Funds such as Threadneedle European, Matthews Asia Dividend and L&G Ethical Trust are currently in the bottom-quartile of their sectors over the past three years but FE Trustnet research shows this is only down to weaker performance at the very start of this period.
Funds’ three-year numbers are closely watched by investors as they are deemed to be the minimum amount of time on which performance can be assessed. However, being fourth-quartile or first-quartile over three years doesn’t mean that a fund has consistently held this rank over the period in question.
In this article, we took all the Investment Association funds that were fourth quartile over the three years to the end of February 2019 and filtered this list down to those that held this position because of a poor run in the first of these three years but have recovered since.
To do this, we found funds that were in their sector’s bottom quartile during the earliest 12-month period and in the top quartile over for the most recent year; for the middle year, the funds were in the first, second or third quartile.
Performance of fund vs sector by discrete periods
Source: FE Analytics
There were nine left after these filters were applied and the largest was the £1bn Threadneedle European fund, which is run by Paul Doyle. The fund has made a bottom-quartile 27.55 per cent total return over the three years to the end of February 2019 but the above chart shows how the picture changes when the three individual 12-month periods are examined.
The fund was in the bottom quartile of the IA Europe Excluding UK sector during the first period, which was a surprise bull year after the Brexit result and the election of Donald Trump as US president. Despite being one of the lowest returning members of its peer group, it still made its investors more than 15 per cent; its average peer was up close to 23 per cent, however.
During the second period, Threadneedle European was in line with the performance of its average peer but the fund has been much stronger over the most recent period. While concerns such as the weak European economy, the US-China trade tensions and Brexit prompted a 6.15 per cent fall in the average IA Europe Excluding UK member, this fund was down just 2.63 per cent.
This underperformance in strongly rising markets but an ability to protect capital when conditions are more difficult will be a common theme of the nine funds highlighted in this research.
Threadneedle European has a bias towards large-cap growth stocks and Doyle tends to look for companies that have a competitive advantage and pricing power generated by brands, patented processes, regulatory barriers to entry and strong market positions, which may explain why it held up in 2018’s challenging conditions. Top holdings include Total, LVMH and L'Oreal.
The next large fund on the list of nine – which is revealed below along with the performance over all periods examined in this research – is FE Alpha Manager Yu Zhang’s £341.5m Matthews Asia Dividend fund, which resides in the IA Asia Pacific Including Japan sector.
Square Mile Investment Consulting & Research, which gives the fund an ‘AA’ rating, said: “The managers think of this fund with a total return perspective: they are looking for compound returns in the region of 10 to 12 per cent over the long run and if they can accomplish this with lower volatility than the broader market, they would regard this as a good achievement.”
Source: FE Analytics
Next up is the £286.5m L&G Ethical Trust, which has made 19.35 per cent over the three years in question and is ranked 190th out of the 249 funds in the IA UK All Companies sector. But it has jumped into 35th place over the past 12 months – although it must be remembered that past performance is no guide to future returns.
The fund invests in companies in the FTSE 350 index whose business meets a range of ethical and environmental guidelines. It is managed by Legal & General Investment Management’s index fund management team and, as such, its portfolio will closely resemble the benchmark after allowing for the removal of companies that do not meet its objectives.
Premier Multi-Asset Conservative Growth comes next in terms of assets under management: David Hambidge, Ian Rees, David Thornton and Simon Evan-Cook run £131m in this strategy. The fund is managed with an absolute return mindset, aiming to provide low volatility and capital preservation.
Square Mile gives the fund an ‘A’ rating and said: “The team has an established investment approach and this has been implemented consistently for a number of years. The valuation aware focus aims to ensure they are always seeking to invest into what they perceive is a discount to the current market value. This not only provides a potential to pick up on the discount to market value but also provides a downside hedge, based on the lower point of entry.”
Janus Henderson Asian Dividend Income is managed by Michael Kerley and Sat Duhra. As its name suggests, it concentrates on companies that pay out good dividends to shareholders and this should lead it into stocks that are relatively defensive.
Frederic Jeanmaire’s Threadneedle Pan European Focus is the only fund that is in its sector’s top quartile for two of the three 12-month periods, although IA Europe Including UK is a relatively small peer group.
Fidelity Japan is run by Hiroyuki Ito and tends to have a bias towards larger companies, which held up better than small-caps during the sell-offs that struck markets in 2018.
UBS Targeted Return is a member of the IA Flexible Investment sector and is managed Andreas J Koester. The £35.3m fund built around a diversified portfolio and has the aim of delivering ‘equity-like’ returns with around two-thirds of the volatility of an equity portfolio.
The final fund to make it onto the list is EF FACET Cautious Discretionary Portfolio, which is a member of the IA Mixed Investment 20-60% Shares sector. It aims to make real returns over the economic cycle and pays close attention to risk management in its process.