Fund Watch uses our team’s process to highlight the past quarter’s developments in the fund world. It is fact-based and uses performance analysis techniques which form part of our investment process. All data is from Lipper for Investment Association (IA) sectors and is calculated in total return terms in sterling for periods ending 30 June 2022.
This quarter’s report includes the following analysis:
- The MM Consistency Ratio – highlighting the surprisingly limited number of funds beating their peers on a regular basis.
- Tops and Bottoms – the ultimate winners and losers over the quarter.
- Sector Skews – the best and worst of the 52 IA sector averages.
- Risky Business – a look at the leading funds for combining first class longer-term returns with the lowest levels of volatility.
The MM Consistency Ratio
Source: Lipper, 30 June 22 – 30 September 22, percentage growth, total return.
Here we conduct a review of the 12 major market sectors, filtering out only those funds that are consistently above average in each of the last three 12-month periods, and for a harder test those consistently top quartile. In the 12 main sectors researched, there are currently 1,174 funds with a 3-year track record.
- The MM Consistency Ratio for top quartile returns over three years (to the end of Q3 2022) remains in stunningly low territory. Incredibly, the all-time low of Q2 (0.35%) has been superseded in Q3 with 0.26% achieving this feat (or in other words… just 3 of the 1174 funds). This ratio’s typical range over the time we have been running this research is c.2-4%.
- Three funds from three different sectors manage the consistency of top quartile returns – the sectors are the IA Mixed Bond, IA Global Equity, and IA UK Smaller Companies. The CT MM Consistency Ratio
- Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw a marginal pick up with 60 of the 1,174 funds delivering above median returns consistently compared to 58 funds last quarter. This means this less demanding ratio rose to 5.1% from 5%.
- 11 of the 12 main IA sectors still managed to contain funds that met the less demanding above median consistency hurdle. The most consistent sector on this measure was the IA £ Strategic Bond sector with 12.2% of funds performing above median for 3 consecutive years, with the IA UK Smaller Companies at 10.6% the next best. The UK equity Income sector failed to have any funds that navigated the choppy waters of Q3.
The lack of dominance of dominance of one style of investing reflects a broad opportunity set from here. This is where things get interesting.
Multi Manager comment
Another incredibly low consistency figure this quarter. With only 3 funds making the cut there is no trend of note, and when we examine the less onerous consistently above average there is little of note either. To my mind this is very interesting. The lack of dominance of one style of investing reflects a market with lots of opportunity for the future as we wait for new trends to emerge in what will be a very different environment from the last decade.
Tops and bottoms
Identifying the best and worst performers of all funds in the quarter across all 52 IA sectors.
- The $145m JPM Brazil equity fund echoed the returns of its base market in Q3, with the tailwind of the dollar enhancing returns over the period. With an overweight in financials and industrials the fund, run by Luis Carrillo and Rachel Rodrigues, benefited from a bounce following a weak Q2 where it lost nearly a quarter of its value.
- Listed property was a painful place to be invested in the final weeks of the quarter as the unravelling of pension funds and heightened inflation concerns created a challenging environment for the space. While NAV’s were not changed, the price the market was prepared to pay for these assets went into freefall as sellers sold at any cost. The VT Gravis UK Listed Property Fund run by Matthew Norris and George Nikolaou invests solely in LSE listed REITS. Ouch.
Source: Lipper, 30 June 22 to 30 September 22, percentage growth, total return.
Sector skews
Identifying the best and worst performers in the quarter across all 52 IA sectors.
- It doesn’t intuitively feel like a quarter where 22 of the 52 IA sectors made positive ground but when you look at the detail the dollar was a strong factor within this with the vast majority being USD Bond sectors, global equity linked or Emerging markets.
- The IA India/Indian Subcontinent sector topped a table of IA sector averages gaining an impressive 17% in the quarter as capital continued to flow into this high growth area of EM where earnings are seemingly robust.
- The IA Latin America and North American Smaller Companies sectors were next best rising 13.8% and 7.8% respectively, buoyed by the 8.8% rise in the dollar.
- The straggler of the table was the IA China/Greater China sector where the average fund fell 13.6%. It has been a volatile year for this sector which was last quarter’s best performer after a poor Q1. The next 4 sectors at the bottom of the table are all UK asset linked whether through Gilts, Corporate Bonds or equity. It has not been the best time to be a UK based investor that’s for sure.
- All UK equity sectors fell with the IA UK All Companies sector down 5.1%, with its large company, and therefore non-sterling earnings component, helping relative to other areas. The more domestic IA UK Smaller Companies sector was the worst of the 3 returning -9.3% while the IA UK Equity Income sector fell 6.4%, perhaps cushioned a little by dividends which have picked up in the post covid world.
- Turning to UK bonds, in short it was not a pretty quarter. The IA UK Index Linked Gilt sector fell 13.1%, having already dropped -20.2% in Q2 of this year. The IA UK Gilt sector was close behind falling 12.6% with the IA Corporate Bond sector falling 9.4%.
- The IA Targeted Absolute Return sector fell -1%. the 12-month return for the sector is now negative at -3.8%.
- Looking at the Mixed Asset IA offerings, there was little to differentiate returns overall; the IA Mixed Investment 0-35% Shares sector fell 3.8%, followed by the IA Mixed 20-60% Shares, falling 3.2%, and lastly the IA Mixed Investment 40-85% Shares falling 2% reflecting the twin headwinds of equity beta and duration for the quarter.
- The IA Global Equity sector gained 2.3% against a return for the IA Global Equity Income sector of +0.3%.
Source: Lipper, 30 June 22 to 30 September 22, Percentage growth, total return.
Currencies
Oh Sterling – this really was a quarter to forget was it not? While the fireworks remain in cable with another 8%+ give back of the pound versus the greenback, there was a universal weakening against major market currencies. The intervention of the Bank of England saved worse blushes, but there is definitely work to do to get back some faith in UK assets from here with the currency being the most visible and liquid reflection of this.
Source: Lipper, 1 July 22 to 30 September 22, Percentage growth, total return.
Risky business
Can you have your cake and eat it? Here we search for funds with good risk characteristics and establish which funds offer the holy grail of low risk and high returns. For this purpose, a longer time-period is required, so we look back over three years to the end of the quarter.
- Measured to the end of Q3 2022, yet again no fund achieved the perfect mix of top of the sector 3-year returns with bottom of the sector 3-year volatility. This mix seems remains elusive.
- The LF Ruffer Total Return Fund again offered one of the best risk/reward combinations, with 1st percentile returns and 99th percentile volatility. The latter fund’s return was half that of the first, but the volatility was also half in standard deviation.
The last three years are an exaggerated version of the last 15 years post Global Financial Crisis, manipulated and some may say propped up by central banks and politicians.
Looking ahead - and looking within...
- A common take out from this report is the failure of active management to offer consistent performance while the various asset classes and markets ebb and flow to reflect short term noise. I have long maintained that this is not a fair conclusion.
- Firstly, this measure is against the average of the peer group. You can’t buy the average fund. The average is made up of increasingly bifurcated offerings. An example may illustrate this point; the worst performing sector this quarter is the China/Greater China sector. This is made up of 24 funds. Over the last 3 years the difference between the best and worst fund in this sector is 61%. You could have made 40% or lost 20%. The last 3 years are an exaggerated version of the last 15 years post GFC, manipulated and some may say propped up by central banks and politicians. We are entering a new era where natural market forces may be more able to exert themselves now inflation is in the system. I foresee more volatility going forward and much like the recent past, consistency versus the average is likely to remain low, but within that active management and the rewards for picking the winners is likely to reap significant rewards. I am pretty excited.
Summary
In summary, we believe the performance numbers are – as always – well worth crunching to find trends, provide ideas, layer knowledge on how each fund performs and to generally provoke thought.
Of course, the analysis must be taken in context, and the qualitative work must be done to allow for fully informed judgments. We hope you found this review interesting, and if you have any questions, please contact:
Rob Burdett
Kelly Prior
If you would like further details or would like to discuss why we think these points are of interest, then please do contact us. We have our own observations and opinions on this analysis and would be happy to discuss them if appropriate.
