Fund sectors focused on investing in European equities, tech stocks and all kinds of bonds are among those that have the highest number of their members holding the top rating of five FE Crowns.
The FE Crown Ratings have just gone through their first rebalance of 2018 and in this article we take a closer look at the peer groups where a high number of funds have been awarded the best rating.
FE’s rating system gives the top 10 per cent of funds in the industry five FE Crowns, the next 15 per cent four crowns and each of the remaining three quartiles three, two and one crowns respectively. Funds are judged on stockpicking, consistency of outperformance against a credible benchmark and achievement of results compared with risk.
We find out which sectors have taken more than their fair share of five crown-rated funds.
IA Sterling Strategic Bond
First up is the IA Sterling Strategic Bond sector, where 17.81 per cent of its members hold five FE Crowns. The sector has proven popular with investors seeking flexible approaches to fixed income, especially as we move into an environment where monetary policy is getting tighter rather than looser.
Of the 13 funds that have five-crown ratings, only four – GAM Star Credit Opportunities GBP, Natixis Loomis Sayles Strategic Income, Royal London Ethical Bond and Sanlam Strategic Bond – held this rating before the rebalance.
Performance of fund vs sector and index over 3yrs to the end of 2017
Source: FE Analytics
GAM Star Credit Opportunities GBP, which is headed up by FE Alpha Manager Anthony Smouha and Gregoire Mivelaz, has been the peer group’s highest returner over the three years to the end of 2017 after making a 32.46 per cent total return. It is built around a specialist portfolio of junior and subordinated debt from investment grade companies, as the managers believe this is where the best risk/reward balance can be found.
While the fund sits in the peer group’s third quartile for annualised volatility, FE Analytics shows it is the sector’s best performer when it comes to maximum gain, alpha generation and risk-adjusted returns as indicated by the Sharpe ratio.
The latest FE Crown rebalance has also seen a number of promotions take place in the IA Sterling Strategic Bond sector, with TwentyFour Dynamic Bond moving from one crown to five and the previously two crown-rated Artemis Strategic Bond, AXA Framlington Managed Income, Janus Henderson Fixed Interest Monthly Income and Janus Henderson Preference & Bond funds moving to the highest rating.
IA Asia Pacific Excluding Japan
Next up we have the IA Asia Pacific Excluding Japan sector, with 17.86 per cent of its members being five crown-rated. The sector has just gone through a strong year, with its average member making a 25.34 per cent return, compared with 13.24 per cent from the MSCI AC World index.
Some 15 of the sector’s members hold five FE Crowns and 13 of these had this rating prior to the rebalance – they are highlighted in the table below.
Source: FE
Of these, Jane Andrews’ Smith & Williamson Oriental Growth fund sits at the top of the performance tables over three years after making an 88.10 per cent returns, the sector’s highest. The fund is overweight Australia and India, while being underweight South Korea and Hong Kong.
The only fund to appear on the FE Invest Approved List is Matthew Dobbs’ Schroder Asian Alpha Plus fund. FE’s analysts like the fund because of the fact Dobbs scrutinises companies from a corporate governance angle, in order to establish that the interests of the management team are the same as those of its shareholders.
GS Asia Equity Portfolio is the only five crown-rated fund to benefit from an upgrade in the rebalance, having previously held four crowns. It is the sector’s seventh best performer over three years after making 78 per cent.
The remaining fund – Fidelity Asia Pacific Opportunities, run by FE Alpha Manager Anthony Srom – was given five crowns in its first ever rating, having only just reached its three-year track record.
IA Japan
The IA Japan sector is often overlooked by investors, but the country has seen a revival in sentiment in recent years thanks to the ambitious stimulus package initiated by prime minister Shinzo Abe. Some 17.86 per cent of the peer group’s members have five FE Crowns after the rebalance.
AXA Framlington Japan, Legg Mason IF Japan Equity, Lindsell Train Japanese Equity and T. Rowe Price Japanese Equity have all retained their previous five crown ratings; Baillie Gifford Japanese, Fidelity Japan Smaller Companies, GAM Star Japan Equity, LF Morant Wright Japan, LF Morant Wright Nippon Yield and M&G Japan have been upgraded from four.
Performance of fund vs sector and index over 3yrs to the end of 2017
Source: FE Analytics
Hideo Shiozumi’s Legg Mason IF Japan Equity fund has made the sector’s highest three-year returns by a wide margin, as shown in the chart above. It’s also the peer group’s best performer over five and 10 years; over the past decade, it has made 460.60 per cent compared with the sector’s 118.50 per cent.
Shiozumi has more than 30 years of experience in running Japanese equities and tends to focus on smaller companies that are linked with the ‘new’ Japanese consumer. This strategy has led to very strong returns but the fund has experienced a maximum drawdown of close to 80 per cent in the past 20 years.
Baillie Gifford Japanese is the only fund on the FE Invest Approved List. “The fund is a long-term holding and not for the nervous. However, the team has a good track record of making excellent stock picks and finding companies which can grow substantially over the longer term,” the FE Invest team said.
IA Technology & Telecommunications
The sector with the second highest concentration of five-crown funds is IA Technology & Telecommunications as 20 per cent of its members hold this rating. Technology has enjoyed a strong run in recent years, with the so-called FAANG stocks of Facebook, Apple, Amazon, Netflix, and (Alphabet’s) Google performing particularly well.
Due to the fact that the sector is a relatively small one, this means only two of its members hold five crowns: Fidelity Global Technology and Polar Capital Global Technology.
Performance of funds vs sector and index over 3yrs to the end of 2017
Source: FE Analytics
Fidelity Global Technology, which has just been upgraded from a four-crown rating, has been managed by Hyunho Sohn since April 2013 and generated a 103.45 per cent total return over the three years to the end of 2017. This makes it the highest returner in the sector, where the average fund has made 66.76 per cent.
Ben Rogoff and Nick Evans’ Polar Capital Global Technology fund isn’t far behind, however, after making 103.41 per cent over the three-year period. Both funds are among the sector’s strongest over five and 10 years as well.
Prior to the rebalance, Pictet Digital was the IA Technology & Telecommunications sector’s only five crown-rated fund but this product now holds four crowns.
IA Europe Excluding UK
The sector with the most of its members holding five FE Crowns is IA Europe Excluding UK; some 28.09 per cent of its funds were given the top rating in the rebalance. European equities returned to favour in 2017, following several years of bearish sentiment on the back of lacklustre growth and the eurozone debt crisis.
In total, 25 funds hold the rating and they are shown in the table below.
Source: FE
The sector’s highest returns over the past three years have come from the Marlborough European Multi-Cap fund, which is managed by David Walton and has made 109.24 per cent. Its average peer has made just 49.20 per cent over this period.
Just over 30 per cent of the portfolio is held in European small-caps, which have enjoyed a strong run in recent years, while less than 7.5 per cent is allocated to large and mega caps. Sweden, France and Italy are its biggest country exposures, plus the manager is holding 17.7 per cent in cash.
Again, only one fund from the peer group is on the FE Invest Approved List: FE Alpha Manager Alexander Darwall’s Jupiter European fund. This was also the most popular fund with the professional investors using FE Analytics in 2017.
The FE Invest team said: “Darwall has built up an impressive track record in European equity investing, and this strategy and style of buying high-quality global companies has now weathered a number of market environments.”