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The top-rated funds that professional investors could be ignoring

19 March 2018

FE Trustnet finds out which funds are potentially being under-researched by investors, even though they hold some of the industry’s highest ratings.

By Gary Jackson,

Editor, FE Trustnet

Highly rated funds such as GAM Star European EquityMatthews Asia China Dividend and Morgan Stanley Global Opportunity are potentially being overlooked by professional investors despite have strong track records, research by FE Trustnet suggests.

It’s no secret that the largest members of the funds industry receive the most attention from both private and professional investors, with the likes of LF Woodford Equity Income, Fundsmith Equity and Standard Life Investments Global Absolute Return Strategies being heavily researched by both groups.

In keeping with this, many funds sit relatively on the sidelines for a number of reasons – including being of a small size or residing in one of the more niche sectors – even though they have built up healthy track records and earned high ratings from research houses such as FE.

In this article, we used the FE Analytics Market Intel Tool to find out what the financial advisers, wealth managers and other professional investors have been researching on FE Analytics over the past 12 months. We then filtered the results to see which funds that are run by an FE Alpha Manager and hold five FE Crowns but have seen relatively little research over this period.

Performance of fund vs sector and index over 10yrs

 

Source: FE Analytics

FE Alpha Manager ratings aim to identify the most talented managers operating in the UK today, examining the performance of individual fund managers over the course of their career in terms of consistency, stockpicking skill and their ability to generate performance in rising and falling markets. The FE Crown ratings look for funds’ superior performance when it comes to stockpicking, outperformance against a credible benchmark and achievement of results at a relatively low risk over recent years.

There are 91 funds that have an FE Alpha Manager working on them and hold a five-crown rating; the chart above shows the highly rated fund that sits lowest in the research rankings on FE Analytics, as MFS Meridian European Core Equity sits in 3,461st place out of 4,658 funds.

The €88.1m fund is currently top quartile in the IA Europe including UK sector over one, three, five and 10 years. It has been headed up by FE Alpha Manager Roger Morley since June 2008, with Gabrielle Gourgey joining him as deputy at the start of 2015.

MFS Meridian European Core Equity focuses on European stocks that the managers expect to achieve above-average growth, with a ‘growth at a reasonable price’ strategy being used to help build the bottom-up portfolio. Pernod Ricard, Reckitt Benckiser and LVMH Moet Hennessy Louis Vuitton are the three biggest individual holdings while the UK is largest geographical allocation at 27.1 per cent.


The table below shows all the Investment Association funds with both an FE Alpha Manager and a five FE Crown rating but are ranked outside of the top 1,500 funds being researched on FE Analytics.

In second place is Janus Henderson Latin American, which is co-managed by FE Alpha Manager Glen Finegan and Nicholas Cowley. Since Finegan took over the $81m fund in February 2015 it has posted a 49.05 per cent total return, which is the third highest of the 16 Latin American offerings in the universe and ahead of its MSCI Emerging Markets Latin America benchmark.

Finegan is head of global emerging markets equities at Janus Henderson Investors, a position he has held since joining Henderson in 2015. Prior to this, he was a senior portfolio manager at First State Stewart and worked om the group’s highly successful emerging markets products.

 

Source: FE Analytics

GAM Continental Euro Equity comes next on the list. Headed up by Niall Gallagher since May 2017, the £7.9m fund uses a fundamental, bottom-up approach and counts the likes of SAP SE, Continental and LVMH Moet Hennessy Louis Vuitton SE among its top holdings.

The fund resides in the IA Unclassified sector, which could explain why it is being overlooked in research. When it comes to performance, the fund has beaten the MSCI Europe ex UK index since Gallagher took over with a 0.53 per cent return (it must be kept in mind that this over a very short time frame) but is lagging the average member of the IA Europe ex UK sector.

Some of the funds on the list have performed very well indeed when compared with their peers.


Orbis Global Balanced, which has run by Alec Cutler since launch in January 2014, is the best performer in the IA Mixed Investment 40-85% Shares sector on a three-year view after returning 44.64 per cent. Its average peer has made just 20.48 per cent over this time.

The £28m fund aims to balance income generation, capital growth and risk of loss through a diversified portfolio. Its top holdings at the moment include AbbVie, BP, Royal Dutch Shell, Bristol-Myers Squibb and ETFS Physical Gold.

Meanwhile, the Morgan Stanley Global Opportunity fund – which is headed up by Kristian Heugh and has assets under management of $5.2bn – has made the IA Global sector’s highest returns over both three and five years. It has made 212.35 per cent over the past five years compared with a 63.93 per cent gain by its average peer.

Looking for undervalued companies with sustainable competitive advantages and long-term growth, the fund has an active share (which is a measure of the fund’s holdings that differ from the benchmark index) of close to 94 per cent. Facebook, Amazon and Mastercard are its three largest holdings and are significantly overweight compared to the MSCI AC World index.

Performance of fund vs sector and index over 5yrs

 

Source: FE Analytics

Michael Clements’ £154.8m Oyster Continental European Selection fund is also notable as it is highly rated by the analysts at Square Mile Investment Consulting & Research as well as holding five FE Crowns and being run by an FE Alpha Manager.

Clements tends to focus on quality businesses – or ones where he sees a natural competitive advantage and the ability to survive or prosper in tougher times – that are trading at a discount. Square Mile said: “This highly attractive offering is aimed at investors who are looking for a concentrated European ex UK vehicle to sit alongside their core holdings.

“There is a strong quality mantra underpinning the strategy but pleasingly this is coupled with a strong focus on buying these companies cheaply. Mr Clements could be viewed as an opportunistic investor as he believes valuation is important when buying quality companies, so he is typically purchasing stocks when they are out of favour with other investors.”

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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.