Multi-Manager

Fund Watch - Q2 2018

It’s now over a decade since the beginning of the global financial crisis
July 2018

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 which forms part of our investment process.

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

All data is from Lipper for Investment Association (IA) sectors and is calculated in total return terms in sterling for periods ending 30 June 2018.

 

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 1,132 funds with a 3-year track record.

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.

Source: Lipper, 31.12.2017 to30.06.2018, percentage growth, total return. Past performance should not be seen as an indication of future performance. 

  • The BMO MM Consistency Ratio for top quartile returns over three years (to the end of Q2 2018) fell to 1.6% (1.7% last time) with 18 of the 1,132 funds achieving this feat. This ratio was below the usual historic range of c.2-5%.
  • The IA £ Corporate Bond sector was the most consistent for top quartile returns with 3.7% of funds making the cut. It was followed by the IA UK All Companies and IA UK Smaller Companies sectors, which had 2.9% and 2.1% of funds making the grade respectively. 4 of the 12 sectors failed to have any consistently top quartile funds over the period.
  • Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw 140 of the 1,132 funds delivering above median returns consistently. This means this less demanding ratio rose to 12.4% from 11.2% in Q2.
  • All 12 main IA sectors had funds meeting the less demanding above median consistency hurdle. The most consistent sector on this measure was the IA £ Corporate Bond sector with 19.5% of funds performing above median for 3 consecutive years. The IA UK Smaller Companies and IA Global Equity sectors were the next best with 19.2% and 14.7% respectively achieving the target. The IA UK Income sector was the least consistent, followed by the IA Japan sector with 3.8% and 8.3% of funds achieving consistency respectively.

 

BMO MM comment

There was little change in the consistency figures for this quarter, with the feat remaining challenging. Looking beneath the headline figures is interesting, with the three most consistently top quartile £ Corporate Bond funds being long duration focused, and a significant skew to “growth” mandates in the equity entries. The key point here is how repeatable is this trend? If we look in the broader “above average” measure there is a proliferation of passive funds. Should we see a change in the expectations of future interest rates and therefore a shift in the yield curve it would take a very different mandate to outperform in both areas of investment.

Tops and bottoms

Identifying the best and worst performers of all funds in the quarter across all 36 IA sectors.

The Baillie Gifford American fund was the best returning fund in the IA peer group in the second quarter, outperforming the gains of its base market. Run by Tom Slater and team, the fund has a significant exposure to growth stocks with technology being the highest exposure at 27%, with Amazon representing 9% of this.

The City Financial Absolute Equity Fund was the worst performer of the IA peer group in the second quarter of 2018, losing over a fifth of its value in the period. A long short fund, with a skew to smaller companies, the losses in the short book have been a major factor in the returns.

Sector skews

Identifying the best and worst performers in the quarter across all 36 IA sectors.

The second quarter of 2018 brought with it a return to more positive market moves that saw most IA sectors gain ground.

The combination of a strong dollar and political change weighed heavily on emerging markets, while the general appetite for tech and an uptick in economic numbers buoyed North American linked sectors.

The IA North American Smaller Companies sector was the best performing sector gaining 16%, with the IA Technology & Telecoms sector next best rising 14.4%. On the flipside the IA Global Emerging Markets Bond sector was the laggard returning -3.4% with the IA Global Emerging Markets sector the next worst falling 2.6%.

The IA UK All Companies sector was the strongest performer of the UK equity sectors rising 9.1% with the IA UK Smaller Companies sector close behind rising 8.7%. The IA UK Equity Income sector at the back of the pack rising 8.3%.

The IA UK Gilt sector led in the UK bond space rising 0.3%, with the IA £ Corporate Bond sector next best falling 0.2%. The IA UK Index Linked Gilt sector was the worst of the UK bond sectors falling 0.5%. The IA £ High Yield and IA £ Strategic Bond sectors were close behind, both falling 0.4%. The IA Global Bond sector outperformed all UK Bonds sectors gaining 0.9% in comparison.

The IA Targeted Absolute Return sector scraped a positive return of +0.2% in the quarter. The 12-month return for the sector remains paltry at +0.4%.

Looking at the Mixed Asset IA sectors, the exposure to equity dictated the ranking of the sectors with the IA Mixed Investment 40-85% Shares sector leading the pack rising 4.9%. The IA Mixed Investment 20-60% Shares sector was the next best gaining 2.9% with the IA Mixed Investment 0-35% Shares the laggard rising 1.8%.

Predictably, the IA Global Equity sector outperformed the IA Global Equity Income sector in the quarter rising 7.9% versus 5.9% respectively.

Currencies

It was an interesting quarter in currency markets where fear and the actions of central bankers resulted in significant shifts. Sterling suffered generally due to Brexit fears, while the dollar benefited from both a rise in interest rates from the Federal Reserve but also through a flight to safety as tensions mounted over global trade wars.

 

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 Q2 2018, yet again no fund achieved the perfect mix of top of the sector 3-year returns with bottom of the sector 3-year volatility. Worthy of mention are the Man GLG Continental European Growth which achieved 3rd percentile returns and 98th percentile risk and the TB Evenload Income Fund achieving 5th percentile returns and 98th percentile risk.

 

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, contact us.

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