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BMO Multi-Manager Fundwatch Q3 2021

We analyse thousands of funds each quarter – in Fund Watch we highlight the elusive few that manage to outperform on a consistent basis.
October 2021

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Risk Disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation. Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

Fund Watch uses our team’s process to highlight the past quarter’s developments in the fund world. It is fact-based and uses performance analysis techniques which form part of our investment process. All data is from Lipper for Investment Association (IA) sectors and is calculated in total return terms in sterling for periods ending 30 September 2021.

This quarter’s report includes the following analysis:

  • The BMO MM Consistency Ratio – highlighting the surprisingly limited number of funds beating their peers on a regular basis.
  • Tops and Bottoms – the ultimate winners and losers over the quarter.
  • Sector Skews – the best and worst of the 52 IA sector averages.
  • Risky Business – a look at the leading funds for combining first class longer-term returns with the lowest levels of volatility.

Point of note

The IA has again increased the number of sectors 46 to 52. The expansion this time has focused on more granularity on industry sectors with Financials, Healthcare, Commodities & Natural Resources and Infrastructure being split out, alongside India and Latin America.

The BMO MM Consistency Ratio

The BMO MM Consistency Ratio

Source: Lipper, 30-Jun-21 to 30-Sep-21, percentage growth, total return.

Here we conduct a review of the 12 major market sectors, filtering out only those funds that were consistently above average in each of the last three 12-month periods and those that were consistently top quartile. In the 12 main sectors researched, there are currently 1,068 funds with three-year track records.

  • The BMO MM Consistency Ratio for top-quartile returns over three years (to the end of Q3 2021) fell to 1.03% (1.9% last time), with just 11 of the 1,068 funds achieving this feat. This ratio was well below the usual historic range of c.2-4%.
  • The IA Europe ex UK sector was again the most consistent for top-quartile returns, with 3.5% of funds making the cut. It was followed by the IA Japan and IA UK Smaller companies sectors, which both had 2.2% of funds making the grade, though in reality this amounted to just one fund in each sector being consistently top quartile over the three 12-month periods. The IA Global Mixed Bond, IA Asia ex Japan, IA Emerging Markets, IA North American, IA UK Equity Income and IA £ Strategic Bond sectors failed to deliver any funds that achieved this level of consistency, with four of the IA sectors having just one fund that managed to do so.
  • Lowering the hurdle rate to simply ‘above median’ in each of the last three 12-month periods saw 109 of the 1,068 funds delivering above-median returns consistently. This means that this less demanding ratio fell to 10.2% from 12.5% in Q2.
  • All 12 main IA sectors contained funds that met the less demanding above-median consistency hurdle. The most consistent sector on this measure was the IA Asia ex Japan sector, with 15.6% of funds performing above the median for three consecutive years. The IA £ Corporate Bond and IA £ Strategic Bond sectors were the next best, with 15.5% and 11.8%, respectively, achieving the target. The IA Emerging Markets sector was the least consistent, with 7.3% of funds surpassing the above-median consistency hurdle.

Risk Disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation. Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.
Use our handy glossary to look up any technical terms you are unfamiliar with.

BMO MM comment

  • We are now roughly 18 months into a period in which markets have been dominated by Covid and all the uncertainty, hope and fear that has come with it. This makes up half of the three-year period analysed in these figures, so it is hardly surprising that we continue to see consistency waning.
  • If we look at the minutiae within the underlying data, one thing that stands out is the lack of negative returns for pretty much all funds in the IA universe over the entire three-year period to the end of Q3 2021. Certainly, 2020 could be characterised as a year in which growth investing dominated, but 2021 has brought a greater focus on the price you are paying. Few managers will flip their portfolios to succeed in such different market conditions, so when you look for consistency relative to the peer group over shorter time frames, you are likely to continue to be left wanting.

Tops and bottoms

Identifying the best and worst performers of all funds in the quarter across all 46 IA sectors.

  • The £55m Liontrust India Fund run by Ewan Thompson led the IA universe in the quarter’s return table. The fund transferred from Neptune to Liontrust as part of the 2019 merger of the two groups, and went into the third quarter with its largest active positions in the materials, IT and financial sectors, reflecting the team’s highest-conviction ideas, which continue to benefit from the strong economic backdrop as the Covid pandemic continues to abate in the region. The fund continues to run a significant underweight position across the consumer sectors, where growth and valuations are less compelling.
  • The Junior Gold Fund run by Angelos Damaskos suffered in tandem with the fate of commodities, which have faltered in recent months. Cost inflation is weighing on operators in the space, but the team are confident that the onset of corporate mergers and acquisitions could see the realisation of value for the smaller mining companies in which they invest.
Junior Gold Ret v Liontrust India C Acc GBP

Source: Lipper, 30-Jun-21 to 30-Sep-21, percentage growth, total return.

Sector skews

Identifying the best and worst performers in the quarter across all 52 IA sectors.

  • Of the 52 IA sectors, 42 made positive ground in the third quarter, with three of the newly created sectors making up the top five performers. This allows greater understanding of where positive gains were made in the quarter.
  • The newly created IA India/Indian Subcontinent sector topped a table of IA sector averages, gaining 14.8%. This sector comprised 16 funds. Last quarter’s table laggard, the IA Japan sector, was next best, gaining 7.1%. The straggler was the newly created IA Latin American sector, which fell 12%.
  • It was a reasonable quarter for UK equity sectors, with the IA UK Smaller Companies sector gaining 3.8% and the IA UK All Companies sector up 2.7%. The IA UK Equity Income sector was close behind, gaining 2.4%.
  • The newly dissected IA Bond sectors showed the dominance of USD issues in the performance tables with the IA USD Government Bond (+2.8%) pipped the IA USD Mixed Bond sector (+2.7%). to be the quarter’s best bond sector. The IA USD High Yield (+2.66%) and IA USD Corporate Bond sectors were the next best (+2.48%).
  • With a fall of 1.4%, the IA UK Gilt sector was the worst bond sector over the quarter. The IA Corporate Bond sector was the next worst at -0.5%.
  • Emerging-market bonds also faltered during the quarter as the rising dollar cast a shadow over the region’s debt. Both the IA Global Emerging Markets Bond Local Currency sector (-0.6%) and the IA Global Emerging Markets Bond Blended sector (-0.4%) lost ground.
  • The IA Targeted Absolute Return sector gained a modest 0.3% over the quarter.
  • If we look at the mixed-asset IA offerings, the IA Mixed 40-85% Shares sector was the strongest performer, rising 1.4%. The IA Mixed Investment 20-60% Shares returned 0.8%, ahead of the 0.1% gain from the IA Mixed Investment 0-35% Shares.
  • The IA Global Equity sector rose 2.3% against a return of 2% for the IA Global Equity Income sector.
IA India/Indian Subcontinent NR v IA Latin America NR

Source: Lipper, 30-Jun-21 to 30-Sep-21, Percentage growth, total return.

Currencies

The constantly moving feast that is central-bank policy and the market’s expectations thereof created a reasonable amount of currency volatility during the quarter. Inflation remained the hot topic on everyone’s lips, with late quarter talk of tapering and eventual rate rises from the US authorities buoying the outlook for the dollar.

Currencies relative to sterling

Source: Lipper, 30-Jun-21 to 30-Sep-21, Percentage growth, total return.

Quote icon
If we look at the underlying data, one thing that stands out is the lack of negative returns for pretty much all funds in the IA universe over the entire three-year period to the end of Q3 2021
Kelly Prior, Investment Manager

Risky business

Can you have your cake and eat it? Here we search for funds with good risk characteristics and establish which funds offer the holy grail of low risk and high returns. For these purposes, a longer time period is required, so we look back over the three years to the end of the quarter.

  • Measured to the end of Q3 2021, yet again no fund achieved the perfect mix of top-of-the-sector three-year returns with bottom-of-the-sector three-year volatilityy. This mix seems to be becoming ever more elusive.
  • The Royal London Sustainable Leaders Trust came close, achieving 99th-percentile risk, but ‘only’ 6th-percentile returns. There were no funds with top-decile returns and bottom-quartile risk over the three years to the end of the quarter. A simplistic observation could be that you have been able to make good returns in these years, but you may have had to weather more volatile performance to achieve it. The middle ground is becoming a crowded place – to achieve long-term excellence, patience is a necessity.

Looking Ahead – Inflated expectations?

  • Since the global financial crisis, active fund management has faced an uphill struggle as macro factors, mainly influenced by exceptionally low interest rates, have meant a lack of creative destruction. This is not ideal for those that get paid to sort the corporate wheat from the chaff. The result has been a boom in passive/non-fundamental investing. So, with the well-telegraphed reversal of these policies, we are seeing a jostling for position going on within different areas of investment. It’s going to be an interesting few quarters from here.
  • I think the IA has chosen an interesting time to start offering a more granular approach to peer-group analysis. We are seeing an ever-increasing swathe of offerings that are tempting us all to become experts in deciding which niche sector or country will be the best investment for our hard-earned savings. The issue with such focused approaches is the additional volatility that this positioning can bring. You will need to hold your nerve and ride out the peaks and troughs of these focused approaches. I remember when the Tech and Telecoms IA sector was launched, there were swathes of funds available to exploit this new investing utopia, though I can’t recall the year. There are a whopping eight funds in this peer group now.
Quote icon
Certainly 2020 could be characterised as a year in which growth investing dominated, but 2021 has brought a greater focus on the price you are paying.
Kelly Prior, Investment Manager

Summary

In summary, we believe the performance numbers are – as always – well worth crunching to find trends, provide ideas, layer knowledge on how each fund performs and to generally provoke thought.
Of course, the analysis must be taken in context, and the qualitative work must be done to allow for fully informed judgments. We hope you found this review interesting, and if you have any questions, please contact:

BMO Global Asset Management press office

Kelly Prior

Use our handy glossary to look up any technical terms you are unfamiliar with.

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