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The top-performing UK funds that the numbers suggest are down to skill, not luck

09 July 2019

FE Trustnet assess the IA UK All Companies sector using the information ratio in a bid to find funds that are run by genuinely talented managers.

By Gary Jackson,

Editor, FE Trustnet

Only a handful of funds in the IA UK All Companies sector have consistently shown great skill in active management, FE data suggests, with strategies managed by Lindsell Train, Liontrust and Majedie standing out.

One of the longest-running debates in fund management is whether active or passive investing is superior. Those in the passive camp argue that tracking an index removes the risk that a manager’s decisions will be incorrect, while active advocates note that outperformance is only possible when a portfolio differs from the market.

One metric that can help identify active managers with a high level of skill in portfolio construction is the information ratio. It is calculated by deducting the return of the benchmark by the fund’s return; the result is then divided by the fund’s tracking error, which is a measure of activeness.

The resulting ratio can be seen as an expression of the success of a manager’s active decisions away from the benchmark for each unit of extra active risk taken on. The higher the information ratio, the better; analysts in FE Invest consider a figure of 0.5 to reflect good performance, 0.75 very good and 1 outstanding.

In this research, we have reviewed the five-year information ratio of all the funds in the IA UK All Companies sector with a track record going back to at least the start of 2007 and an r-squared ratio to the FTSE All Share of at least 0.6 (to make sure the results are statistically significant).

Rather than just consider the most recent five-year period, we used rolling periods going back to the start of 2000 (or the funds’ full history, if shorter) to find the average information ratio and ensure any strong performance persisted over the long term. It must be noted that this is a very tough set of criteria.

Rolling five-year information ratios of LF Lindsell Train UK Equity and IA UK All Companies sector

 

Source: FE Analytics

Only eight funds out of the 169 we analysed in this research ended up with an average five-year information ratio of more 0.5 – indicating ‘good’ or better performance.

The fund with the highest – LF Lindsell Train UK Equity – is shown in the chart above. Its rolling information ratio relative to the FTSE All Share came in at 1.03, which is significantly better than the -0.04 from the average IA UK All Companies fund and puts it in the ‘outstanding’ category; what’s more, its highest five-year information ratio stands a very impressive 1.73 while the lowest has been 0.61.


LF Lindsell Train UK Equity, which is headed up by FE Alpha Manager Nick Train, has been one of the strongest members of the peer group since its launch in July 2006.

Between then and the end of May 2019, it made a total return of 359.75 per cent, compared with 108.96 per from the FTSE All Share and ranking it third out of 169 funds in the IA UK All Companies sector. It is also top-quartile for annualised volatility, maximum drawdown, maximum gain, maximum loss and Sharpe ratio.

Square Mile Investment Consulting & Research, which gives the fund an ‘AAA’ rating, said: “In Nick Train, the fund benefits from an articulate and thoughtful manager who, over the course of his lengthy career, has demonstrated that he is an excellent steward of investors' capital.

“The ability to see past short­term volatility is testament to Train's strengths as a stockpicker and he constructs this portfolio with a very high level of conviction.”

 

Source: FE Analytics

The table above shows all eight funds with a rolling five-year information ratio in excess of 0.5. Aviva Investors UK Equity MoM 1, in second place, is another strategy run by Train with the same process as LF Lindsell Train UK Equity.

In third place is another highly regarded offering: Liontrust Special Situations, with an average information ratio of 0.96. This portfolio is run by the FE Alpha Manager duo of Anthony Cross and Julian Fosh; Cross has managed the fund since launch in November 2005, with Fosh joining him in 2008.

The ‘Economic Advantage’ process behind the fund looks for companies with hidden intangible strengths such as intellectual property, strong distribution channels and significant recurring business.

Analysts at FundCalibre said: “If you consider the amount of time that Cross has spent developing the investment process, combined with the skill of the managers and the track record of the Liontrust Special Situations fund, it's easy to see why it is so well regarded by those who invest in the UK. For investors wanting high-conviction, multi-cap exposure to the UK stock market, this fund ranks among the best.”



LF Majedie UK Focus appears in third place, with an average five-year information ratio of 0.78. it is managed by James de Uphaugh, Chris FieldMatthew Smith and Imran Sattar. De Uphaugh, Field and Smith hold FE Alpha Manager status.

The concentrated portfolio is built from the best ideas of the co-managers, who all work on other strategies run by Majedie Asset Management. At the moment, more than 60 per cent of the portfolio is in FTSE 100 stocks, with its largest holdings including Tesco, BP and Legal & General.

Since launch in September 2003, Majedie UK Focus has posted a 427.89 per cent total return. This ranks it fifth in the sector, where the average return has been 218.89 per cent, and is significantly higher than the FTSE All Share’s 233.28 per cent gain.

Other IA UK All Companies members that narrowly missed out on being on the above list by having an average five-year information ratio of 0.4 or average include Fidelity Special Situations, BlackRock UK Special Situations, Schroder Recovery, Standard Life Investments UK Equity UnconstrainedAXA Framlington UK Select Opportunities and Invesco Income.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.