The majority of investors in several bond and multi-asset sectors own funds that are poorly rated under the FE Crown Rating system, research by FE Trustnet reveals.
FE Crown Ratings are designed to help investors distinguish between funds that are strongly outperforming their benchmark and those that are not. They identify funds that have displayed superior performance in terms of stockpicking, consistency and risk control in recent years.
The top 10 per cent of funds are awarded five FE Crowns, while the next 15 per cent receive four crowns. Each of the remaining three quartiles are given three, two and one crown(s) respectively.
Performance of average five and one FE Crown-rated IA UK All Companies funds over 10yrs
Source: FE Analytics
While these quantitative ratings are backward looking, the difference in the performance track record of one and five FE Crown-rated funds can be significant – as the above chart shows.
The average IA UK All Companies fund currently holding a five-crown rating, for example, has outperformed its one crown-rated peer by more than 65 percentage points over the past 10 years.
This trend holds for shorter time frames too. FE Analytics show that the average five crown-rated fund has made 103.40 per cent over five years, 47.79 per cent over three years and 21.59 per cent over one year; the average one crown-rated fund, however, is up by just 57.30 per cent over five years, 21.49 per cent over three years and 14.75 per cent over one year.
While the FE Crown Ratings are not individual fund recommendations and should not be seen as specific advice, we thought it would be interesting to find out which sectors had the most assets in poorly rated funds. In a future article, we will reveal the sectors with the most money in top-rated funds.
The table below shows all the Investment Association sectors were more than 25 per cent of assets are held in funds currently rated with one FE Crown. It is clear that a disproportionate amount of assets is invested in the worst rated funds in some areas.
It’s IA UK Gilts that comes off worse. Some £5.4bn of the sector’s £8bn of assets in funds eligible for a rating have been labelled with one FE Crown.
Source: FE Analytics
There are five funds from the sector holding one FE Crown. The largest is the £3bn Scottish Widows Gilt fund, while the others are the £1.5bn Allianz Gilt Yield, £534m Royal London UK Government Bond, £313m Henderson Inst UK Gilt and £26m Standard Life Investments UK Gilt funds.
Indeed, the sector does not have a single member that holds five FE Crowns and only two that are four crown-rated. These are Aberdeen Sterling Long Dated Government Bond and Newton Long Gilt.
Overall, the bond sectors come off fairly poorly in this area. The IA Sterling Strategic Bond sector – which is one of the largest peer groups in the Investment Association universe – has 38.3 per cent of rated assets in one-crown funds; this equates to £44.9bn.
In total, there are 36 strategic bond funds holding this rating with the largest being the £21.4bn M&G Optimal Income fund. Other large names include Legg Mason Western Asset Macro Opportunities Bond (£5.8bn), Invesco Perpetual Monthly Income Plus (£3.3bn), Fidelity Strategic Bond (£1.8bn) and TwentyFour Dynamic Bond (£1.6bn).
We also aimed to uncover which sectors had the higher share of assets under management in one and two FE Crown-rated funds. These ratings are given to the bottom half of the universe, but 11 sectors have more than half their total assets in such funds.
While bond strategies feature heavily on this table, multi-asset and absolute return funds are also present. The IA Flexible Investment sector is in third place with 68.1 per cent of assets, or £37.8bn, in one crown funds.
Source: FE Analytics
Within this peer group, there are 29 funds with the lowest FE Crown Rating. The £2bn Carmignac Portfolio Patrimoine fund is the biggest, with Schroder Dynamic Multi Asset, Artemis Strategic Assets, Carmignac Portfolio Emerging Patrimoine and CF Ruffer Japanese all running more than £500m.
Another 31 funds have two FE Crown-rated funds, including the £20bn Carmignac Patrimoine fund. Troy Asset Management’s Trojan fund also appears in this list.
The IA Targeted Absolute Return sector is also notable for having the bulk of its assets in poorly rated funds. This peer group has proven to be very popular over recent years, being the best-selling Investment Association sector on many occasions.
Some 62.3 per cent of FE Crown-rated AUM falls into this category, totalling more than £51bn.
Standard Life Investments Global Absolute Return Strategies falls into this category, holding a two-crown rating and running more than £21.5bn. More of the sector’s biggest members join it, including the £10.4bn Newton Real Return fund (two crowns) and the £770.8m CF Odey Absolute Return fund (one crown).