A frequent contributor to the comments section on FE Trustnet asked us to analyse how the best performing funds of 2012 fared in 2013. Since we’re forever asking our readers to provide feedback on our stories, we thought it was only right to answer this request.
Starting with the 10 best performing funds overall last year, all but two have managed to beat their sector averages this time around. Six of the 10 – including the Standard Life UK Equity Unconstrained and Fidelity UK Smaller Companies portfolios – are once again top quartile performers in their respective sectors over the 12 month period.
Only the First State Asian Property Securities and JPM Turkey Equity funds have underperformed their peer groups in 2013. This is slightly misleading however, given that they sit in the IMA Property and IMA Specialist sectors, which contain a whole host of funds with different risk levels and objectives.
If one looks more closely, the JPM Turkey Equity fund has only marginally underperformed its MSCI Turkey 10/40 benchmark in 2013, even though it’s lost 27.18 per cent over the period. The First State property fund has lost 2.26 per cent, which compares favourably to most Asian real estate indices, such as the FTSE Asia Pacific ex Japan Real Estate & Services index, which is down more than 11 per cent.
Source: FE Analytics
Among the standout performers over the two discrete periods are the Fidelity UK Smaller Companies and Cazenove UK Smaller Companies funds, run by FE Alpha Managers Alex Wright and Paul Marriage.
Both have achieved top decile performance in their UK Smaller Companies sector in 2013, as was also the case in 2012. Indeed, with returns of close to 50 per cent, both were only a whisker away from making the top-10 list for 2013.
The CF Odey Absolute Return fund is also well worth a mention. The £889m portfolio topped its IMA Targeted Absolute Return sector in 2012, and has done it again this year with ease, with returns of 45.22 per cent.
Performance of fund and sector over 2yrs
Source: FE Analytics
Given that it’s a long/short fund with a similar annualised volatility record to the FTSE All Share, there are question marks over whether it should be compared to more mainstream absolute return portfolios, however.
FE Alpha Manager Andy Brough’s Schroder UK Mid 250 fund and Ed Legget’s Standard Life UK Equity Unconstrained fund have also achieved top decile performance in their respective sectors.
Looking more generally, there is a positive correlation when looking at the best performing funds of 2012 and 2013 across a number of different IMA sectors.
Take the IMA UK Equity Income sector, for example. Of the 47 funds that beat their sector average in 2012, 33 – or 70 per cent – repeated the trick in 2013. Perhaps more impressively, 15 of the 25 UK Equity Income funds that achieved top quartile performance in 2012 also did so in 2013.
The standout UK Equity Income manager over the two discrete periods is without doubt John McClure, whose Unicorn UK Income portfolio came first in the sector in 2012 and fourth in 2013. Indeed, over the past five calendar years, McClure has only been out of the top-five once – in 2011.
There’s an even higher correlation in the UK All Companies sector, with 82 per cent of funds that beat their sector average in 2012 also beating it in 2013. Impressively, not a single fund that was among the top 48 performers in 2012 underperformed their sector in 2013.
As well as the Standard Life and Schroder funds mentioned earlier, standout performers include Schroder Recovery and Premier ConBrio Sanford Deland UK Buffettology.
So why have such a large proportion of fund managers managed to outperform for two successive years?
It should be noted that 2012 and 2013 have been very similar markets in many respects, with small and mid-cap companies generally outperforming large caps. Even the rally in domestic cyclical companies started at the end of the second quartile of 2012, including a strong run for banks such as Lloyds.
The consistency of funds has been heavily influenced by how certain areas of the market have performed. Unicorn UK Income has consistently added value and outperformed both the FTSE All Share and FTSE Small Cap indices, but there’s little doubt that McClure’s natural bias towards small caps has been the biggest driver of his performance over the past two years.
Similarly, Legget’s natural bias towards beaten up cyclical companies benefited his Standard Life UK Equity Unconstrained fund in both 2012 and 2013. If 2014 features a significant market correction on the scale of 2008, the chances of his fund making it three years on the trot is less likely, judging by his performance in previous down-markets.
Fund manager skill is of course important when it comes to outperforming in any one year, but the natural biases that they possess – which the majority have – means that in the short-term they are highly dependent on market behaviour. Those managers who manage to outperform in different types of market are few and far between - John McClure being one example.This, of course, is one reason why investing for the longer-term is so important.
There is a positive correlation across other IMA equity sectors, though it isn’t as strong as seen in those focused on UK equities. In the IMA Global sector, the percentage of funds that beat the sector average in both 2012 and 2013 was 57 per cent, while in the IMA Global Emerging Markets sector the figure is 68 per cent.
The correlation picks up again when looking at multi-asset funds however, which is perhaps unsurprising given that many managers naturally have a higher equity content than others. In IMA Mixed Investment 20-60%, for example, 77 per cent of funds outperformed their sector average in 2012 and 2013.
We’ll do the same study this time next year, to see how the best funds of 2013 get on in 2014. In the meantime, early in 2014 we will start a series looking at the most consistent funds in the IMA universe in recent years, looking for those that have outperformed for five years or more.
This should allow us to find those managers who can outperform in all market conditions.
If you have an idea for a study you'd like the FE Trustnet team to conduct, leave a comment below or email us at editorial@financialexpress.com.