Research from Thames River’s multi-manager team of Gary Potter and Robert Burdett shows that of 957 funds with a three-year track record across the 10 main Investment Management Association sectors, just 41 have been top quartile in the past three 12-month periods.
No fund in the IMA’s global emerging markets, Asia ex Japan or global bond sectors was among those 41. Performance was judged over rolling three-year periods to the end of June and examined on a net of all charges’ basis.
The duo’s research shows that if the hurdle rate is lowered to those funds that achieved above-median returns in each of the past three 12-month periods, then 153 of the 957 funds reach that goal.
At 16 per cent of the onshore universe, it would appear on the surface not to say a lot about the added value of active fund management.
Nor does it make an adviser’s job any easier when it comes to selecting consistent funds for clients. It does show that there are good performers and even great performers able to achieve gains in what has been a difficult market environment. But consistent? That would seem a difficult ability to hit on, particularly in the now extremely popular area of emerging markets.
There are some very recognisable names among those consistent 41. Invesco Perpetual’s Neil Woodford has three funds among the 41 while Liontrust’s Jeremy Lang is also present with his First growth fund.
From a sector basis, there are three European funds that make the grade, eight from the global growth sector, two Japan funds, four US portfolios and 15 from the UK all companies sector. Among the 15 UK equity names are Liontrust First growth, Blackrock special situations, Aegon UK equity and Rensburg UK mid cap.
Four of the consistent funds are in the corporate bond sector although none is what advisers would consider a household name – CF Churchouse investment-grade fixed interest, Singer & Friedlander preferred income, Rothschild preferred income and Renfield corporate bond. A further five are in the UK equity income sector, three of which are Woodford’s, with the remaining two from Standard Life and Neptune.
The survey only covers the main 10 sectors but Potter does note that there are seven funds in the specialist sector that would have made the list, raising the total number to 48 funds. It is not hard, however, to see that these portfolios have benefited from recent trends. Among those seven are Jupiter Emerging Europe, First State global resources, JP Morgan natural resources and Neptune Russia and Greater Russia.
Potter says it is obvious that past performance is no indication of future performance but running down this list helps to promote ideas and see what funds are providing consistent returns.
He says: “Performance numbers are usually well worth crunching to find trends, provide ideas, layer knowledge on how each fund performs and generally to provoke thought.”
He does not think it is fair to cast aspersions on active management as a whole. Instead, he points out that there was only one fund among the 41that was passively managed – HSBC Japan index – reinforcing the argument that active management outperforms.
Potter says one thing that can be extrapolated from the list of consistent funds is the quality of the names present. Many of the managers are experienced and have good fundamental processes behind them. “They do not waver and get caught in fads,” Potter adds.
Many also have strong macro overlays or elements to their processes which explains how they have been able to transition such a change in market conditions and remain top quartile.
At first glance, the list also does not include those managers that typically take high cash positions in times of difficult markets. Potter says most of the managers are stock-driven and not constrained by benchmark considerations.
What is interesting to note is there are no absolute return funds among the list although there are a few multi-asset portfolios. Potter points out that 10 of the 17 funds that moved to the IMA’s new absolute return sector failed to achieve absolute returns over the second quarter.
Consistency in portfolios is a key consideration for advisers in their selection but it does not help them to analyse the newest entrants in the market, particularly in a retail market known for marketing-led launches. Potter and Burdett, keen to find opportunities, also monitor how new launches behave in their first performance periods.
Looking at the first-quarter performance of funds launched in the final quarter of 2007, they point out that Neptune global max alpha got off to a very good start, moving straight to top quartile in the global growth sector. The best absolute return for a newcomer was from European real estate opportunities with a gain of 8.95 per cent followed by Investec target return Eur, listed in the unclassified sector.
Over the first quarter of this year, Potter and Burdett identified 15 launches and tracked their performance over the second quarter. Among these, the best gains came from Allianz RCM global eco trends with a fifth-percentile ranking in the IMA global growth sector. This fund achieved the best absolute return of the newcomers with a gain of 3.99 per cent.