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Five-crown equity funds cement sector-topping positions in a turbulent 2020

28 May 2020

Trustnet finds out how the market-rattling events have affected funds with different FE fundinfo Crown Ratings.

By Gary Jackson,

Editor, Trustnet

Funds that hold the highest FE fundinfo Crown Rating of five – such as Fundsmith Equity, Baillie Gifford Global Discovery and LF Lindsell Train UK Equity – have maintained their positions at the top of the sectors this year, research by Trustnet shows.

The coronavirus pandemic and the widespread lockdowns imposed to slow its spread have caused a spike in market volatility, with a heavy sell-off in March giving way to a sharp rally in April. Of course, investors do not know what will happen next but most are expecting uncertainty and volatility to continue for some time to come.

But how have highly rated funds held up in these conditions? The FE fundinfo Crown Ratings are designed to help investors distinguish funds that have superior performance in terms of stock picking, consistency and risk control over recent years.

The best 10 per cent of funds are awarded a five crown rating, the next-best 15 per cent a four crown rating and the three remaining buckets of 25 per cent are given three, two or one crowns. The latest rebalance took place in January 2020 – so before the coronavirus crisis took hold – with the next one scheduled for July.

In this research, Trustnet looked at the average return in 2020 made by each crown rating bucket across the Investment Association sectors. In this article, we will concentrate on the equity sectors and turn our attention to fixed income and multi-asset next week.

  Source: FE Analytics

The table above, which is ranked alphabetically and colour-coded for your convenience, illustrates how equity funds of differing FE fundinfo Crown Ratings performed over 2020 to 27 May. The most obvious trend is that the highest-rated funds continued to outperform over a period that has seen markets endure a brutal sell-off followed by a sharp bounce.

It’s the IA North America sector where there has been the biggest difference in the 2020 returns of the top and bottom crown-rated funds – the average five-crown member of the peer group has made 12.36 per cent in the year to date, while the average one-crown fund is 19.10 percentage points behind it.

Morgan Stanley US Growth, which holds five FE fundinfo Crowns, is the best performing member of the sector this year with a total return of 48.32 per cent. It’s also top-quartile over three, five and 10 years.

It looks for high-quality companies with sustainable competitive advantages, strong free-cash-flow yields and favourable returns on invested capital – meaning it has a quality-growth approach. This style of investing has performed strongly over much of the past decade and has continued to thrive in the coronavirus crisis as investors focus their attention areas of perceived safety.

Performance of fund vs sector and index over 2020

 

Source: FE Analytics

The fund is overweight technology stocks, for example, which have been one of the market’s few bright spots this year as more flexible working and online shopping is carried out. Its holding Zoom Video Communications, a proprietary cloud-based communications platform, was the top performer over 2020’s first quarter.

Other IA North America funds that hold five crowns and have made some of the year’s strongest total returns include T. Rowe Price US Large Cap Growth Equity, AB American Growth Portfolio, Brown Advisory US Equity GrowthNinety One American Franchise and Seilern America.

There has also been a big difference in the average returns of the one and five crown-rated funds in the IA Global sector, which is one of most popular in the Investment Association universe. However, the average five-crown fund is only up 2.53 per cent over the year to date.

Baillie Gifford Global Discovery is the five-crown rating that made the sector’s highest return after gaining 27.76 per cent; the only fund to beat it is Baillie Gifford Long Term Global Growth Investment, which is too young to be rated.

This is another growth fund, continuing the trend that was seen in the IA North America sector and has played out in other equity peer groups well. Five-crown funds like Trojan Global Equity, Seilern World Growth, Fundsmith EquityComgest Growth World and Wellington Global Quality Growth have also made some of the IA Global sector’s highest returns over 2020 to date through implementing a quality-growth style.

Closer to home, there’s an 11.28 per cent difference in the returns of the average one and five crown-rated fund in the IA UK All Companies sector. However, even the five-crown members of this peer group have, on average, made a loss in 2020 so far.

Indeed, the only member of the 253-strong sector to make a positive return is Ardevora UK Equity. This fund is up 0.86 per cent but has an FE fundinfo Crown Rating of three.

The highest-placed five-crown UK equity fund is Royal London Sustainable Leaders Trust, which has lost 5.71 per cent – the third best result of the entire sector. As its name suggests, the fund looks for companies that score well on a range of environmental, social and governance (ESG) factors – another theme that has outperformed this year.

Performance of fund vs sector over 2020

 

Source: FE Analytics

Other five-crown funds topping the peer group include LF Lindsell Train UK Equity, TB Evenlode Income, Liontrust Special Situations, Liontrust Sustainable Future UK GrowthCFP SDL UK Buffettology and Threadneedle UK Sustainable Equity, showing those trends of quality-growth and ESG in play.

Not every sector has seen five-crown funds generate their highest returns this year, however. In the IA UK Equity Income sector, there isn’t much difference in the returns of the average one and five crown-rated fund.

There are four top-rated funds in the peer group and only one – BMO Responsible UK Income – is in its top quartile; there is one of the remaining funds in each of the other three quartiles. Funds with a crown rating of three have, on average, been the best performers in this sector.

And in IA UK Smaller Companies, it has been one-crown funds that have made the best average return this year, falling 8.23 per cent compared with a 14.78 per cent slide in its five-crown members.

LF Miton UK Smaller Companies has made the peer group’s best return this year, gaining 18.8 per cent, but it holds just one crown. The highest-ranked five-crown fund is Liontrust UK Smaller Companies, which is in the peer group’s top quartile with a fall of 7.9 per cent.

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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.