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 1,090 funds with a 3-year track record.
- The BMO MM Consistency Ratio for top quartile returns over three years (to the end of Q4 2019) rose to 2.2% (1.7% last time) with 24 of the 1,090 funds achieving this feat. This ratio was within the usual historic range of c.2-4%.
- The IA North American sector was the most consistent for top quartile returns with and unusually high 9.1% of funds making the cut. It was followed by the IA Global Equity and IA Japan sectors, which had 2.8% and 2.3% of funds making the grade respectively. The IA Asia ex Japan and IA £ Strategic Bond 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 139 of the 1,090 funds delivering above median returns consistently. This means this less demanding ratio rose to 12.8% from 12.7%.
- 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 23.9% of funds performing above median for 3 consecutive years. The IA Europe ex UK and IA Japan sectors were the next best with 16% and 14% respectively achieving the target, with the IA Global Bond sector the least consistent with 5.5% of funds achieving above median consistency hurdle.
BMO MM comment
- The final quarter of the year proved to be yet another gripping instalment of the soap opera that markets seem to have become. The “will they won’t they” conclusions of trade wars and the UK election / Brexit continued to dominate sentiment in the quarter, with the finale of December a fittingly dramatic end to a decade that few could have predicted.
- With recent quarters having been dominated by either passive and/or quality growth offerings it was refreshing to see a more balanced mix of funds in the consistency tables. In the fixed income world the same was true of the lack of dominance of long duration strategies, having been shaken out by Q4 when there was a significant shift in yield curves.
A look back over the last 10 years – as it seems to be all the rage to reflect (I have thus far yet to succumb to this on FB but I’m sure it’s only a matter of time), we thought it might be interesting to mull over the trends of the statistics of the last 10 years quarterly musings.
- Looking first at the most challenging consistency ratio of top quartile returns over 3 consecutive 12 month periods, the range has been remarkably muted. The best number achieved was 4.6% in Q3 2014 when we saw a surge in mid cap fund in the UK flattering the stats. The low of 0.5% was seen in Q4 2018 as the vicious rotation in December left managers wanting. Those that held their nerve (or bought the dip) were handsomely rewarded as markets bounced back shortly after a change of rhetoric from the Federal Reserve.
- Widening the goalposts to achieving above average returns over 3 consecutive 12 month periods yielded stronger results as would be expected: the range this time seeing a 18.6% figure again in Q3 2014, however the low of 8.6% was seen in Q1 2011.
- Over the 40 data point period the average sits at 2.4% for top quartile consistency and 13.2% above average consistency, remarkably close to the numbers reported for this fourth quarter of 2019.
- Reading through these historic musings the key stand-out is that there is always something to worry about – but also opportunity if you are prepared to look for it. It has been a fascinating decade, but also a perplexing one in investment terms. We know the things that have driven markets for the last decade are unlikely to persist in the same form for the next 10 years. Investors’ behaviour does however remain as emotional as ever. The potential for a black swan event is increasingly viable, and those assets that are priced for perfection look more vulnerable than ever.