Fund Watch

Q2 2019

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. All data is from Lipper for Investment Association (IA) sectors and is calculated in total return terms in sterling for periods ending 30 June 2019.

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.

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 1,088 funds with a 3-year track record.

  • The BMO MM Consistency Ratio for top quartile returns over three years (to the end of Q2 2019) rose to 2.3% (2.2% last time) with 25 of the 1,088 funds achieving this feat. This ratio was within the usual historic range of between 2-5%.
  • The IA £ Corporate Bond sector was yet again the most consistent for top quartile returns with 7.7% of funds making the cut. It was followed by the IA Emerging Markets and IA North American sectors, which had 3.5% and 3.4% of funds making the grade respectively. The IA Global Bond sector was the only sector not 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 152 of the 1,088 funds delivering above median returns consistently. This less demanding ratio rose to 14%, from 11.1% last quarter.
  • All 12 main IA sectors met the less demanding above-median consistency hurdle. The most consistent sector on this measure was the IA North American sector with 23.9% of funds performing above median for 3 consecutive years. The IA £ Corporate Bond and IA Japan sectors were the next best with 21.8% and 17.8% respectively achieving the target, with the IA Europe ex UK sector the least consistent with 8.9% of funds achieving the above-median consistency hurdle.
 
BMO MM comment

We live in interesting times. Bond yields continue to fall as the outlook for interest rates suggests an increasingly accommodative stance from the world’s central banks as the fortunes of global economies look to be lessening. At the same time, equities continue to rise as the cost of corporate funding remains low.

  • Quality growth equity funds and long duration (more sensitive to movements in interest rates) fixed income offerings continue to dominate the consistency tables, as the comfort blanket of central bank policy that keeps investors at the party, remains in place. As I write, 35 global PMI (Purchasing Managers’ Index) surveys have been reported. These are the recognised bellwethers for the health of the economy. 27 have dropped suggesting slowing economies month-on-month, with 19 of those reflecting economies actually shrinking. Granted, stock markets are not economies, but the ability of companies to grow earnings is priced in to many equity markets, and this in particular needs to be thoroughly checked at this point in the cycle.

Related capability

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Tops and bottoms

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

  • The £960m LF Ruffer Gold fund run by Paul Kennedy was the strongest performer in the IA universe in the second quarter of 2019. A global strategy investing in gold and precious metal related companies, the fund capitalised on the positive run in commodities in recent weeks.
  • The £3.7bn LF Woodford Equity Income fund, run by Neil Woodford, was the worst performer of the IA peer group in the second quarter. The fund has come under heavy scrutiny in recent months due to the ‘gating’ of the fund, after it was judged to be unable to meet redemptions due to a large exposure to illiquid assets. Assets held have subsequently been marked down to reflect a more realistic clearing price for the book of stocks, but the fund remains suspended at the time of writing.
Sector skews

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

  • The second quarter of 2019 saw a continued positive run for all IA sectors.
  • The euphoria surrounding the support of central banks for economies in keeping down the cost of funding through low interest rates supported equities. Bond markets also saw prices rise and yields fall reflecting the other side of the story – that low rates mean slowing economies.
  • The IA Europe ex UK sector was the best performer gaining 8.7%, with the IA European Smaller Companies sector next best rising 8%. On the flipside the IA Short Term Money market sector was the laggard returning 0.1% with the IA UK Direct Property sector the next worst gaining 0.2%.
  • The IA UK Smaller Companies sector was the strongest performer of the UK equity sectors gaining 4.8% with the IA UK All Companies sector next best gaining 3.8%. The IA UK Equity Income sector was at the back of the pack rising 1.9%.
  • The IA £ Strategic Bond sector led in the UK bond space rising 2.4% in Q2, with the IA £ Corporate Bond next best gaining 2.3%. The IA £ High Yield sector also gained 2.3%. Having surged ahead in Q1, UK government sectors gave more modest, but still respectable, returns in the second quarter with the IA UK Index Linked Gilt sector rising 2% and IA UK Gilt sector rising 1.6%. The IA Global Bond sector outperformed all of the UK centric bond sectors gaining an impressive 4.1% in the quarter.
  • The IA Targeted Absolute Return sector gained 1.4% in the quarter. Over the 12-months to the end of Q2 the sector has gained 0.9%.
  • 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 4.3%. The IA Mixed Investment 20-60% Shares sector was the next best gaining 3% with the IA Mixed Investment 0-35% Shares the laggard rising 2.6%.
  • The IA Global Equity sector rose 6.6% against a rise of 6.1% for the IA Global Equity Income sector.
Currencies

It was a poor quarter for sterling as political headlines dominated sentiment around the currency with the pathway for Brexit being muddied with a change of Prime Minister now scheduled for July, with a hard Brexit now a possibility again. The yen surged, as it tends to do in more uncertain times, though the euro also staged something of a recovery against sterling.

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 2019, 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 again is the Lazard MENA Fund, which achieved 7th percentile returns and 99th 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. If you have any questions, contact us.

Related capability

Multi-Manager

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