Index-linked bonds, gold and agriculture are the portfolio themes bolstering the biggest upward movements in FE Trustnet’s latest crown rating rebalance.
As explained in an article earlier this morning, FE Trustnet’s crown ratings system is rebalanced twice each year and is based on a fund’s alpha, volatility and consistency of strong returns over three-year periods to the end of the year.
During each rebalance, there are always a couple of funds that significantly jump up in the rankings based on the above metrics. This time round, a total of three funds have managed to bolster their crown ratings from one to five since the last rebalance in July 2016.
One of these is the Sarasin Food & Agriculture Opportunities fund, which is managed by FE Alpha Manager Henry Boucher and deputy-managed by Ed Bailey.
The £105m fund invests in food and agriculture companies from across the world - continental Europe and the US are its highest regional weightings at 28 per cent each, although it also has significant weightings in emerging markets, the UK and the Pacific basin.
In terms of stocks, the fund has its largest weightings in processors and producers, counting the likes of seafood companies Marine Harvest and Leroy Seafood Group, as well as Australian wine producer Treasury Wine Estates as some of its largest portfolio weightings.
The manager looks at areas of the food spectrum that are most likely to be bolstered by macro trends. From this, he aims to find companies with strong pricing power, market positioning and technological leadership.
Over the last three years to the end of 2016, the fund has returned 41.76 per cent, outperforming its average peer by 20.36 percentage points. However, it is perhaps unfair to compare its performance to its IA Specialist sector average given its wide remit.
Performance of Sarasin Food & Agriculture Opportunities vs sector and benchmark over 3yrs to 2017
Source: FE Analytics
According to Boucher, the fund is likely to continue benefitting from a rising population and a change in dietary habits across emerging markets as a result of rising income.
Another fund that has jumped from one to five crowns is VT Ursus Arctos, a global equity fund that resides in the IA Unclassified sector. However, the fund is unavailable on most investment platforms and little information on the investment vehicle is widely available.
The final fund to have been re-rated to five crowns from one is the Henderson Index-Linked Bond fund, which has been managed by Mitul Patel since 2010. Over the last three years to the end of 2016, the £266m fund has returned 49.06 per cent compared to its sector average and benchmark’s respective returns of 46.8 and 52.76 per cent.
In terms of its risk metrics, the fund is in the top quartile for its maximum gain – which represents the longest running consecutive gain without making a loss - relative to its average peer over the same time frame.
Inflation-linked bonds have done particularly well over the last year or so; during the first half of 2016, there was a flight to safety as people snapped up fixed income holdings for steady streams of income.
However, a violent rotation into higher-risk stocks led to a sudden rise in bond yields, as expectations grew for fiscal loosening, rising interest rates and a higher growth macroeconomic environment.
While this has fared badly for most fixed income funds over recent months, inflation-linked bonds remain appealing as they are of course less susceptible to this potential headwind.
The Newton Index Linked Gilt fund is another example of this, as it has jumped from two to five crowns in the latest re-rating.
Headed up by Howard Cunningham, the £132m fund has returned 50.62 per cent over the last three years to the end of 2016.
Performance of fund vs sector and benchmark over 3yrs to 2017
Source: FE Analytics
The fund has a different portfolio allocation compared to the aforementioned Henderson fund as it is also able to invest in other areas of fixed income such as index-linked corporates and overseas inflation-linked government bonds. While the bulk of the fund is invested in AA-rated bonds (the current UK sovereign rating), it also holds small weightings in AAA, A and BBB-rated bonds.
Again, because the fund is able to invest a small portion of holdings that aren’t UK gilts, it has a top-quartile alpha generation relative to its average peer.
Another area of the market that has done particularly well recently is gold, although its rally has tapered off somewhat over recent months due to expectations of a strengthening dollar.
A fund that has benefitted from this movement is WAY Charteris Gold & Precious Metals, which has also seen its rating jump from two to five crowns in the rebalance.
Launched by manager Ian Williams in 2010, the £13.8m fund has returned 45.15 per cent over the last three years to the end of 2016, while the S&P GSCI Gold Spot index is up 26.46 per cent over the same time frame.
Performance of fund vs sector and benchmark over 3yrs to 2017
Source: FE Analytics
However, it is not a fund for the faint-hearted as it has a maximum drawdown – which measures the most potential money lost if bought and sold at the worst times – of 54.47 per cent.
The fund invests in gold or precious metal stocks across the globe apart from South Africa – it is also allowed to hold up to 20 per cent in cash and a further 10 per cent in ETFs at any one time.
Currently, the fund holds 37 per cent in gold and 63 per cent in silver, a majority of which are blue-chip mining companies that are more than $500m in size.
Funds that were re-rated from three to five crowns include BlackRock Gold & General, Fidelity UK Select and Jupiter UK Special Situations.