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Woodford, BlackRock and BNY Mellon: The new funds achieving five crown ratings

24 July 2017

FE has awarded 11 previously unrated funds in the Investment Association universe with a prestigious five FE Crown rating in its latest bi-annual rebalance.

By Lauren Mason,

Senior reporter, FE Trustnet

CF Woodford Equity Income, BlackRock Asia Special Situations and BNY Mellon Japan Small Cap Equity Focus are among 11 funds to be awarded five FE Crowns the first time they have been eligible for a rating in the latest bi-annual rebalance.

FE’s crown ratings, which range from one to five, are awarded based on stock-picking, consistency of outperformance against a credible benchmark and the achievement of results at a relatively low risk.

‘Good performance’ is not just based on total returns either; the quantitative screening also takes into account managers taking significant bets on market movements, sudden bursts of performance with other periods being indifferent or poor and taking very high risks generally.

Overall, the top 10 per cent of funds are awarded five FE Crowns, the next 15 per cent receive four crowns and the remaining three quartiles are awarded three, two and one crowns respectively.

Given these results are based on funds’ three-year performances, a number of funds in the Investment Association universe have been awarded FE crowns for the first time and, out of these, 11 have already achieved the highest possible rating.

Perhaps unsurprisingly, star manager Neil Woodford’s CF Woodford Equity Income is one of these 11 funds. Its launch in June 2014 broke the UK record for its £1.6bn fund raise in its two-week offer period.

Over three years, the now-£10.1bn fund has outperformed its average peer and FTSE All Share benchmark by 11.48 and 12.35 percentage points respectively, with a total return of 39.2 per cent.

Performance of fund vs sector and benchmark over 3yrs

 

Source: FE Analytics

It has done so with an alpha generation of 3.9 which means that, when the sector average is assumed to have a return of zero, the fund has generated extra 3.9 per cent of value over this time. This is the second-highest three-year alpha generation out of all 78 funds in the IA UK Equity Income sector.

The fund also boasts the sixth-highest maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 6.49 per cent over three years.

Woodford’s fund has a total return mandate and invests mostly in high-quality companies with some exposure to AIM stocks and unlisted start-ups – it is able to allocate up to 10 per cent of the portfolio to unquoted companies.


The manager has built up an avid following since his time at Invesco Perpetual, where he managed the Invesco Perpetual Income and High Income funds for 24 and 26 years respectively.

The FE Research team has awarded CF Woodford Equity Income a place on its FE Invest Approved list for the manager’s consistency.

“Neil Woodford has maintained the same investment approach, which is based on a five-year strategic view on the economy,” it said. “Actually, the manager benefits from further flexibility and the approach is more collegial than at Invesco Perpetual. Stock selection and industry bets embrace this strategic frame.”

The research team at Square Mile, which has awarded the fund its highest ‘AAA’ rating, said its research is not driven by the manager’s popularity or media attention but is based upon its analysis of the individual manager, the team, its investment process and its strategy.

“In this case we conclude that this is a compelling investment proposition and one most worthy of consideration by long term investors,” it stated. “There is a clear and understandable investment process in place, which has been used by Mr Woodford for many years, and furthermore he is backed by an experienced and likeminded team as well as a committed parent firm.”

While CF Woodford Equity Income is the most high-profile fund to have been awarded five FE Crowns during its first ever rating, there are several other funds to have also made the cut.

Another example of BlackRock Asia Special Situations, which is £140.1m in size and is headed up by Andrew Swan and Emily Dong.

Over the last three years, the fund has outperformed its average peer in the IA Asia Pacific ex Japan sector and its MSCI Asia ex Japan benchmark by 33.16 and 27.5 percentage points respectively with a total return of 84.03 per cent.

Performance of fund vs sector and benchmark over 3yrs

 

Source: FE Analytics

Swan and Dong aim to provide growth and income through a relatively concentrated portfolio of stocks. For instance, its largest holding – Samsung Electronics – accounts for 8.37 per cent of the overall portfolio and its 10 largest holdings account for 43.3 per cent. The fund currently has a notable regional overweight to China and an underweight to Taiwan and Hong Kong relative to its benchmark.

While it has a second-quartile alpha generation and maximum drawdown over three years, it has the highest Sharpe ratio – which measures risk-adjusted returns – out of all 99 funds in the sector.

The only other fund from the IA Asia Pacific ex Japan sector to be awarded five FE Crowns in its first rating is T. Rowe Price Asian Opportunities Equity, which was launched by Eric C. Moffett in May 2014.


Aside from BNY Mellon Japan Small Cap Equity Focus, only two other country specialist funds made it onto the list and both reside in the IA North America sector.

Brown Advisory US Flexible Equity is a $288m Sicav which is domiciled in Ireland. Headed up by R. Hutchings Vernon, it has a concentrated portfolio of 42 stocks and aims to find “improving businesses at bargain prices”.

Over three years, it has performed broadly in-line with its average peer but has achieved a top-quartile annualised volatility, maximum drawdown and Sharpe ratio over this time frame.

The second US equity fund to achieve a five FE Crown rating in its first rebalance is Allianz Best Styles US Equity. Launched in June 2013, the $2.4bn Luxembourg-domiciled Sicav adopts a flexible investing style and, over three years, has outperformed its sector average by 4.63 percentage points with a total return of 69.76 per cent.

Moving across asset classes, another fund to have achieved five FE crowns in its first rating is Kames Diversified Monthly Income, which resides in the IA Mixed Investment 20-60% Shares sector.

The fund, which has an AUM of £357m, was launched by Vincent McEntegart in February 2014 and aims to provide income with the potential for capital growth over the medium term.

It has a highly-diversified portfolio of 210 holdings, 36.4 per cent of which are bonds and 24.3 per cent of which are equities. It also has 18.1 per cent in listed property, 16.9 per cent in specialist income and a 4.3 per cent cash weighting. It is able to invest across all regions and can invest across a range of quality ratings within its fixed income allocation.

Over three years, the fund has outperformed its average peer by 8.22 percentage points with a total return of 28.7 per cent. It has done so with a top-quartile alpha generation and Sharpe ratio, but with a third-quartile annualised volatility. The fund currently yields 5.18 per cent.

Other multi-asset funds to have achieved a five FE Crown rating in their first rebalancing include Capital Group Global Allocation (LUX) and VT Randolph Place Diversified.

 

Source: FE Research

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