invested in large caps, but has big positions in smaller companies such as Qintetiq Group, which is a top-10 holding.
JOHCM UK Dynamic requires a minimum investment of £1,000 and has an OCF of 1.5 per cent – excluding performance fee.
Standard Life UK Equity Income Unconstrained – 1 FE Crown to 4 FE Crowns
Thomas Moore is another young gun who is being tipped for big things in the future and his fund’s upgrade from one FE Crown to four in the latest rebalancing reflects the reasons why.
The mid cap focused Standard Life UK Equity Income Unconstrained portfolio is a top-quartile performer in its IMA UK Equity Income sector over one and three years, and since he started running it in January 2009.
Like Savvides’ fund, it tends to be more volatile than its sector and benchmark and had a tough time in the summer sell-off of 2011; however, it has more than made up for this in up markets.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Moore believes that it is increasingly difficult – and possibly dangerous – to add value through established mega cap dividend payers, as they have next to no potential to grow. As a result, he looks to smaller companies which have more attractive total return profiles, which can also crucially increase their dividend over time.
Among his biggest bets at the moment are M&C Saatchi, Hiscox and Resolution.
The £151m Standard Life UK Equity Income Unconstrained fund requires a minimum investment of £1,000 and has an OCF of 1.91 per cent.
SWIP UK Flexible Strategy – 1 FE Crown to 4 FE Crowns
Like CF Ruffer Japanese, this is another fund that sits in an IMA sector that may throw a lot of investors off.
It is very similar to absolute return funds in that it attempts to deliver a positive return regardless of market conditions; however, SWIP has chosen to put the fund in the IMA Specialist sector.
The £33m vehicle uses both long and short positions to beat the 3 Month Libor rate, rather like a hedge fund. It had a miserable time under previous manager Robert Waugh during the financial crisis, losing 29.66 per cent – only slightly less than the FTSE All Share – in 2008 alone.
However, James Clunie took over in August 2009 and steadied the ship very effectively, delivering a positive return in excess of cash and inflation in each calendar year between 2009 and 2012. This has translated in to strong risk-adjusted returns over a three-year period, as the graph below shows.
Performance of fund vs indices over 3yrs
Source: FE Analytics
This has seen the fund’s FE Crown rating rise from one to four in the latest rebalancing.
Clunie left SWIP for Jupiter in April this year and has been replaced by Tony Foster and Mark Phillips. It will be interesting to see how the fund copes without Clunie, who has turned around performance so successfully.
SWIP UK Flexible Strategy requires a minimum investment of £1,000 and has an OCF of 1.65 per cent. Foster and Phillips currently have close to 50 per cent in cash and cash equivalents, and 7 per cent of short future exposure. The remaining portion is invested in long equities.
