Kyle Caldwell reports on the latest active fund performance data, and shares four tips to avoid a substandard fund.
Active funds are struggling to consistently bring home the bacon, with the latest FundWatch report showing that only four of 1,153 funds analysed have achieved top-quartile performance (in the best 25% of performers in their fund sector) over the last three 12-month periods.
The data, from Columbia Threadneedle’s multi-manager team, found this to be the lowest percentage (0.35%) of funds to pass this test since the report started in 2008. The four funds that stood out from the crowd were Quilter Investors Sterling Diversified Bond, Matthews Asia Smaller Companies, Luxembourg Selection Active Solar fund, and Fidelity Japan.
When the hurdle is lowered to median returns, 58 out of 1,153 funds (9.5%) consistently delivered returns above the sector average in each of the three last 12-month periods. This was down from 68 funds in the last quarter.
Kelly Prior, investment manager in the multi-manager people team at Columbia Threadneedle Investments, said that while “the data points make for hard reading”, she believes “it does indicate that fund managers are holding their nerve and not trying to chase these very unusual markets”.
Prior added, however, that this quarter’s findings “are unprecedented”, and demonstrate “the extreme rotations that markets have been through in the last couple of years and how different flavours of investment have led markets at different times”.
Prior added: “The only hiding place this year has been cash – and that is far from the natural hiding place of most active managers, who will be excited by the opportunity that this current turmoil can offer for the long-term investor.
“As we look ahead, it is interesting to see that there is no dominance of any one style or flavour of mandate in the consistency filter. The next big trend is up for grabs, but for now we may have to wear some volatility before the next pattern emerges.”
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Sector winners and losers
Of the 12 main fund sectors that Columbia Threadneedle examined, the Investment Association’s (IA) UK Smaller Companies recorded the highest proportion of funds (10.4%) that beat the sector average in each of the three last 12-month periods. This was followed by the IA Asia Pacific ex-Japan sector, with 8.8% of consistent outperformers.
The IA UK All Companies sector recorded the smallest proportion of funds that managed to outperform over the three 12-month periods examined, at 2.3%.
Smaller stocks tend to be more volatile and less well researched than large companies, which gives active managers a better chance of gaining an edge over an index.
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How to avoid a substandard active fund
With thousands of funds to choose from DIY investors have a challenge on their hands when trying to identify the cream of the crop.
Such enormous choice can also be overwhelming and risks being completely off-putting, particularly for novices on the start of their investment journey.
While a fund cannot be expected to outperform all the time – even the very best fund managers fall out of form, there are ways that investors can assess from the outset whether an active fund is worth its salt. Here are four top tips:
Look at the top 10 holdings and performance
When sizing up a fund, look at the top 10 holdings and compare them with the top 10 constituents in the benchmark index - such as the FTSE All-Share for UK equity funds. A large overlap is a warning sign that the fund is playing it safe.
Has the fund slightly lagged the index in the past?
Examine how the fund has performed against its benchmark index. If the two 'lines' look similar over both the short and long term, the fund manager is evidently not taking many active bets.
Active share ratio
This ratio shows how much the fund’s holdings differ from its benchmark (typically a stock market index). The higher the ratio, the more active the fund manager is likely to be.
A fund that holds the same stocks as its benchmark in the same proportions will have an active share of 0%, while a fund that holds none of the index's stocks will have an active share of 100%.
Unfortunately, fund firms are not required to publish this ratio. So it is not widely available.
Skin in the game
Although it is harder to examine given that there’s no regulatory requirement for fund managers to disclose whether they ‘eat their own cooking’ by investing their own money in the fund they manage, it is at the very least worth asking the fund management company this question.
While having ‘skin in the game’ is no guarantee of success, it does send a powerful message to investors that the fund manager has an added incentive to perform well.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.