GB-EN Intermediary

Fundwatch Q2 2021

We analyse thousands of funds each quarter – in Fund Watch we highlight the elusive few that manage to outperform on a consistent basis.
July 2021

Subscribe to our insights

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 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 June 2021.

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

Point of note

The IA have moved from 39 to 46 sectors, expanding the likes of Global Bond and High Yield into smaller but more comparable silos. Having previously used the IA Global Bond sector in our analysis, we have adapted and now use the IA Global Mixed Bond sector to represent this space as the largest of the sub sectors.

The BMO MM Consistency Ratio

Top quartile performance and above average performance rolling 3 years charts

Source: Lipper, 31-Mar-21 to 30-Jun-21, percentage growth, total return.

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 1,046 funds with a 3-year track record.

  • The BMO MM Consistency Ratio for top quartile returns over three years (to the end of Q2 2021) rose to 1.9% (1.8% last time) with 20 of the 1,046 funds achieving this feat. This ratio was just below the usual historic range of c.2-4%.
  • The IA Europe ex UK sector was the most consistent for top quartile returns with 4.7% of funds making the cut. It was followed by the IA Emerging Markets and IA Asia ex Japan sectors, which had 3.6% and 3.1% of funds making the grade respectively. The IA Global Mixed Bond, IA Japan, IA UK Smaller Companies and IA UK Equity Income sectors failed to deliver any funds that achieved this level consistency, with two of the IA sectors having just 1 fund achieving the feat.
  • Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw 131 of the 1,046 funds delivering above median returns consistently. This means this less demanding ratio rose to 12.5% from the astonishingly low 9.5% of Q1.
  • 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 Equity sector with 18.8% of funds performing above median for 3 consecutive years. The IA £ Corporate Bond and IA Global Equity sectors were the next best with 15.5% and 14.6% respectively achieving the target, with the IA UK Equity income sector the least consistent with 9% of funds achieving above median consistency hurdle.

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 terms you are unfamiliar with.
Use our handy glossary to look up any technical terms you are unfamiliar with.

BMO MM comment

  • While the consistency figures ticked up in the second quarter this hides some pretty brutal moves under the surface of markets in the period. The reflation narrative of the early spring brought with it blessed relief for those managers and funds who have been banging the valuation drum for so long. The Fed speak in the final weeks of June turned the market on its head, and back on the growth train we go.
  • Fund managers generally have a defined style of investing which will mean they will perform in different market conditions. As we see rotations in markets driven by changing economic conditions, so different managers will rise to the top (or fall to the bottom) of the performance tables. Growth and longer duration assets that benefit in a low interest rate environment have had the upper hand for the vast majority of the time since the global financial crisis. It will be interesting to see how things develop as we get closer to the withdrawal of the punchbowl at the party from the Federal reserve – they are starting to think about talking about this now after all.

Tops and bottoms

Identifying the best and worst performers of all funds in the quarter across all 46 IA sectors.

  • The £95m Baillie Gifford Health Innovation fund run by the trio of Julia Angeles, Marina Record and Rose Nguyen led the IA universe in the return table in the quarter with a volatile but strong performance for the 3 month period. Dominated by Biotech, life sciences and healthcare equipment and supply companies the fund was a beneficiary of the late quarter surge in growth, but in particular the likes of its largest holding Moderna which at c10% of the fund had a big impact when it hit an all time high share price in late June.
  • The star of Q1 2020, the VT Argonaut Absolute Return fund, was the laggard in the second quarter of 2021 as strong equity market returns prevailed. Recall the fund gained over 22% in the dark days of 2020 thanks to its shorting strategy. Since then the fund has lost 6.7% as equity markets have recovered, with the very recent run in growth stocks counter to the stance of Barry Norris the fund manager who believes the risk reward is better in more modestly priced stocks.
Baillie Gifford Health Innovate

Source: Lipper, 31-Mar-21 to 30-Jun-21, percentage growth, total return.

Sector skews

Identifying the best and worst performers in the quarter across all 46 IA sectors.

  • 42 of the 46 IA sectors made positive ground in the second quarter, with the shift into higher beta areas clear at the top of the table.
  • The IA UK Smaller Companies sector topped a table of IA sector averages gaining 9.8% with the IA Technology and Telecoms very close behind at 9.7%. The laggard of the table was the IA Japan sector losing 0.3%.
  • It was a strong month for UK equity sectors outside of small caps with the IA UK All Companies sector gaining a solid 5.6%, just ahead of the IA UK Equity Income sector up 5.1%.
  • The decision of the IA to dissect Bond funds into more granular silo’s allows more analysis of the different sections of the market. The IA UK Index Linked sector (12 funds) significantly outpaced the IA UK Gilt sector (26 funds) returning 4.1% versus 1.5% respectively despite the receding fear of a longer-term inflation issue towards the end of the period.
  • Within High yield the IA Global High Yield Bond sector (3 funds) returned 2.6%, against 2.2% for the IA £ High Yield sector (18 funds) and 1.7% for the IA USD High Yield Sector (2 funds).
  • The IA Targeted Absolute Return sector gained 1.6% in the quarter.
IA Japan NR v IA UK Smaller Companies NR

Source: Lipper, 31-Mar-21 to 30-Jun-21, Percentage growth, total return.

  • Looking at the Mixed Asset IA offerings, the IA Mixed 40- 85% Shares sector was the strongest performer rising 5%. The IA Mixed Investment 20-60% Shares returned 3.7% ahead of the 2.5% gain from the IA Mixed Investment 0-35% Shares.
  • The IA Global Equity sector rose 7% against a return of 4.8% for the IA Global Equity Income sector a swing back in favour of growth over income in the quarter

Currencies

  • It was a wild ride in the currency markets in the quarter with the final two weeks of June providing some fireworks as a change in stance from the Federal Reserve bringing forward the potential for interest rate rises boosted the attractiveness of the dollar.
Currencies relative to sterling

Source: Lipper, 31-Mar-21 to 30-Jun-21, Percentage growth, total return.

Quote icon
The reflation narrative of the early spring bought with it blessed relief for those managers and funds who have been banging the valuation drum for so long.
Kelly Prior, Investment Manager

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 2021, yet again no fund achieved the perfect mix of top of the sector 3-year returns with bottom of the sector 3-year volatility. This mix seems to be becoming ever more elusive. The Royal London Sustainable Leaders Trust came close achieved 99th percentile risk, but “only” 7th percentile return. There were no funds with top decile returns and bottom quartile risk over the three years to the end of the quarter. A simplistic observation could be that you have been able to make good returns in these years, but you may have had to weather more volatile performance to achieve it. The middle ground is becoming a crowded place – to achieve long term excellence patience is a necessity.

Looking Ahead – Inflated expectations?

  • Inflation was the buzz word of the quarter as the expectation of economic recovery and swathes of pent up demand driven spending coupled with supply bottlenecks dominated the narrative. Anecdotal stories of low stockpiles and employers scrabbling to find staff to enable them to meet demand were aplenty, with consensus busting inflation figures in April and May adding to the frenzy. Step up the Fed in the latter weeks of the quarter and it was all change. Good job investing is done over a 5-7 year time horizon, not a 5-7 week one isn’t it?
  • The summer months often bring with them unusual conditions as liquidity abates while we all head off to the beach and take a break from the office. Ah. Cornwall is going to be busy this year and may not offer quite the rest bite that we all hoped we would get after 18 months of covid’itus.
  • The latter months of the year have the potential to be challenging if Goldilocks decides to leave the party. Volatility is the friend of the long-term active investor. Here’s hoping…
Quote icon

Inflation was the buzz word of the quarter as the expectation of economic recovery and pent up demand driven spending coupled with supply bottlenecks dominated the narrative.

Kelly Prior, Investment Manager

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, please contact:

BMO Global Asset Management press office

Rob Burdett

Kelly Prior

Subscribe to our insights

More articles for this Asset Class

Multi-Manager
The Gherkin skyscrapper in London
10 min read
October 2021

BMO Multi-Manager Fundwatch Q3 2021

We analyse thousands of funds each quarter – in Fund Watch we highlight the elusive few that manage to outperform on a consistent basis.
Multi-Manager
A man in a shirt and tie is holding 3 mugs
5 min read
October 2021

Reducing risk in the portfolios

We’ve been working on de-risking our portfolios and have increased our exposure to market-neutral absolute return funds. We explain why and take a look at one of our holdings.
Multi-Manager
Globe made of glass
4 min read
October 2021

Multi-Manager People’s Perspectives

15th October 2021
View more