Look back over the past year and, from an investment perspective, it’s hard to remember what everyone was worrying about. A peiod of excess returns has helped most managers grow assets despite a dour period for inflows. Against this backdrop, Money Management’s annual study of fund houses has sought to identify those that have been the most consistent over the past 12 months.
Using FE data for the year to 1 May 2017, we have identified the best fund groups by average return and the best by average sector ranking – measured across a company’s entire eligible fund range.
Our results in aggregate are prime evidence of how the previous year ultimately proved much plainer sailing than the 12 months preceding it. The average return on £1,000 for a number of leading fund houses is comfortably beyond the £1,200 mark. Contrast that with our 2016 study in which only five firms, each with one fund apiece, managed to return more than £1,100.
This year’s results again split firms into large, medium, and small groupings: defined as those with more than 40 funds, between 10 and 39 funds, and between 2 and 9 funds respectively. This is to ensure that companies with a handful of outperforming funds are not pitted directly against businesses whose ranges encompass a much wider variety of asset classes.
It should be noted that even two firms in the same category may not be directly comparable, particularly at the lower end of the scale. One firm may focus on US equities, for example, while another is an emerging markets specialist.
So we have also refined the results by asset class, to show which firms have proven most adept in a particular area of the market. But it is important to emphasise our findings should not be treated as an investment recommendation.
All funds chosen must be suitable for advisers, meaning those whose name specifies an institutional mandate were excluded. Money market funds were also omitted this year. The fund universe used for the survey is the Investment Association (IA) sectors – portfolios are classified according to the IA groupings, and those funds which sit outside the sectors were ineligible.
Of course, different groups will prosper at different times depending on their specialism. But arguably the most significant factor behind the past year’s returns is the fall in the value of the pound. Sterling fell by 12 per cent against the dollar during the period in question, meaning funds investing overseas received a sizeable boost to their values irrespective of investment performance. This artificial uplift in part helps explain why returns are so much higher than in previous periods.
The performance is also down to a return to form for a number of equity markets. The past 12 months will have seen a number of emerging market-focused fund houses come back into favour as their asset class recovered from a lengthy fallow period. Europe, too, has benefited from improved sentiment, and technology funds have also flourished – as demonstrated by the performance of the single best portfolio over the period. The Polar Capital Global Technology fund turned £1,000 into £1,601, a rise of over 60 per cent. Funds dedicated to Indian, Chinese and Russian equities, respectively, are also to be found in that top 10.
Our study, however, focuses on fund groups as a whole. Table 1 and Table 2 rank the best groups by overall returns and by their funds’ ranking against peers in the individual IA sectors.
The winner
This year’s victor in terms of performance is JPMorgan Asset Management (JPMAM), with an average return of £1,239 across its 64-strong fund range. The firm has capitalised on the returns on offer from emerging market, European and global equity markets in particular, though its top performer was the US Smaller Companies fund that returned £1,479.
Jasper Berens, head of the UK funds business at JPMAM, points to a number of reasons for the firm’s success, including its “incredibly low manager turnover compared with peers” and its mix of investment styles and processes.
“We have been running money for UK clients for a very long time. For advisers, I think a big differentiating factor is the markets and economics information that we provide under [chief market strategist] Stephanie Flanders’ leadership.
“The global nature of the firm means we have clients everywhere over the world, and therefore we have portfolio managers on the ground all over the world as well,” he adds.
For the first time in three years, the fund house topping Table 1 does not do the same for Table 2. The top performing large company by average sector decile is BlackRock, with a score of 4.2 (on a scale where 1 is in the top 10 per cent and 10 is in the bottom 10 per cent). In a change to previous years’ studies, the overall winner for 2017 has been selected on the basis of average performance, not sector rankings. This reflects the fact that advisers are increasingly looking for strong absolute performance rather than relative returns.
JPM and BlackRock feature in both Tables 1 and 2, though only BlackRock did so last year. Other returnees are limited to M&G and Schroders in Table 1 and L&G in Table 2. Notably, last year’s winner, BNY Mellon, is featured in neither table this time around.
Standouts
While maintaining consistent performance across a smaller fund range is in theory easier, a number of groups have produced strong returns even in this context. Polar Capital tops the table for firms with between 10 and 39 funds, and would remain in first place even if its standout Global Technology fund was excluded from the rankings.
On a sector decile basis, it is Baillie Gifford that has triumphed. Spread across a notable 33 funds, its score of 2.8 just pips Architas. For smaller firms, the two tables are dominated by Dodge & Cox and Morant Wright. The latter offers two Japanese funds, but the former’s strength is spread across three different asset classes: US equities, global equities and global bonds.
Firms that manage just one fund have been excluded from our overall figures this year, in order to ensure a focus on companies whose consistency extends beyond a single portfolio. But the star single-fund houses do still feature in our breakdown of top performers by asset class.
Table 3 highlights these figures, and provides a simple guide to which sectors were the best performers over the last 12 months. In a strong year for most equity markets, it is perhaps more instructive to pick out the sectors which struggled.
Chief among those is property, which endured a nightmarish summer last year due to the mass redemptions following the EU referendum. Many funds had to suspend trading as a result, leading to an FCA inquiry which remains ongoing. The portfolios themselves subsequently reopened, but it is notable that the sector standouts – the likes of Schroders, First State and Skagen – tend to invest in property equities rather than the underlying assets.
Fixed income returns were also lower than in previous years, but that was to be expected given the asset class’s bull run. Many would have feared a worse outcome than that which materialised last year. Despite the emergence of the ‘Trump trade’, in which investors bet on higher inflation and a tougher time for bonds, fixed income securities of all stripes have shown little sign of falling victim to a sustained sell-off.
Pictet and BNY Mellon produced the best bond returns, helped by their exposure to emerging market debt (see page 17). BNY is also a standout in terms of European equities – not always an area associated with the group. An average return of £1,182 for fixed income and £1,352 for European shares makes BNY one of a select few firms to top multiple categories.
The others are Gam (emerging market and Asian equities), Neptune (emerging market and European stocks) and Dodge & Cox (fixed income, global and US equities).
Adviser sentiment
The results may make for positive reading, but in reality there have been a number of shifts in sentiment since last May. The caution which characterised the run-up to Brexit, as well as the immediate aftermath, was quickly forgotten as markets rallied over the summer. Similarly, while investors took a surprise US election outcome in their stride, the dawn of the ‘Trump trade’ did see many managers rotate to less defensive parts of the equity market. The question of the moment is whether this trend is faltering.
Advisers have surely taken last year as evidence of the merits of investing for the long term, and of ignoring short-term noise. Nonetheless, safety-first absolute return funds topped the sales charts for much of the past year even as markets continued to climb higher.
Dean Mullaly, managing director of Mark Dean Wealth Management, says that taking a long term view is still important.
“We are in the business of buy, hold and monitor. When I say monitor, I mean monitor the client’s overall asset allocation against their chosen risk profile and so on. We do not try to time the market.”
But in a sign of growing nervousness, he acknowledges: “Our biggest challenge at the moment has been to stick to our philosophy in the face of seemingly rising markets. Many markets around the world are at all time highs, so a new investor today must be taking on more risk to the downside than someone who invested a few years back. But I think this just makes me focus even more on the discussion with clients around how they feel about risk and not just rely on the answers they give in a risk profile questionnaire.”
Other changes to advisers’ attitudes can be discerned more clearly, according to JPMAM’s Mr Berens. He believes the “star manager” culture that has defined the retail investment industry for many years is beginning to fade away as advisers focus on teams and outcomes rather than individuals.
“We don’t believe in a star manager culture. Sometimes that can be awkward for us relative to our peers… but star managers are quite dangerous from a business perspective [as well].”
The lesson of the past year is that long-term time horizons and strong processes remain pivotal to investment success. With each year of strong returns comes the impulse to add protection to clients’ portfolios, and only time will tell how wise that inclination proves. In the meantime, a diversified strategy looks as sensible a choice as ever. Our research may not be a scientific guide, but it does highlight that investors are not short of choices if they want to get active.
