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 Q3 2019) fell to 1.7% (2.3% last time) with only 18 of the 1,088 funds achieving this feat. This ratio was below the usual historic range of c.2-5%.
• The IA Japan sector was the most consistent for top quartile performers with 4.7% of funds making the cut. It was followed by the IA North American and IA UK All Companies sectors, which had 3.4% and 2.6% of funds respectively. The IA Asia ex Japan and IA Global Bonds sectors failed to deliver any funds that achieved this level consistency.
• Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw 138 of the 1,088 funds delivering. This means this less demanding ratio fell to 12.7% from 14%.
• 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 peer group with 22.7% of funds performing above median for 3 consecutive years. The IA Europe ex UK and IA Global Equity sectors were the next best with 17.2% and 14.3% respectively whilst the IA Global Bond sector was the least consistent with 5.4% of funds clearing the hurdle.

BMO MM comment

• The traditional summer lull was anything but with yields in core developed market bonds falling to all-time lows, gold hitting all-time highs and sentiment all over the place.
• One of the trends we have noted in recent missives is the dominance of quality growth and passive funds within the consistency tables. This quarter it feels this trend has abated somewhat with the tide reversing at the margin as investors changed their preference towards value.
• The rise in the oil price proved temporary, with an apparent return to production at an astonishing speed following the drone attack in Saudi, defusing what could otherwise have been an inflation shock for the markets. Similarly, the impact of the jump in overnight Repo rates in the US has yet to be resolved, though seems contained at the moment. The point is, it wouldn’t take a lot to spook markets at the moment, though Q4 economic numbers have a tendancy to surprise on the upside but the latest Purchasing Managers’ Indices (PMIs) perhaps reduce the chances this time.
• Consistency of funds remains at a low level despite the ever-expanding number of passive vehicles within the IA peer groups. As we work through the sunset of this extended economic cycle, increased volatility seems inevitable. While this may not yield an increase in consistency in the short term, a return to fundamental investing should see a pick up at some point.