Over a seven-year period that encapsulates the 2008 and 2011 sells-offs as well as a number of strong rising years, Schroders has at least one fund that excels in terms of risk-adjusted returns across 17 IMA sectors.
The vast majority of its funds are top-quartile for Sharpe ratio over the period in the IMA Asia Pacific ex Japan, Europe ex UK, Global, Japan, North America, North American Smaller Companies, UK All Companies, UK Equity Income and UK Small Companies sectors.
Source: FE Analytics
The firm also has top-quartile performers across the IMA Mixed Investment sectors. Many of its funds that are just short of a seven-year track record also look strong from a risk-adjusted return point of view, such as FE Alpha Manager Paul Marriage’s Schroder Absolute UK Dynamic fund.
The Sharpe ratio measures a fund's return relative to a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund's volatility.
When comparing two funds versus the same benchmark, the one with a higher Sharpe ratio provides a better return for the same risk or, equivalently, the same return for lower risk.
Among the standout performers in the Schroders range are Julie Dean’s Schroder UK Opportunities fund and Richard Sennitt’s Schroder Asian Income fund. Both have massively outperformed their peers over seven years, despite taking on less volatility.
Performance of funds and sectors over 7yrs
Source: FE Analytics
Managing risk is particularly important in small and mid cap funds as they tend to be hit harder during periods of market weakness. A strong Sharpe ratio among small and mid cap funds tends to demonstrate an ability to protect against times of severe market stress, as well as competitive returns in rising markets.
Of Schroders’ three UK smaller companies funds, two are top quartile for risk-adjusted returns over seven years: Schroder Institutional UK Smaller Companies and Schroder UK Dynamic Smaller Companies. The other Schroders fund in the sector, Schroder UK Smaller Companies, is second quartile.
All three funds are managed by two FE Alpha Managers. Rosemary Banyard and Andrew Brough co-manage the £497m Schroder UK Smaller Companies and £253m Schroder Institutional UK Smaller Companies funds, while Paul Marriage and John Warren co-manage the £1bn Schroder UK Dynamic Smaller Companies fund.
According to FE Analytics, the three funds have all outperformed the average return in the sector over seven years. Schroder UK Dynamic Smaller Companies, formerly a Cazenove fund, has performed particularly well, doubling the returns of the sector average.
Performance of funds vs sector over 7yrs
Source: FE Analytics
The fund has also delivered top-quartile returns over three, five and 10 years as well as in four of the past six full calendar years.
However, that didn’t stop Rathbones' David Coombs selling out of the fund after he became concerned about capacity constraints caused by the fund’s size. It has since closed to new money.
Schroders has incorporated a number of funds from Cazenove Capital in the past year after buying the group in July 2013. Several of the funds under discussion traded under the Cazenove name for most of the seven-year period.
FE analyst Amandine Thierree (pictured) says the acquisition was a major coup for Schroders, pointing to Marriage, Dean and Matt Hudson as among the strongest managers across the three UK equity sectors. She is also a big fan of Marcus Brookes and Robin McDonald, who run the Schroder MM Diversity fund – a top-quartile performer for Sharpe ratio in its IMA Mixed Investment 20%-60% Shares sector over seven years.
“The ex-Cazenove fund managers I have met seem pleased. The ex-Cazenove teams were ring-fenced at the beginning and kept their dealing team before everything got integrated, so the process has been very smooth,” Thierree said.
Another sector in which Schroders has demonstrated its consistent high performance managing risk is fixed interest. It has not been as good from a risk-adjusted return point of view, however.
Many investors will be unsurprised to learn that M&G has the best record in this area, boasting six bond funds with top-quartile Sharpe ratio scores over a seven-year period. These include the likes of M&G Index Linked Bond, M&G Global Macro Bond and of course Richard Woolnough’s £21.3bn M&G Optimal Income fund. FE Trustnet will look at the giant fund in more detail in an upcoming article.
Fidelity is a close second with five, although its smaller range of funds means the proportion of those with a top-quartile Sharpe ratio is actually higher. FE Alpha Manager Ian Spreadbury’s Fidelity Moneybuilder Income and Fidelity Strategic Bond are among the standout performers.
Looking at boutique firms with a smaller number of funds in their range, there is only one winner.
JO Hambro has six funds with a seven-year track record and all are top-quartile performers for Sharpe ratio over the period.
The range includes sector-leaders such as Clive Beagles and James Lowen’s JOCHM UK Equity Income fund and FE Alpha Manager Alex Saviddes’ JOHCM UK Dynamic fund.
Some of the funds, such as those mentioned above, have been prepared to take on more volatility than their peers, but they have more than compensated for this with stellar performance. Beagles and Saviddes have both benefited from significant mid cap overweights in recent years.
Others, such as FE Alpha Manager John Wood’s JOHCM UK Opportunities portfolio, have been among the least volatile in their sector, but have still managed to deliver competitive total returns.
Performance of funds and index since June 2008
Source: FE Analytics
Wood actively uses cash when he doesn’t believe there are compelling value opportunities, which has helped him protect against the downside in years such as 2008 and 2011.
