InvestmentsMay 23 2016

Fund House of the Year 2016

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Fund House of the Year 2016

To say the past 12 months have been tricky for investors would be an understatement. It has been increasingly difficult to find the right fund, especially in unstable markets and with underlying macro risks potentially having an effect – such as the US presidential election in November this year, or the upcoming EU referendum.

For the third year, we have set out to establish which were the best performing fund groups for the 12 months to 1 May, to find out who will be crowned Money Management’s Fund House of the Year 2016.

To reach a conclusion, we use data from FE, and all funds selected were retail funds available to UK investors which must sit in Investment Association (IA) sectors. All funds used were clean share classes. Funds were then organised by group, and space (according to IA stipulations) to calculate average returns.

All rankings were based on the average return for all funds from each group. And, as with previous years, all results and Tables should be looked at while keeping in mind that each group may have specialist areas and can not be directly comparable – nor should our findings be used for a recommendation.

There have been various market cycles in the past year, with some sectors performing much better than others, so one group which may outperform within – say – the UK space, may massively underperform in other areas.

Because research such as this can be biased towards smaller companies, we separate results into small-, mid- and large-sized companies, organised by the number of funds available, rather than funds under management. Small groups are those that have between one and nine funds, medium-sized groups have between 10 and 39 funds, while large groups are those with 40 or more funds.

Before looking in depth at the details, it is important to consider the past year for markets and funds. Out of all funds available (3,376), 2,188 – 65 per cent – saw either no return on an initial investment or lost money over the year. In terms of individual funds, the £642.2m Legg Mason IF Japan Equity fund saw the highest returns, recording 65.5 per cent growth over the year – a return of £1,655 based on an initial £1,000 investment. Interestingly, seven out of the top 10 funds were all gold-focused. Gold has always been a hotly debated topic, but this past year has seen strong returns.

Tables 1 and 2 look into the top 10 small-, medium- and large-sized companies, but Table 2 is arranged by performance based on an initial £1,000 investment, and Table 3 by the average sector decile across all funds the group has available. Both Tables also show average discrete performance of 12 months to 1 May during 2013-14, 2014-15 and 2015-16.

At first glance, it can be seen that the small- and medium-sized companies have mostly outperformed their large counterparts. However, it is not fair to directly compare a group which has just one fund to one with 62. So while it may look like large companies have not done as well, that is not the case. Maintaining consistently strong performance across a larger range of funds is arguably more difficult. Although the number of groups that failed to return at all on average should definitely be kept in mind.

When it comes to the medium-sized companies, a special mention must go to Stewart Investors – formerly First State Stewart – and Miton, which both saw high average deciles of 1 (across 11 funds) and 2.2 (across 10 funds) respectively.

Being in the top decile for all 11 funds in the current market climate is no easy feat. However, some of the Stewart Investors funds sit in the Specialist sector, and are not ranked because it is not possible to compare such different funds with each other. Three funds sit in the Asia space, and while they have all underperformed and lost money, they have still done a lot better than the majority of funds in the space.

It should also be noted that MFM and Marlborough are not grouped together as they are not solely managed by one company – for example, Hathaway Investment Management is the investment adviser for the MFM Hathaway fund, not Marlborough.

At the top of both Tables for large companies is BNY Mellon (including Newton and Insight Investment) which has 62 funds and recorded an average sector decile of 3.8, making it Money Management’s Fund House of the Year.

Becoming a winner

So how has the company done it? Fergus McCarthy, head of UK & Ireland intermediary sales at BNY Mellon says the group’s performance is proof of how its multi-boutique format works well. “One of the key attributes from our perspective is that an intermediary will have one point of contact and then we will give them access to our different boutiques. It is a case that you can come to us and get different views and different investment approaches.

“We have a number of events around the country where we try to showcase two or three at any one time. It gives intermediaries a good feel for the autonomy that they each have. Then they can come and see multiple firms through the medium of just one outlet,” he adds.

Different areas

Table 3 looks into the different spaces across IA sectors, and it becomes immediately clear which sectors had the most difficult year. Surprisingly, the UK funds have not been hit as hard as expected after the turbulent markets at the start of this year. But Asia funds have seen a different story. Smith & Williamson is the only manager to have seen a positive return on its funds in the Far East – seeing an average £1,020 across two funds in the space.

No space has seen stand out performances massively ahead of others, however, Global, Japan and North America have seen some of the highest returns among companies of all sizes. Smith & Williamson has seen the highest average return when on a sector-specific basis – although this was based on just one fund in the Global group.

While the highest returns come from a range of sizes of company, the difficulty in maintaining performance across a broad fund range is underlined.

Just one company in the top 20 on a sector level has more than two funds within one space – Marlborough has five funds in the UK and scrapes into the top 20 in 20th position across all companies on a sector-specific basis. This can be because of the expertise needed to invest in certain markets, especially country-specific.

Looking at the Fixed Income sectors, T.Rowe Price saw the greatest returns, with £1,079 over four funds. The Global Bonds sector has seen the highest performers within all sectors, while Strategic Bond funds have failed to see the same success.

Mixed Investments covers all funds that can invest in more than one asset class, and multi-asset funds are firm investor favourites at the moment. But again, the numbers do not show great returns. While BNY Mellon has been successful in other areas, it shows a small loss – despite topping the space for large companies. Small companies seem to dominate returns for the space, which can be hard to manage for smaller groups because they tend to have fewer analysts and experts than larger companies – something needed for multi-asset funds.

Adviser sentiment

Given it has been a tough year for markets and funds, have advisers had to change their views on how to invest?

Sandy Robertson, managing director of Aberdeen-based Acumen Financial Planning, says the company’s planning outlook does not necessarily change because of short-term fluctuations in financial markets.

When it comes to the type of investment he prefers, he says, “We like all clients’ investments to produce income. An asset that produces no income, such as gold, is a speculation on being able to sell it at a higher price to someone else. We like all client investments, irrespective of asset class, to be capable of being traded on a recognised market on a daily basis so when liquidity is required it is there.”

Elsewhere, Roger Milbourn, senior partner at advisory firm Financial Themes in London, says that unit trust performance over the past year gives strength to the need to actively monitor and manage investments. “Our value proposition is very much centred on preserving capital as well as growing it, and while the charges are higher for an active proposition, with markets as volatile as they are, passive investment strategies are feeling the pinch.

“Given that unit trusts are available across most products, the investment dog should almost always wag the tax tail, and not the other way around. However, tax planning is at the forefront of financial planning and product selection plays a large part in the overall advice to the client,” he adds.

But BNY Mellon’s Mr McCarthy has noticed a shift from the way intermediaries are investing – and for how long. He says 10 years used to be the norm, then it was seven years down to five, and now three years is the “magic number”. Especially now as vehicles such as ETFs are in the market, and you can have daily trading, the length of investment outlooks has changed.

“There is a part of me that wonders, now we are in a fee-based world, whether there are some advisers out there that feel to justify their fees they need to be a bit more active in the portfolios. I wonder too about the ease at which they can trade funds. The technological improvements platforms have had mean many are now able to offer discretionary technology.

“There is a much greater focus on cost. Advisers in a fee-based world are really having to think about how they can justify that fee to their clients,” Mr McCarthy says.

Whether or not the focus on fees has changed the way advisers invest is yet to be seen. Perhaps in another 10 years, we will know for sure how holding periods have changed. The past few years have been tough on investors, and there is almost no doubt that many would have withdrawn their money from funds because of the state of the markets.

Although 65 per cent of funds failed to return on their initial investments over the year, many groups are seeing positive performances and are going against the odds. An example of this is our winner, BNY Mellon. Although it has suffered some setbacks in emerging markets, its expertise in areas such as Japan and global markets have negated any losses.

This research is by no means scientific, nor a recommendation on choosing a fund, but it does suggest that a balanced portfolio with expertise from various groups remains the best way to invest.