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Corporate bond funds most consistent in past 3yrs

17 July 2018

Research by BMO reveals IA Sterling Corporate Bond is the sector with the most constituents making a top-quartile return in each of the last three 12-month periods.

By Henry Scroggs,

Reporter, FE Trustnet

IA Sterling Corporate Bond holds the highest number of funds to outperform their peers in each of the past three years of any sector in the Investment Association (IA) universe, research by the BMO Global Asset Management Multi-Manager team revealed.

The research, which is carried out every three months as a survey called FundWatch, looks at the past quarter’s developments in the fund world.

One of the main studies in the research is the BMO MM Consistency Ratio, which measures how many funds in the 12 main IA sectors have produced top-quartile returns among their peers in each of the past three 12-month periods to the last quarter-end.

The results revealed that the IA Sterling Corporate Bond sector had the highest amount of funds that posted top-quartile returns in the last three 12-month periods to the end of June 2018 with 3.7 per cent of the funds in the sector achieving this.

Kelly Prior, investment manager in BMO Global Asset Management’s multi-manager team said it was the “stand-out performer”.

Looking under the bonnet of these numbers, Prior added: “Our research showed that the three most consistently top-quartile IA [Sterling] Corporate Bond funds are long-duration focused.”

This should come as no surprise since long-duration bond funds tend to do better in environments where interest rates are not moving, which has been the case in the past three years with the exception of the US Federal Reserve.

However, as we are moving towards a global rate-hiking environment, some analysts would argue that it is likely shorter-duration bond funds will outperform their longer-dated counterparts going forward.

Performance of long-duration UK corporate bond funds since 2008

 

Source: FE Analytics

Already this year, the short-duration funds in the IA Sterling Corporate Bond sector are sitting at the top end of the sector, while long-duration funds are positioned nearer the bottom quartile.

In the equity sectors, growth funds have performed particularly well in the past three 12-month periods.

Again, this should not come as a surprise since growth funds have generally outperformed value funds since the financial crisis occurred 10 years ago.

Closely following the corporate bond sector was the IA UK All Companies sector, with 2.9 per cent of funds producing top-quartile returns over the last three 12-month periods.

The IA UK Smaller Companies sector was next where 2.1 per cent of funds achieved the feat (down from 6.4 per cent in the previous quarter).

Four of the 12 sectors analysed did not manage to have any consistent top-quartile performers in the past three years: IA Europe ex UK, IA Global Emerging Markets, IA Japan and IA UK Equity Income.


Overall, the research showed that only 1.6 per cent of funds in the 12 main IA sectors managed to deliver consistent top-quartile returns in the past three 12-month periods. This number fell from 1.7 per cent last quarter and is below the historic average of between 2-5 per cent.

Prior said: “Despite the positive market moves in the second quarter of 2018, our research shows fund managers continue to find it challenging to deliver consistent positive returns over three years.”

However, it wasn’t all bad news and further analysis of the same funds revealed that there was an uptick in the number of funds that delivered above-median returns in the last three 12-month periods. The total number was up to 12.4 per cent, compared to 11.2 per cent last quarter.

Each of the 12 main sectors had funds making the cut here but, again IA Sterling Corporate Bond was the winner with 19.5 per cent of its constituent funds achieving this.

Conversely, the IA UK Equity Income and IA Japan sectors had the fewest above-median performers with 3.8 and 8.3 per cent respectively.

BMO’s multi-manager team commented that if you look at the broader “above average” measure there is a proliferation of passive funds included in the results.

The team questioned how repeatable the previously-mentioned trends such as the strong performance of long-duration bond funds and growth-focused equity funds were.

Prior said: “Should we see a change in the expectations of future interest rates and therefore a shift in the yield curve, it would take a very different mandate to outperform in both areas of investment.”

Bank of England inflation fan chart

 

Source: Bank of England

So far this year, the US Federal Reserve has increased rates, while the Bank of England has yet to do so and the European Central Bank has said it will hold off until summer next year.


In the second quarter of the year, markets are continuing their run of ‘normality’ seen in the first quarter of the year and generally speaking, most of the IA sectors have performed well.

IA North American Smaller Companies has been the best performer during the second quarter of 2018, up 13.97 per cent.

IA Technology & Telecommunications is the second-best with 12.11 per cent and IA North America follows with 11.07 per cent, according to data from FE Analytics.

Generally speaking, North America has had a strong run of form recently with the S&P 500 up 9.74 per cent in sterling terms over the last quarter and unsurprisingly the best-performing fund invests in the region.

In the second quarter of 2018, Baillie Gifford American was up 24.85 per cent and beat all other funds in the Investment Association universe.

The £1.7bn fund has four managers including Scottish Mortgage Investment Trust’s Tom Slater.

It is a concentrated portfolio of between 30-50 stocks and has a low turnover. Some of the top holdings are well-known technology stocks such as Amazon, Netflix, Tesla, Facebook and Alphabet.

On the flipside, there were seven sectors that, on average, returned a negative performance during the second quarter of the year.

Data from FE Analytics shows that the emerging markets suffered the most. From an equities perspective, the IA Global Emerging Markets, was the worst performing sector, down 2.87 per cent, with the fixed income equivalent – IA Global Emerging Markets Bonds – also in negative territory losing 2.66 per cent.

Performance of funds during Q2 2018

 

Source: FE Analytics

Looking at a fund-specific level, the worst performing fund in the second quarter of the year was City Financial Absolute Equity, which was down 21.76 per cent.

The fund is run by FE Alpha Manager David Crawford, who employs a long/short strategy with an aim to achieve absolute returns over rolling 36-month periods.

In a recent note to investors, the manager said that losses were concentrated in the fund’s short book but a long position in Faron Pharmaceutical hurt the fund’s performance by over 3 per cent when it failed a drug trial.

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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.