Little known funds come out on top

Unicorn Asset Management’s £5.7m Mastertrust fund, run by Peter Walls, and the £36.7m Practical Investment fund from Consistent Unit Trust Management have both posted returns in excess of 40 per cent in the three years to March 22, beating their multi-asset peers.

This three-year period coincided with a rally in equity markets. Funds investing in investment trusts will have benefited from the ability of these products to borrow money, or ‘gear’, in order to boost the funds’ returns.

Mr Walls’ policy of buying trusts when their share prices are trading at a significant discount to the value of their assets has led the fund to consistently top the IMA Flexible Investment sector, and its previous incarnation, the IMA Active Managed sector. Six of the fund’s top-10 holdings at the end of February were trading at double-digit discounts.

At the end of December Mr Walls – a self-proclaimed “true contrarian” investor – sold out of the Jupiter European Opportunities trust, run by Alexander Darwall, having seen the trust’s discount narrow from 18 per cent to near-zero.

The fund’s small size could be boosted in 2013, as Unicorn last year brought in distribution firm LGBR Capital to improve the company’s sales and distribution. Star manager John McClure has already seen his top-performing UK Income fund double its assets as a result of the deal.

The Practical Investment fund does not publish regular factsheets, but data collated by Morningstar shows that, at the end of February 2013, the fund’s top 10 holdings featured several star names, including Neil Woodford’s Edinburgh Investment trust and the British Assets trust, run by F&C Investments’ Phil Doel.

Investment Adviser research into the 10 best-performing products across the four IMA Mixed Investment sectors has shown that multi-asset funds have dominated.

Only two of the top 10 funds are multi-manager products, both run by Wise Investment founder Tony Yarrow. Mr Yarrow’s £29.7m TB Wise Investment fund and £26.4m TB Wise Income fund have produced three-year returns of 34.6 per cent and 32.9 per cent respectively, beating the IMA Flexible Investment sector’s average gain of 19.1 per cent.

It is unsurprising to see the sector perceived to include the lowest-risk funds – the IMA Mixed Investment 0-35% Shares sector – posting the lowest average return.

However, the sector’s 16.3 per cent average return was not far behind that of the Mixed Investment 20-60% Shares sector, whose constituents averaged an increase of 17.6 per cent. In spite of massive flows into bond funds in the past two years, and double-digit returns from many corporate bond products, leading equity markets have outperformed fixed income indices in the three-year period under scrutiny.

This has led the sector with funds most exposed to equities – the IMA Mixed Investment 40-85% Shares sector – to post an average return of 20.5 per cent in the three-year period to March 22.

Half of the top 10 best-performing funds come from this sector and are still positioned with a significant weighting towards equities, pushing the upper limits of the sector’s rules. The £88.8m CIS Sustainable World fund has 79 per cent invested in equities, while boutique manager McInroy & Wood’s £258.8m Balanced fund has 75 per cent in equities.

However, recent research from S&P Capital IQ indicates the returns posted by some of these funds could have been even stronger. Last month, Randal Goldsmith, head of asset allocation at S&P Capital IQ, said: “We know of no flexible multi-asset funds that were zero, or close to zero, in risk assets in the first half of the year and then fully invested in risk assets in the second half, which would have generated significant outperformance, or even to have just been very aggressive for the whole year, which would also have produced meaningful outperformance.”

But in a three-year period punctuated by political turmoil, the eurozone debt crisis and volatile equity and bond markets, returns in excess of 30 per cent, as achieved by these top-10 performers, are not to be sniffed at.

Nick Reeve is senior reporter at Investment Adviser