Asset allocation calls mattered less than fund selection last year as markets continued their post-financial crisis run with sectors showing wide differences between the best and worst performers.
BMO Global Asset Management investment manager Scott Spencer said picking the right fund could make the difference between double-digit returns and losses last year. 
Spencer (pictured) explained: “We really believe that getting asset allocation calls right is important but that doesn’t mean squat if you don’t get fund selection right.”
He noted that the average IA Asia ex Japan fund returned 24.47 per cent but the difference between the best and worst performer was more than 30 per cent.
“Clearly you would be better off having the average Asian fund than the average UK fund last year,” he said. “We were overweight Asia so that did well, but for us it is important getting that fund selection right.
“If you had bought the worst performing Asian fund last year it would only have returned 7 per cent. You would have got the asset allocation right but you would have underperformed.”
Performance of funds in 2017
Source: FE Analytics
The best performer in the sector was the Barclays GlobalAccess Pacific Rim (ex-Japan) fund which was up by 47.55 per cent, while the worst performer was JOHCM Asia ex Japan Small and Mid Cap – managed by Cho Yu Kooi and FE Apha Manager Samir Mehta – up by just 8.41 per cent (on a total return basis).
Looking at the UK, Spencer – a member of BMO’s multi-manager team – noted that while the average IA UK All Companies fund delivered a 13.81 per cent return last year, there was a more than 40 per cent difference between the best and worst performer.
The best performing UK All Companies fund was the £3.1m Elite Webb Capital Smaller Companies Income & Growth fund with a 41.66 per cent return, while the worst performer – the VT Cape Wrath Focus fund – recorded a 1.77 per cent loss.
Commenting on the outflows from UK equity funds last year, Spencer noted that the second-best performer from across the IA universe was a UK Smaller Companies fund: Old Mutual UK Smaller Companies Focus.
Indeed, despite ongoing concerns over Brexit negotiations and the impact on the domestic economy, the IA UK Smaller Companies sector was the second-best performer of the year, with the average fund returning 27.18 per cent.
“No matter what your call on the UK, if you had got that [fund selection] right you would have made very good returns for your clients,” he said.
In the absolute return funds sector, Spencer highlighted that even for more outcome-focused funds there was a huge gap between the top performing strategies and worst.
Performance of funds in 2017
Source: FE Analytics
Of course, it should be noted that the sector is home to a range of strategies focused on different asset classes and with different objectives.
He explained: “This is a sector where most funds should deliver the lowest return, but there is a 60 per cent difference between the best performing fund in that sector to the worst performing fund in the sector.
“That’s a huge difference for any client that’s gone in and said ‘I just want absolute returns’. They could be up or they could be down.”
The best performing absolute return fund of 2017 was the £502.8m Polar Capital UK Absolute Equity fund, which returned 47.51 per cent while the sector’s worst performer was the £23.4m Thesis TM Sanditon UK Select fund, which recorded a 12.63 per cent loss.
Spencer said a significant number of funds number of funds from the IA Targeted Absolute Return sector lost money, “including a lot of the big money takers”.
Indeed, giant funds such as Aviva Investors Multi Strategy Target Return, Aviva Investors Multi Strategy Target Income, Standard Life Investments Absolute Return Global Bond Strategies and Jupiter Absolute Return all posted losses last year.
Tthe IA Targeted Absolute Return sector was not the only instance where dispersion between funds was seen, said Spencer, highlighting the IA Property peer group as another with wide range in performance.
Performance of funds in 2017
Source: FE Analytics
However, it should again be noted that the sector is home to range of strategies investing in both real assets and property-related equities and across different geographies.
“Even property, which is regarded as a pretty safe asset class, you can see a huge difference in terms of the best performing and worst performing property fund,” he said.
The best performing fund from the IA Property sector was the €284.2m Janus Henderson Horizon Pan European Property Equities fund with a 24.52 per cent return, while the worst performer was £200.4m Aviva Investors European Property with a 3.48 per cent loss.