Very few UK equity funds were able to successfully navigate the differing market conditions of 2018’s final quarter and the opening four months of 2019, FE Trustnet research shows, as the IA UK All Companies sector has the smallest proportion of members in the top quartile over both periods.
While the final three months of last year saw markets suffer two significant sell-offs on the back of trade tensions, higher interest rates and fears over global growth, 2019 started off on a much stronger footing as these concerns receded.
In this research, we compared all of the Investment Association sector’s quartile rankings from the final three months of 2018 with those from the first four months of 2019 to see which funds had stayed ahead of their peers in both.
Of the 2,981 eligible funds (in some sectors, such as IA Specialist and IA Targeted Absolute Return, it is not appropriate to use quartile rankings), 61 were in their respective sectors’ first quartile during both the sell-off and the following rally – or 2.05 per cent of funds.
Performance of fund vs sector and index in Q4 2018 and 2019 to end of Apr
Source: FE Analytics
In the IA UK All Companies sector, however, just 0.76 per cent of funds – or two – turned in top-quartile returns for both periods under consideration. This is the lowest proportion out of the 25 sectors we considered.
Both of the funds are run by FE Alpha Manager Nick Train: his flagship £6.2bn LF Lindsell Train UK Equity fund and Aviva Investors UK Equity MoM 1, which he manages on a third-party basis.
LF Lindsell Train UK Equity has been one of the standout performers from the IA UK All Companies sector in recent years thanks to a quality-growth approach that looks for durable, cash-generative business franchises. The five FE Crown-rated fund is currently in the peer group’s first decile over one, three, five and 10 years.
The FE Invest team, which has the fund on its Approved List, said: “Although this is an active fund, Train very rarely changes the portfolio. This is simply because he applies a very strict investment approach, so once a stock meets his criteria, should the investment case remain then he has no reason to sell it. Achieving this impressive track-record with the low portfolio turnover highlights his stockpicking skills.”
Within the IA UK All Companies sector, there were a much higher proportion of funds that made some of the worst returns in the final quarter of 2018 only to make some of the strongest returns in 2019.
There are 61 funds with top-quartile returns in 2019 up to the end of April and 27 of these – or 44.3 per cent – were in the bottom quartile in 2018’s final quarter. Notable examples include the £7.4bn Invesco High Income fund, the £2bn Jupiter UK Special Situations fund and the £1bn Schroder Recovery fund.
As the table below shows, it was the IA Japanese Smaller Companies sector that had the greatest proportion of its members retaining top-quartile numbers over both time frames. Some 28.6 per cent of its members did this.
Source: FE Analytics
That said, there are only seven members of this peer group, which is the smallest in the Investment Association universe. The ones that are top quartile in both periods are Janus Henderson Horizon Japanese Smaller Companies and Aberdeen Standard SICAV I Japanese Smaller Companies.
IA UK Gilts is in second place, as 17.9 per cent of its 28 members made the cut. The five doing this were Aberdeen Sterling Long Dated Government Bond, Vanguard UK Long Duration Gilt Index, iShares Over 15 Years Gilts Index (UK), Allianz Gilt Yield and Vanguard UK Government Bond Index.
As would be expected, when we get to sectors with more than 50 members, the share of funds outperforming in both periods falls.
IA Global Equity Income is the highest ranked of the larger peer groups, with 5.4 per cent of its 56 members – or three funds – achieving top quartile returns in both the sell-off and the following rally. They were Morgan Stanley Global Brands Equity Income, TB Evenlode Global Income and Legg Mason IF RARE Global Infrastructure Income.
Joining IA UK All Companies at the bottom of the table is IA Sterling Strategic Bond; only Janus Henderson Preference & Bond topped its peers in both periods. In IA Mixed Investment 40-85% Shares (the third worst sector), Thesis Climate Assets and Liontrust Sustainable Future Cautious Managed are the only members on our list.
With 61 funds achieving top-quartile returns in both periods, there are too many to include in a table. The below shows the top-20, ranked by their assets under management.
Source: FE Analytics
Fundsmith Equity is the largest that made the cut, with assets under management of £17bn. Headed up by FE Alpha Manager Terry Smith, this is another fund whose very strong track record has not been restricted to just the past seven months; it is currently the highest returning member of the IA Global sector since its launch in November 2010.
It’s not the only large fund from the IA Global sector find itself on the list, as Lindsell Train Global Equity, Pictet Water and Stonehage Fleming Global Best Ideas Equity also outperformed over both periods examined.