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Fund Watch - Q3 2019

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

FundWatch 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 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 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.

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Tops and bottoms

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

  • A regular in the best/worst fund section, the £18m Junior Gold fund run by Angelos Damaskos was the strongest performer in the IA universe in the third quarter of 2019 following in the footsteps of the LF Ruffer Gold fund last quarter. A high beta play on the Gold and Silver markets, the fund capitalised on strong performance from both commodities, with the trend looking supportive from here.
  • The £83m LF Miton UK Smaller Companies fund, run by Gervais Williams and Martin Turner was the worst performer of the IA peer group in the third quarter. With 79% of the asset being invested in AIM companies it seems stock specific issues created unusually poor performance from this highly experienced team.
Sector skews

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

  • The third quarter of 2019 saw a continuation of the positive run for most IA sectors.
  • It was a particularly volatile period for markets, with yield curve inversion creating fear of recession at a time of increased trade war tension and rotations within markets as economic data deteriorated. The actions of central banks calmed nerves in September resulting in a reversal of fortunes for markets, and a reasonable quarter overall in most areas.
  • The IA UK Index Linked Gilt sector was the best performer gaining 8%, with the IA UK Gilt sector next best rising 6.3%.
  • On the flipside the IA European Smaller Companies sector was the laggard falling 2.3% with the IA UK Smaller Companies sector the next worst losing 1.3%.
  • The IA UK Equity Income and UK All Companies sectors both gained 1.1%, outperforming Small caps.
  • As mentioned above IA UK Index Linked and UK Gilt sector led in the UK bond space with the IA UK Strategic Bond sector next best gaining 2%. The IA £ High Yield sector was the worst performer gaining 1.3%. The IA Global Bond sector returned a respectable 2.2% in the quarter. It has been a stunning year so far for fixed interest returns. The actions of central bankers have encouraged an already nervous investment community to take refuge in what has traditionally been seen a safe hiding place driving yields on Government bonds to never seen before levels in many cases.
  • The IA Targeted Absolute Return sector gained 0.5% in the quarter. Over the 12-month to the end of Q3 the sector has gained 1.2%. Annualised CPI for August came in at 1.7% for comparison.
  • Looking at the Mixed Asset IA offerings, interestingly all 3 sectors (the IA Mixed 40-85% Shares, IA Mixed Investment 0-35% Shares and IA Mixed Investment 20-60% Shares) returned the same 1.9% (allowing for rounding). This possibly reflects the lack of exposure to long duration assets in the bond element of holdings, but also a lack of beta in the equity element. Few are positioned at extremes at this point.
  • The IA Global Equity sector rose 2.4% against a rise 2.8% for the IA Global Equity Income sector.
Currencies

The dollar and Japanese yen rallied against a Brexit challenged sterling in August as markets sought refuge in times of uncertainty in these traditional safe haven currencies. September brought with it some normalisation as nerves calmed, but it feels currency will remain the release valve in times of uncertainty for now.

Risky business

Can you have your cake and eat it? Here we search for funds with good risk characteristics and establish which 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 Q3 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 though remains the TB Evenlode Income Fund which achieved 5th 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.

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