On the quant side, particularly strong fund managers are given the FE Alpha Manager tag for consistent outperformance in both rising and falling markets, while funds are awarded between one and five FE Crowns on a similar basis.
The AFI panel is made up of more than 20 industry experts, including Whitechurch’s Ben Willis and Rowan Dartington’s Tim Cockerill. The team chooses the funds it rates the highest for cautious, balanced and aggressive portfolios.
Here, we highlight the elite group of funds that score full marks across all of these measures and are included in the FE Select 100 as a result.
Invesco Perpetual UK Strategic Income
FE Alpha Manager Mark Barnett runs a number of highly rated funds at Invesco, but only his five crown-rated Invesco Perpetual UK Strategic fund ticks every box from an FE ratings point of view.
The fund has consistently outperformed its sector and benchmark, with significantly lower volatility, which the AFI believes makes it an ideal core holding for cautious, balanced and aggressive investors.
Performance of fund, sector and index over 7yrs
Source: FE Analytics
Barnett has recently become cautious of the optimism surrounding the UK economic recovery, which should mean his fund performs much better in a market correction compared with his more bullish peers.
Strong stockpicking in the mid cap market has enabled him to outperform in rising markets as well, however.
Rob Gleeson and his team point to the flexibility of the £439m fund as a standout feature compared with the rest of Invesco’s UK equity range.
“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 represent a compelling opportunity,” they said.
Group ratings were introduced more recently, awarding elite fund groups either “outstanding” or “highly-commended” status. Invesco Perpetual was the only group awarded “outstanding” status for UK equities in the latest rebalancing.
Barnett recently outlined his outlook for UK equities in an FE Trustnet article, including his views on mounting concerns over FTSE 250 valuations.
M&G Optimal Income
The £20bn M&G Optimal Income portfolio has been by far the most popular in the IMA Strategic Bond sector in recent years, and with good reason.
FE Alpha Manager Richard Woolnough has led the fund to significant outperformance versus its peers over the short-, medium- and long-term, thanks to his ultra-flexible mandate.
Rising yields in certain areas have caused some bond funds to struggle over the past year or so, but Woolnough’s ability to tap into short-term value opportunities has seen Optimal Income make more than 5 per cent since the onset of the "taper tantrum" in May last year.
Performance of fund and sector since 20 May 2013
Source: FE Analytics
The fund is also ahead of its peers over one, three and five years, with similar levels of volatility.
“Woolnough (pictured) is much less constrained in this portfolio than in the other ones he manages. Here he can express and implement his views more accurately, and as a result, M&G Optimal Income has beaten both its sector and his other two funds,” said the FE Research team. “Woolnough and M&G’s expertise in the fixed income area means the fund is expected to continue performing well, and the manager’s freedom allows him to react quickly if his views are wrong.”
The team says the fund’s burgeoning size is a reason to be slightly wary, however, as it could eventually affect the manager’s flexibility. Its relatively low yield of 2.54 per cent may also put off some investors.
M&G was rated “outstanding” for both UK fixed interest and international fixed interest in the latest rebalancing of FE's group awards.
Artemis High Income
The five crown-rated Artemis High Income fund is a favourite with advisers, thanks to its very attractive yield of 5.2 per cent.
Contrary to many competitors in the Sterling Strategic Bond sector, the team does not take macroeconomic views into account, nor does it try to anticipate the movement of interest rates. Instead, it focuses only on generating a regular and attractive yield.
FE Alpha Manager Adrian Frost and Adrian Gosden do this by investing predominantly in bonds, though they tend to have between 15 and 20 per cent in equities to help prop up the fund’s yield and capital growth potential.
The mix between equities and bonds has seen the fund shoot to the very top of its IMA Strategic Bond sector over three years and it is a top-three performer over five and 10 years as well.
However, the equity content means the fund tends to be more volatile than its peers. FE data shows that it lost only marginally less than the FTSE All Share in 2008 [27.07 per cent], and also posted a slight loss in 2011.
For this reason, FE Research believes the fund should be viewed as a multi-asset portfolio, comparable to one in the IMA Mixed Investment 0-35% or IMA UK Equity Income & Bond sectors.
JOHCM UK Opportunities
There are almost 300 funds in the highly competitive UK All Companies sector, but only one is a part of all three AFI portfolios and has five FE crowns and an FE Alpha Manager at the helm.
John Wood is a no-nonsense value investor, targeting quality companies at attractive prices. He tends to favour companies that derive their earnings from overseas, as this helps to diversify his returns away from the performance of the UK economy.
His £1.4bn JOHCM UK Opps fund is a concentrated portfolio of only 30 or 40 stocks. If Wood cannot find enough names that meet his criteria, he is more than happy to sit on the sidelines – his cash weighting is currently at 18.33 per cent, for example.
His style suits sideways and falling markets and he tends to lag behind his peers when the UK economy is accelerating. However, his risk/return profile has been very strong since the fund's launch in late 2005; as well as being one of the least volatile funds in the sector, it is one of the strongest performers, with returns of 116.7 per cent.
Performance of fund, sector and index since Nov 2005
Source: FE Analytics
FE Research says the manager’s priority of not losing money makes it a good core option for investors with varying risk levels.
“Wood says he doesn’t care about falling behind an index over a number of quarters, because what matters most to him is that his investors make money over the long-term,” it said.
Jupiter Strategic Bond
IMA Strategic Bond is clearly a very strong sector, with Jupiter making up the trio of flawless funds.
Like Woolnough, FE Alpha Manager Ariel Bezalel is rated very highly for his flexibility and willingness to tap into esoteric areas in fixed interest. Oil rigs and Cypriot government bonds are among the manager’s most successful plays in recent years, helping his fund to outperform its sector over one, three and five years.
“Bezalel has taken full advantage of his unconstrained mandate. By varying the portfolio’s allocation to government bonds or high- or low-rated corporate bonds according to his assessment of the economy, he has generated outstanding performance since the fund’s inception,” said FE Research.
“He has a great deal of experience investing in bond markets and his absolute return mindset gives him an edge over many of his competitors in his sector.”
Performance of funds and sector over 5yrs
Source: FE Analytics
The £1.2bn Jupiter Strategic Bond fund has a better record over five years than its M&G rival, though this has come at the expense of greater volatility.
The remaining fund that ticks all of the boxes is Nick Train’s CF Lindsell Train UK Equity fund, which sits in the IMA UK All Companies sector. The Unicorn UK Income fund was also on the list, until the tragic news of former FE Alpha Manager John McClure’s death earlier this month.
If you want to create a list of your own top-rated funds, go to the IMA UT & OIECs Ratings page on FE Trustnet.
