Investors are spoilt for choice when it comes to the number of ratings designed to help them with fund selection.
However, while these are valuable for picking individual funds, they are less useful when choosing holdings that complement each other as part of a balanced portfolio.
For example, someone hoping to live off the dividends from their portfolio may think they are effectively diversifying by holding more than one of the top-rated IA UK Equity Income funds, but this strategy is worthless if they became highly rated through holding the same top-performing stocks.
Over the coming weeks, FE Trustnet will highlight the funds in each sector that have five FE Crowns and a correlation of less than 0.5 (1 = a perfect correlation and 0 = no correlation) with their top-rated peers over the past five years.
Of the 16 funds in the IA UK All Companies sector with five FE Crowns, just five meet the above criteria: CFP Sanford DeLand UK Buffettology, Unicorn UK Growth, LF Lindsell Train UK Equity, TB Evenlode Income and Liontrust UK Growth.
Correlation of five crown-rated funds
|Name||CFP SDL UK Buffettology||LF Lindsell Train UK Equity||Liontrust UK Growth||TB Evenlode Income||Unicorn UK Growth|
|CFP SDL UK Buffettology||N/A||0.49||0.56||0.44||0.76|
|LF Lindsell Train UK Equity||0.49||N/A||0.80||0.89||0.42|
|Liontrust UK Growth||0.56||0.80||N/A||0.90||0.48|
|TB Evenlode Income||0.44||0.89||0.90||N/A||0.37|
|Unicorn UK Growth||0.76||0.42||0.48||0.37||N/A|
Source: FE Analytics
CFP Sanford DeLand UK Buffettology
CFP Sanford DeLand UK Buffettology is one of only two IA UK All Companies funds with a correlation of below 0.5 with three of its top-rated sector peers: Lindsell Train UK Equity, Liontrust UK Growth and TB Evenlode Income.
This fund uses a process which its FE Alpha Manager Keith Ashworth-Lord (pictured) calls “business perspective investing”, which follows the example set by Berkshire Hathaway chairman Warren Buffett and boils down to buying the best companies at reasonable valuations. Among the characteristics Ashworth-Lord looks for in a company are strong franchises with pricing power, highly profitable returns on capital and delivery of most of their earnings in cash.
CFP Sanford DeLand UK Buffettology has returned the most to investors of any fund on this list over the past five years – it has made 132.54 per cent compared with 57.53 per cent from the sector average and 51.05 per cent from the FTSE All Share.
The fund is £373.8m in size and has ongoing charges of 1.28 per cent.
Unicorn UK Growth is the only other fund on this list with a correlation of below 0.5 with three of its top-rated sector peers – again, these are LF Lindsell Train UK Equity, Liontrust UK Growth and TB Evenlode Income.
The fund is headed up by FE Alpha Manager Fraser Mackersie, who describes his process as “absolutely bottom-up”: it involves searching for companies that are cash generative with a strong balance sheet and that are exposed to strong end markets.
Mackersie said that although he begins with a screen, the way to add value further down the market cap scale is by going out and meeting with companies’ management teams.
Unicorn also runs a VCT, the Outstanding British Companies fund – which focuses on AIM stocks – and a dedicated smaller companies fund, meaning that by the time a stock has reached a stage of maturity where it is suitable for inclusion in Unicorn UK Growth, the manager has often been aware of its progress for a number of years.
Unicorn UK Growth has made 117.77 per cent over the past five years, the second highest figure of any fund on this list.
The £65.4m fund has ongoing charges of 0.89 per cent.
Performance of funds vs sector and index over 5yrs
|CFP SDL UK Buffettology||132.54|
|Unicorn UK Growth||117.77|
|LF Lindsell Train UK Equity||95.75|
|TB Evenlode Income||84.99|
|Liontrust UK Growth||74.16|
|IA UK All Companies||57.53|
|FTSE All Share||51.05|
Source: FE Analytics
LF Lindsell Train UK Equity, headed up by FE Alpha Manager Nick Train (pictured), has a correlation of less than 0.5 with CFP Sanford DeLand UK Buffettology and Unicorn UK Growth.
Like Ashworth-Lord, Train’s investment approach is similar to the one followed by Buffett.
“Train says he has observed, during his 20 years’ experience in UK equity investing, that the market undervalues durable, cash-generative business franchises,” noted analysts at FE Invest.
“Train believes he can identify companies that will survive over the long term by maintaining their competitive advantages. Therefore, he always invests in companies for extended periods and his portfolio has remained largely unchanged since its inception.
“The manager will only sell a stock if the company is not able to maintain its dominant position – for example, due to a new technological development.
“Train believes there are few companies in the UK that match his criteria, hence the portfolio is highly concentrated around 25 firms.”
LF Lindsell Train UK Equity has made 95.75 per cent over the past five years. It is £5.4bn in size and has ongoing charges of 0.7 per cent.
Earlier this year, it was named as the most consistent IA UK All Companies fund of the past decade, beating its sector average in every one of the past 10 calendar years.
TB Evenlode Income has a correlation of less than 0.5 with CFP Sanford DeLand UK Buffettology and Unicorn UK Growth.
The fund’s FE Alpha Manager Hugh Yarrow aims to identify profitable businesses with large market shares and/or a competitive edge, which allows them to consistently generate high levels of recurring cash flows that can be given back as dividends to shareholders.
FE Invest said the process begins with an initial quantitative screen for highly profitable, asset-light and low-debt companies, before the manager tries to understand their qualitative drivers.
“A price target is set after proprietary 10-year financial modelling on each chosen stock,” it added.
“With a concentrated, low-turnover portfolio, construction and position sizing is based on conviction on valuations, balance sheet strength and forecasted cash flow.”
TB Evenlode Income has made 84.99 per cent over the past five years. It has beaten the FTSE All Share in every full calendar year since launch in 2009.
The £2.2bn fund has ongoing charges of 0.9 per cent. It soft-closed to new money in May this year, although it is still available without the high initial charge on some retail platforms.
Finally, Liontrust UK Growth has a correlation of less than 0.5 with CFP Sanford DeLand UK Buffettology and Unicorn UK Growth.
Like all funds headed up by the FE Alpha Manager duo of Anthony Cross and Julian Fosh, Liontrust UK Growth is run with the managers’ “Economic Advantage” approach. This means it invests only in companies that possess at least one of three intangible barriers to competition: intellectual property, a strong distribution network, or high contracted recurring income.
The fund has made 74.16 per cent over the past five years.
It is £314.1m in size and has ongoing charges of 0.87 per cent.