Five funds from the Investment Association universe launched in 2012 have delivered top quartile performance during their first five years, according to data from FE Analytics.
Last month, FE Trustnet looked at the case for backing the new upstart managers and funds with a number of market commentators weighing in.
Overall, they said investors that wait for funds to gain a long track record may be missing out on potentially strong returns.
As such, below we look at the five equity funds in the Investment Association universe of the 174 funds that launched in 2012 who sit in the top quartile of their respective sectors in their first five years.
In an upcoming article we will also focus in on the bond and multi-asset funds that have made top quartile returns over their first five years.
We start with the fund that has been the best in its sector during the first five years of its life – Hermes Asia ex Japan Equity fund run by FE Alpha Manager Jonathan Pines and deputy manager Sandy Pei.
The five FE Crown-rated fund was launched on 1 November 2012 and has returned 171.32 per cent during its first five years, 88.95 and 96.5 percentage points ahead of the MSCI AC Asia ex Japan index and IA Asia Pacific ex Japan sector respectively.
Performance of fund vs sectors and benchmark over first 5yrs since launch
Source: FE Analytics
The £25m fund is made up of 64 holdings, with overweight positions in information technology, consumer discretionary, industrials and materials and a large underweight to financials.
The fund is 46.55 per cent weighted to China, with 29.28 per cent in South Korea and 14.77 per cent in Taiwan. It has an ongoing charges figure (OCF) of 0.85 per cent.
Analysts at Square Mile Research noted: “Pines could be viewed as an opportunistic investor, looking to invest where there is a valuation discrepancy.
“However, and importantly for a strategy such as this, he is also deeply aware of the potential loss for any investment and hence looks for a margin of safety before any purchase is made.
“This fund is not focused on one particular type of company and the manager invests right across the quality spectrum; though lower quality companies need to be at exceptional valuations to warrant further investigation.”
The only other fund on the list run by an FE Alpha Manager is the £276.6m JOHCM Global Opportunities, run by Ben Leyland and deputy manager Robert Lancastle.
The five crown-rated fund is a high conviction, relatively concentrated portfolio of 30 stocks that has a long-term approach centred around compounding returns.
This approach has worked well over the first five years, with the fund returning 121.82 per cent since its launch on 29 June 2012 – a top quartile return in the IA Global sector and 22.28 per cent ahead of the MSCI All Countries World benchmark.
Performance of fund vs sectors and benchmark over first 5yrs since launch
Source: FE Analytics
The fund is highly weighted to consumer discretionary, industrials and utilities and has small holdings in the financials and healthcare sectors. It has an OCF of 0.85 per cent.
Currently the manager is nervous on valuation grounds, holding 18.7 per cent of the fund in cash to wait for a more ideal time to invest in the market.
Earlier this year he told FE Trustnet: “Your big problem is if you think about categorising the market into three. There’s value, quality and growth stuff and they’ve all rallied very hard for the last five or six years so now they are all expensive.
“[Investors] are very worried but they are still investing and what worries me most is that the conditions are there, particularly in financial markets, for an almighty crash because everybody is facing the same way.”
Standard Life Investments Global Smaller Companies
The only other five crown-rated fund on the list is the £670m Standard Life Investments Global Smaller Companies fund run by Alan Rowsell.
Launched in January 2012, the fund returned 114.14 per cent over its first five years, beating the IA Global sector average by 38.19 percentage points.
The concentrated portfolio of 54 holdings invests in global smaller companies with a 40.7 per cent weighting to the US, 12.7 per cent to Japan and 12.4 per cent to the UK.
The fund is run using the same investment approach as the other Standard Life Investments smaller companies funds, which use the proprietary system ‘Matrix’ as part of his investment process.
The quant-based screening tool highlights high-quality businesses with a competitive advantage which should lead to consistent and sustainable earnings growth and is used to whittle down from 6,500 potential investments in the MSCI World Small Cap index to a more manageable number.
Once this is at a more manageable size, in-depth analysis is begun to attempt to identify the future large caps. As such, the manager tends to have a long-term approach with little regard for valuation or special situations. The fund has an OCF of 1.06 per cent.
The next highest rated fund is the £898m, four-crown Fidelity Global Dividend fund run by Daniel Roberts.
The fund, which sits in the IA Global Equity Income sector, has returned 105.11 per cent during the first five years since its launch in January 2012 – the second-best returning strategy in the sector and comfortably ahead of the MSCI AC World, as the below chart shows.
Performance of fund vs sectors and benchmark over first 5yrs since launch
Source: FE Analytics
The fund is on the FE Approved list, with analysts noting that while its approach to equity income investment is not revolutionary and does not differ too much from other equity income managers, Roberts has been more successful in implementing it as he may be more patient than his peers having run this strategy for more than a decade.
“Roberts also does not hesitate to take strong sector bets, which typically pay off over time. As a result the manager can’t be described as a pure stock picker, although his stock picking skills have added to performance over time. We believe this fund is a no-brainer for cautious investors searching for a global source of dividends.”
The fund has a yield of 2.76 per cent and an OCF of 0.97 per cent.
Schroder European Alpha Income
Last up is the £1.3bn Schroder European Alpha Income fund run by James Sym, which was launched on 1 November 2012.
In its first five years, the fund returned 146.2 per cent, beating the IA Europe ex UK sector and FTSE World Europe ex UK benchmark by 47.48 and 48.03 percentage points respectively.
While the fund has a yield objective to deliver an income higher than the market, this is a secondary target behind its overall ambition to generate a higher total return than the market.
As such, over the manager's tenure so far, the fund has not always met this yield target despite its outperformance.
Anaylsts at Square Mile Research noted: “The name of the fund contains the word ‘income’ but we believe that this is truly a total return offering and that investors should be aware that the manager does not explicitly run the fund for income generation.”
Sym uses a pragmatic investment approach, building a portfolio of typically 40 predominantly large- and mid-cap stocks full of companies chosen for a range of factors including sensitivity to different phases of the economic and business cycle, as well as other fundamental metrics, such as barriers to entry, valuation and dividend potential.
“The portfolio can therefore include a mixture of high or low yielding stocks that can be defensive growing businesses or more cyclically sensitive in nature, depending on the opportunity set the manager is finding attractive at any one time and on his assessment of where we are in the cycle,” the Square Mile analysts said.
The fund has a yield of 2.6 per cent and an OCF of 0.92 per cent.