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The top-quartile funds from BMO’s most consistent sectors

13 April 2018

FE Trustnet highlights the funds with the most consistent top-quartile 12-month returns from BMO Global Asset Management’s research into the most consistent sectors.

By Rob Langston,

News editor, FE Trustnet

Funds from the Investment Association’s UK Smaller Companies, UK All Companies and Europe ex UK sectors have delivered some of the most consistent top-quartile returns over recent years, according to BMO Global Asset Management research.

The BMO MM Consistency Ratio – which measures the number of funds making top-quartile returns in each of the last three 12-month discrete periods – rose to 1.7 per cent at the end of 2018’s first quarter, up from 1.24 per cent during the previous quarter. However, this remains below the historic average range of 2-5 per cent.

 
Source: BMO Global Asset Management

IA UK Smaller Companies emerged as the most consistent sector for top-quartile returns with 6.4 per cent of funds making the grade. The next most consistent sectors were IA UK All Companies and IA Europe ex UK with respective ratios of 2.9 per cent and 2.3 per cent.

According to BMO, four of the 12 sectors it examines in the research have failed to register any consistently top-quartile funds over the three-year period.

Kelly Prior, investment manager in BMO Global Asset Management’s multi-manager team, said: “The first quarter of 2018 bought with it some much anticipated volatility which saw most IA sectors down on the previous quarter.

“The IA UK Smaller Companies sector was the stand out performer of the quarter, securing the highest proportion of funds delivering consistent returns.

“It also weathered the dip in markets in February driven by a bout of volatility better than most of the other IA sectors.”

Prior added: “Whilst we have seen an uptick in funds delivering top-quartile returns over three years, our survey shows still only a small proportion of funds are delivering over the long term, falling short of the historic average.”

However, the asset manager noted that no funds achieved the ‘perfect mix’ of top sector three-year returns with bottom of the sector three-year volatility.

“Worthy of mention are the MFM Bowland fund which achieved first percentile returns and 96th percentile risk and the Man GLG Continental European Growth fund achieving third percentile returns and 96th percentile risk,” the firm noted.

Below, FE Trustnet considers the funds delivering top quartile returns over the three previous 12-month periods from BMO’s most consistent sectors.


 

IA UK Smaller Companies

The three funds delivering top-quartile returns from this sector over the past three 12-month periods are Marlborough UK Micro Cap GrowthOld Mutual UK Smaller Companies Focus and TB Amati UK Smaller Companies.

Over the most recent three-year period, the Old Mutual UK Smaller Companies Focus emerges as the best performer with a total return of 101.7 per cent, compared with a 47.38 per cent gain for the average fund, according to data from FE Analytics.

Performance of funds vs sector over 3yrs

 
Source: FE Analytics

The £361.4m, five FE Crown-rated Old Mutual fund has been managed by Nick Williamson since January 2016. Williamson previously acted as deputy manager for its onshore and offshore UK smaller companies funds.

Old Mutual UK Smaller Companies Focus invests in companies with a market capitalisation no greater than the largest company in the Numis Smaller Companies index at the time of investment.

The four FE Crown-rated TB Amati UK Smaller Companies fund has delivered the next best total return over three years, rising by 85.43 per cent.

The £120m fund is overseen by FE Alpha Manager Paul Jourdan along with Douglas LawsonDavid Stevenson and Anna Wilson.

The fund is included on the FE Invest Approved List, where analysts highlighted that its small size allows it to buy into some of the smallest and fastest growing stocks that larger peers aren’t able to invest in due to liquidity constraints.

Finally, the Marlborough UK Micro Cap Growth fund – managed by FE Alpha Manager Giles Hargreave and Guy Feld – has returned 78.18 per cent over the past three years.

The £1.1bn fund invests in companies with a market capitalisation of £250m or less at the time of purchase, although a considerable proportion will be invested in companies below the £150m level.

FE Invest analysts note that the investment team tends to build up holdings slowly, rarely taking a position of more than 2 per cent, and has a strict sell-process for companies they have lost faith in.



IA UK All Companies

A number of IA UK All Companies funds boast consecutive top-quartile performance over the past three 12-month periods, all with five FE Crown ratings: Liontrust Special Situations, MFM Bowland, MI Chelverton UK Equity GrowthOld Mutual UK Dynamic Equity and Unicorn UK Growth.

The best performer over three years is the MI Chelverton UK Equity Growth fund with a total return of 89.72 per cent, compared with a gain of 17.11 per cent for the average IA UK All Companies fund.

Performance of funds vs sector over 3yrs

 

Source: FE Analytics

The £203.1m, five FE Crown-rated MI Chelverton UK Equity Growth is managed by James Baker and Edward Booth who look for companies that can grow faster than the market and are highly cash generative to fund their own growth.

Companies the managers target are those with a sustainable competitive advantage such as a unique product or dominant position in a particular market.

The fund has consistently featured in the top decile of funds from the sector during the past three calendar years and has comfortably outperformed the FTSE All Share index’s annual total returns.

Four of the consistent funds also have FE Alpha Managers managing them, including Unicorn UK Growth (Fraser Mackersie), Old Mutual UK Dynamic Equity (Luke Kerr), Old Mutual UK Mid Cap (Richard Watts), and Liontrust Special Situations (Anthony Cross and Julian Fosh).

Of these four, the best performer is Unicorn UK Growth with a return of 65.75 per cent over the past three years.

Under Mackersie, the £51.7m fund invests in a concentrated portfolio of up to 50 stocks, with a focus on smaller companies. Around 60 per cent of the portfolio is in companies with a market capitalisation of under £1bn and the largest holdings are financial technology firm First Derivatives, identity management specialist GB Group and laser-guided equipment manufacturer Somero Enterprises.


IA Europe ex UK

Lastly, in the IA Europe ex UK sector the Baillie Gifford European and Marlborough European Multi-Cap funds emerge with the most consistent top quartile-performance over the past three 12-month periods.

The best performing fund over the past three years of the two is the five FE Crown-rated Marlborough European Multi-Cap fund, which has generated a total return of 76.77 per cent compared with a 25.58 per cent gain for the IA Europe ex UK sector.

The £394.4m fund is run by FE Alpha Manager David Walton who was joined by Will Searle in February 2017. It targets capital growth through a portfolio of European equities from across the market capitalisation spectrum.

Performance of funds vs sector over 3yrs

 

Source: FE Analytics

Less than a quarter of the fund’s portfolio is invested in companies with a market cap of more than €1bn, with a significant allocation (16.3 per cent) to micro-cap stocks below €250m.

Last month the managers said that while markets have seen increased volatility since the start of the year, the European economy “appears to be resilient”.

“Corporate revenues are largely growing albeit with margins lagging somewhat due to short term cost pressures,” noted Walton and Searle. “We continue to search for good companies that are well managed, particularly in the small cap sector of the market.”

The £418.1m, five FE Crown-rated Baillie Gifford European fund, managed by Stephen PriceMoritz Sitte and Tom Walsh, has delivered a total return of 42.7 per cent over the past three years.

The managers invest in high-quality, well-managed businesses that should be able to grow significantly, with a long-term investment horizon.

Companies the managers invest in will typically have a strong competitive position in their respective industries and are managed by owner-oriented people.

As such, the fund has a low annual portfolio turnover rate and its high-conviction, team-based approach results in a portfolio of between 40-80 stocks.

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