Long-term outperformers Schroder US Mid Cap, JOHCM Continental European and Stonehage Fleming European All Cap Equity are the three regional funds run by FE Alpha Managers struggling in 2017, according to the latest study from FE Trustnet.
Outperforming over the long term is a difficult thing to do and even some of the best managers can have down periods relative to their peers.
Having looked at the long-term underperformers in the multi-asset and global sectors that have outperformed so far in 2017, below we look at the top managers running funds that have outperformed over the last decade but have struggled year-to-date.
Schroder US Mid Cap
We start in North America – a notoriously difficult market for active managers to outperform in over the long term.
Despite this, FE Alpha Manager Jenny Jones has proven that she can buck the trend, with the £2.1bn Schroder US Mid Cap fund sitting in the top quartile of the IA North America sector over the last decade.
The fund has returned 253.85 per cent to investors over the last 10 years, 78.93 percentage points ahead of the sector and 21.52 percentage points above the Russell 2500 index.
But it has underperformed the sector this year, which has returned 8.94 per cent, though its 5.47 per cent return is still above the benchmark’s 5.09 per cent, as the below chart shows.
Performance of fund vs sector and benchmark over YTD
Source: FE Analytics
The portfolio invests in companies that are similar in size to those in the bottom 40 per cent by market capitalisation of the North American equity market.
Jones uses three key themes to identify companies: those that demonstrate strong growth trends and improving levels of cash; that generate dependable earnings and revenues; and are undergoing positive change that is not being recognised by the market.
The four FE Crown-rated fund is on the FE Invest Approved list, with the analysts noting: “Jones has built a robust process throughout her extensive US equity investing career, where every team member is given responsibility for the portfolio’s performance.
“Although the portfolio is not officially constrained by a benchmark, it is unlikely that the fund will have extreme over- or underweights relative to the market benchmark.
“This can be seen as both a negative and a positive: not taking big bets may hamper returns should the team’s in-depth research be correct but it also means the fund is less likely to lose more than the index in poor periods.
“This means the fund could work as a core allocation to US equities and the US economy despite its mid-cap focus.”
Schroder US Mid Cap has a clean ongoing charges figure (OCF) of 0.91 per cent.
JOHCM Continental European
Turning to Europe, the four FE Crown-rated JOHCM Continental European fund run by FE Alpha Manager Paul Wild is another that has underperformed this year.
Over the last decade the fund has returned 118.68 per cent, placing it in the top quartile of the IA Europe ex UK sector and almost double the MSCI Europe ex UK benchmark’s 66 per cent.
However, despite sentiment improving towards Europe from foreign investors on the back of an improving growth story, the fund has underperformed this year as its value style has lagged some of its growth-focused peers.
Indeed, it has returned 12.87 per cent year-to-date, 3.17 and 2.55 percentage points behind the sector average and benchmark respectively.
Performance of fund vs sector and benchmark over YTD
Source: FE Analytics
Wild uses a pragmatic approach combining top-down economic and sector views with bottom-up stock picking aimed predominantly large-cap stocks.
The underperformance so far in 2017 has stemmed from the first half of the year, with a reflationary environment and uncertainty over the French presidential election creating a ‘perfect storm’ for value-biased investors.
Wild noted at the start of the year: “It was a pretty disappointing start to the year. It was predominantly stock picking that drove [the under] performance.
“Stock picking was unusually poor in February and March, which effectively explains 80 per cent of the drawdown but it generally tends to be pretty good.”
Currently, the fund is overweight financials, materials and energy, with underweights in consumer staples, healthcare and industrials – explaining the difficulty it would have had in a risk-off, inflationary environment.
It also holds 2.2 per cent in cash. JOHCM Continental European has an OCF of 0.82 per cent.
Stonehage Fleming European All Cap Equity
Staying in the IA European ex UK sector, the £148m Stonehage Fleming European All Cap Equity fund run by FE Alpha Manager Robrecht Wouters is also underperforming in 2017.
The five FE Crown-rated aims to achieve a balance return of income and capital growth and over the last 10 years has returned 214.1 per cent – the second highest figure in the sector and more than three times the return of the MSCI Europe ex UK sector.
Indeed, over the last 10 calendar years the fund has never made a bottom quartile return and has shown to be adept in different market conditions, producing top quartile performances in six individual years including 2007, 2008 and 2009 as well as topping the sector in 2010.
Perhaps even more impressively, it has managed these returns while also experiencing some of the lowest volatility in the sector, as well as one of the lowest maximum drawdowns – the most an investors could have lost if buying and selling at the worst times.
However, it is on course for its first bottom quartile return this year despite making 11.52 per cent, with the sector and benchmark beating the portfolio by 4.52 and 3.9 percentage points respectively.
Performance of fund vs sector and benchmark over YTD
Source: FE Analytics
The fund, which is managed by JO Hambro Capital Management, is for clients of family office Stonehage Fleming and is not available on the major platforms.
In an upcoming article next week we will look at the long-term outperforming UK funds run by FE Alpha Managers struggling in 2017.