Multi-Manager

Fund Watch - Q1 2020

Fund Watch uses our team’s process to highlight the past quarter’s developments in the fund world.
April 2020

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 31 March 2020.

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 37 IA sector averages
  • Risky Business – a look at the leading funds for combining first class longer-term returns with the lowest levels of volatility

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.

Source: Lipper, 31-Dec-19 – 31-Mar-20, percentage growth, total return.

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 jargon you are unfamiliar with.
The BMO MM Consistency Ratio

Here we conduct a review of the 12 major market sectors, filtering out only those funds that are consistently above average in each of the last three 12-month periods, and those consistently top quartile. In the 12 main sectors researched, there are currently 1,077 funds with a three-year track record.

  • The BMO MM Consistency Ratio for top quartile returns over three years (to the end of Q1 2020) rose to 3.8% (2.2% last time) with 41 of the 1,077 funds achieving this feat. This ratio was within the usual historic range of approximately 2-4%.
  • The IA North American sector was the most consistent for top quartile returns, with an unusually high 14.1% of funds making the cut (this number was also high last quarter). It was followed by the IA UK Smaller Companies and IA Global Equity sectors, which had 6.3% and 3.9% of funds making the grade respectively. The IA UK Equity Income and IA £ Strategic Bond sectors failed to deliver any funds that achieved this level of consistency.
  • Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw 169 of the 1,077 funds delivering above median returns consistently. This means this less demanding ratio rose to 15.7% from 12.8%.
  • 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 North American sector, with an impressive 25.9% of funds performing above median for three consecutive years. The IA Emerging Markets and IA Japan sectors were the next best, with 20.4% and 19.5% respectively achieving the target. The IA UK Equity Income sector was the least consistent, with 9% of funds achieving the above median consistency hurdle.

 

BMO MM comment
  •  To say that Q1 2020 is one that will live on in the memory of many is a mild understatement, thought the consistency figures are a great reminder than a quarter does not make a year given they are based on rolling 12 month periods.
  • One trend that did emerge in the quarter was a reversion back to safety. Funds focused on quality growth companies that have apparent dependable earnings streams unsurprisingly outperformed given the fear that gripped the market.
  • Aside from the IA Gilt sector one clear absence from the tables is any iteration of passive investing. Given the volatility that we are likely to see from here I suspect this may be the case for quite some time. Set up active managers – now is your time to shine.

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Tops and bottoms

Identifying the best and worst performers of all funds in the quarter across all 37 IA sectors.

Source: Lipper, 31-Dec-19 – 31-Mar-20, percentage growth, total return.

  • The £23m FP Argonaut Absolute Return run by Barry Norris bucked the trend of the industry, returning 22.6% as the top performer in IA universe this quarter. Run with an eye on diversifying away from more mainstream investments, this long short fund does vary its net exposure but is generally positively exposed to the market (net long). Unsurprisingly, the largest contribution to performance in the quarter was the short book. In March alone the fund had short positions in over a dozen stocks that fell more than 50% – therefore they made money on these trades.
  • The compounding of a demand shock as the world shut down in COVID-19 lockdowns with a supply glut following the breakdown in relations of the world’s major oil producers caused an unsurprising collapse in the oil price during the quarter. It is therefore predictable to see an Oil fund as the worst performer over this period. The £4.4m Junior Oils Trust run by Angelos Damaskos focuses on smaller oil & gas exploration companies, which understandably have suffered the most in such an environment
Sector skews

Identifying the best and worst performers in the quarter across all 37 IA sectors.

Source: Lipper, 31-Dec-19 – 31-Mar-20, percentage growth, total return

  • The first quarter of 2020 saw significant falls for the vast majority of IA sectors, with essentially only UK Gilts and Cash gaining ground. By contrast, the three UK Equity IA sectors were the greatest fallers.
  • The IA UK Smaller Companies sector was the worst performer, falling a staggering 30%, with the IA UK Equity Income sector the next worst, falling 28.4%. The IA UK All Companies sector was only marginally better, falling 28%.
  • On the flipside, the IA UK Gilt sector was the leader of the IA table, gaining 7.3%. The IA UK Index Linked Gilt sector rose 5.5% in comparison as the next best in the table.
  • Of the other Sterling Bond sectors, the IA £ Corporate Bond sector led the pack, falling 4.3%, with the IA £ Strategic sector next worst at -6.6%. The IA £ High Yield sector lost 15.6% in comparison, while the IA Global Bond sector lost 15.4%.
  • While the playbook for assets in March in particular was reminiscent of 2008, the speed of the falls were significantly more vicious. The bond market in particular was completely dysfunctional for a number of days as the rush to the door from price-insensitive asset owners (yes, we mean you passive funds), combined with a lack of inventory holders (investment banks who used to act as middle man and smooth the ride have long gone post the global financial crisis), caused huge gaps down in pricing. This, of course, means there is an opportunity for those that can see the wood for the trees from here.
  • The IA Targeted Absolute Return sector lost 7.1% in the quarter. Over the 12 months to the end of Q1, the sector has lost 4.3%. • Looking at the Mixed Asset IA offerings, the IA Mixed 0-35% Shares sector was the least bad, falling 8.3%. The IA Mixed Investment 20-60% Shares sector returned -13.4%, ahead of the 15.8% fall from the IA Mixed Investment 40-85% Shares sector.
  • The IA Global Equity sector fell 15.4% against a return of -17.9% for the IA Global Equity Income sector. A significant factor for any income-focused mandate will be the impact of the drop in the oil price and oil-related stocks, which are among the largest dividend paying companies. From here the impact of the lockdown means this issue is now spreading to a broader universe of companies who look to secure their long-term survival by retaining cash rather than paying out to equity holders, at least for the short term. 
Currencies

Having rallied in the final quarter of 2019, Q1 saw sterling weaken significantly against the world’s major currencies. The US dollar and yen in particular benefited from a scramble to safety from investors, as well as technical buying as liquidity in assets dried up in mid-March. The latter weeks of the quarter saw some give back from the extremes, but we expect currency volatility to remain elevated from here.

Source: Lipper, 31-Dec-19 – 31-Mar-20, percentage growth, total return.

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 this purpose, a longer time period is required, so we look back over three years to the end of the quarter.

  • Measured to the end of Q1 2020, yet again no fund achieved the perfect mix of top of the sector three-year returns with bottom of the sector three-year volatility. This mix seems to be becoming ever more elusive. The VT Castlebay UK Equity fund achieved 100th percentile risk, but only 6th percentile return. 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 managers have been able to make good returns in these years, but may have had to weather more volatile performance to achieve this. The middle ground is becoming a crowded place – to achieve long-term excellence, patience is a necessity.
Looking ahead – whats next in 2020?
  • Brexit seems but a distant memory as a driver of returns for the remainder of the year, as does the US presidential election in November.
  • We live in unprecedented times and we can only hope that the COVID-19 virus that currently grips the world, and the resulting lockdown, will pass soon. We recognise we can add little value in predicting when this will happen. Our thoughts are with everyone and their families at this time.
  • That said, we can reflect on asset prices and the potential playbook for the next few quarters. The one definite is that extreme volatility is here for the foreseeable future. It is important to remember that the information that drives asset prices is virtually impossible to predict in the near term, but looking further out, a little more certainty can be found. We know weak companies will struggle to prevail, while others will benefit from being able to weather the storms and in some cases will make good returns in this environment. Active management will pick through the rubble of Q1 with a focus on the longer-term survivors.
  • I couldn’t help but re-present this final point from last quarter’s missive. And no – I am not a witch. “Could this finally be the quarter/year/decade where the realisation that investing clients’ assets without looking under the bonnet (who did lend their money to Pizza Express/Thomas Cook/WeWork/Debenhams/Patisserie Valerie to name but a few anyway?) and just investing on the basis of the representation of a name in an index comes home to roost.”
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, contact us.

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