M&G Optimal Income and Standard Life Global Absolute Return Strategies (GARS) were the stand out favourites for investors in the 2013 ISA season, but the former is the only fund to beat its sector average since and has returned more than three times the latter.
Both saw in excess of £1.5bn of inflows between January 1 and April 5 2013, meaning investors who piled into the funds in the run up to the ISA deadline have held them, mostly, for at least a year.
January to March is the busiest period for the asset management industry, with investors keen to beat the tax deadline through a stocks and shares ISA.
According to FE Analytics, the £ 18.82bn M&G Optimal Income fund has returned 6.15 per cent since the new tax year began, whereas the £19.92bn Standard Life GARS returned 1.74 per cent.
Performance of funds since 5 April 2013
Source: FE Analytics
Fixed income has been a testing place to be in past 12 months; however M&G Optimal Income did manage to stay ahead of other funds in the IMA Sterling Strategic Bond sector which made an average return of 2.81per cent over the same period.
It is the best second quartile performer over this period but is a top quartile performer over three years.
Performance of fund vs sector since 5 April 2013
Source: FE Analytics
Standard Life GARS underperformed compared to its sector average of 4.8 per cent, since the new tax year began.
It was a third quartile performer over this year but remains a top quartile performer over five years, returning 51 per cent.
Performance of fund vs sector since 5 April 2013
Source: FE Analytics
Both funds struggled throughout the beginning of the new tax year, particularly during the market correction in June, where both funds declined in value despite being seen as defensive funds that aim to protect investor capital on the downside.
M&G Optimal Income remains the UK’s top fixed income fund. It has taken in roughly £4.7bn in new money this since the start of 2014, £2bn more than the next most popular fund – M&G Global Dividend, which was third most popular fund in last year’s ISA Season.
FE Alpha Manager Richard Woolnough’s portfolio is now at £18.8bn in size. It has 50 per cent in investment grade bonds, 29.6 per cent in high yield and 23.4 per cent in government debt.
Woolnough also has 9 per cent of the fund in equities, reflecting the manager’s belief that yields are more attractive in some areas of the stock markets. The fund has ongoing charges of 0.91 per cent.
Schroders’ Marcus Brookes says the fund is still his top pick for investors deciding where to place this year’s stocks and shares ISA.
“It currently has a strong bias towards investment grade corporate bonds, and they account for around half its portfolio, but it also holds government bonds, high yield credit and even some equities.”
The £8.9bn M&G Global Dividend, the £9.05bn Newton Real Return and the £4.11bn Newton Asian Income also saw large inflows over the 2013 ISA Season, making them the third, fourth and fifth most popular funds.
However, all failed to beat their respective sectors’ average returns. M&G Global Dividend returned 5.8 per cent, compared to a sector average of 8.7 per cent.
Performance of fund vs sector and benchmark since 5 April 2013
Source: FE Analytics
Newton Real Return returned 1.33 per cent, compared to a sector average of 4.8 per cent. Newton Asian Income lost 9.88 per cent, compared to an average fall in the IMA Asia Pacific ex Japan sector of 5.27 per cent.
Performance of fund vs sector and benchmark since 5 April 2013
Source: FE Analytics
All five funds are amongst the largest UK funds and their popularity highlights the tendency of UK retail investors to follow the herd and go for the largest portfolios.
Some analysts warn that buying a larger fund could be bad for your long-term returns.
Charles Hepworth and James McDaid who head up GAM’s fund of funds division, told FE Trustnet recently they firmly believe that the bigger the fund gets, the more difficult it becomes to outperform, which is why they are looking for funds that aren’t past the stage where they can no longer generate alpha.
Fund size has been a more prominent issue over the past twelve months with several funds forced to soft-close.
FE Trustnet looked at top-performing smaller funds which invesotrs might like to consider instead of the well-marketed giants in a recent series of articles.
