Choosing an investment fund should not be based on strong past performance in isolation.
About Money Observer Rated Funds
Choosing an investment fund should not be based on strong past performance in isolation. It’s also crucial to identify funds or investment trusts that suit your own investment aims, which is what we expect of Money Observer Rated Funds, explains Andrew Pitts.
Rated Funds: in brief
- Rated Funds for 2020 comprise 205 actively managed funds and investment trusts. A further 54 ‘passive’ index-tracking Rated Funds comprise open-ended funds, exchange traded funds and exchange traded commodities.
- Rated Funds are presented in 15 easy-to-understand asset groups. The most popular groups – UK Growth, UK Equity Income and Global Growth – are divided into ‘core’ and ‘adventurous’ sub-groups. The Mixed Asset group is divided into three sub-groups that reflect the constituents’ underlying exposure to equities.
- Most of the 15 asset groups include funds and trusts with a range of styles and aims. This helps investors identify funds that suit their own particular preferences, such as investing for income or a focus on smaller companies.
- At least one ‘ethical’ Rated Fund suggestion has been included in most asset groups for the first time (the exceptions being Japanese Equities and Global Equity Income).
- The majority of Rated Funds have made consistently superior returns against a relevant peer group over at least three years. However, a Rated Fund may also be selected for other reasons: for example, if it is a ‘specialist’ where peer group comparisons are less easily made, or it offers a compelling investment theme or style where past performance may have little bearing on the potential for future gains
Rated Fund Groups Explained
Money Observer Rated Funds are presented in 15 asset class groups with titles that can be easier to interpret than the official industry sector names. For example, we believe ‘UK Growth’, the name for our asset group targeting growth from UK-listed shares, is more user-friendly than the official ‘UK all companies’ title.
Some funds appear in a more appropriate Rated Funds asset group than their official sector. The most common examples are equity income funds, many of which don’t comply with the strict sector income requirements of the Investment Association (IA). Other Rated Funds that might not appear where aficionados expect them to be include several categorised in the Mixed Asset group, as well as some that have been included in the UK Smaller Companies group (rather than UK Growth) to better reflect their current and recent asset mix.
The IA specialist sector, with around 200 funds, is a rich source of excellent funds that can get lost in the crowd. However, several are included in what we believe to be more appropriate Rated Fund asset groups – for example, Stewart Investors Emerging Markets Sustainability, which we have slotted into our Emerging Markets group. The mixed-asset funds are grouped into three categories based on the indicative equity content within each fund’s underlying portfolio.
How were the 2020 Rated Funds selected?
The Rated Funds committee (chaired by Rated Funds editor Andrew Pitts, previously editor of Money Observer. The other members are Faith Glasgow, Money Observer’s current editor, Kyle Caldwell, deputy editor, and interactive investor head of funds research Dzmitry Lipski) assessed the universe of UK-authorised funds and trusts to produce a long-list for each Rated Funds asset group. All the open-ended funds included are recognised by the IA, while companies or investment trusts are recognised by the Association of Investment Companies. Exchange traded products quoted on the London Stock Exchange, plus index-tracking open-ended funds, were considered for the passive, index-tracking options.
In each asset group, funds that focus on specific strategies, such as generating income, focusing on smaller companies, or sustainable/ethical investment, are included where appropriate. However, the selection committee has also striven to limit the constituents of each group to a manageable number. The previous year’s Rated Funds, as well as Money Observer award-winning funds from 2019, were assessed for inclusion before other potential constituents were considered.
In most cases, the final constituents were selected because they have delivered consistently superior returns over at least three years compared with a relevant peer group. Short and longer-term periods were analysed, in tandem with three discrete annual periods. Investment statistics, including the Sharpe and information ratios (which are both useful measures of risk-adjusted performance) and the Sortino ratio (a measure of downside risk), were also considered.
Other factors taken into consideration included the investment manager’s track record and income yields (where relevant),plus dealing spreads and share price discount or premium to underlying asset value for investment trusts.
Funds and trusts may also have been picked for Rated Fund status if the committee agreed they were relevant for the current investment environment, with less emphasis placed on past performance.
Why are investment trusts included?
Most fund recommendation lists include few investment trusts, if any. Where appropriate for each Rated Funds asset group, the committee has endeavoured to ensure that both funds and trusts are well-represented.
Investment trusts are in many instances just as good a choice for private investors as open-ended funds, if not better. This is particularly true in difficult market conditions where volatility can adversely impact open-ended fund performance, such as in the property or smaller company sectors.
The closed-ended structure of investment trusts can result in short-term volatility. But the structure can also be more rewarding over time for investors seeking, for example, an income from equities. Closed-ended companies also provide a route into more specialised asset classes such as private equity and physical infrastructure.
Some investment trusts can also employ gearing (borrow to invest). This can magnify gains or losses, depending on the success of the investment manager and the prevailing market conditions, so prospective investors need to be aware of this opportunity and associated risk.
Generally speaking, the superior medium-to-longer-term performance of investment trusts versus open-ended funds in a variety of sectors also supports their inclusion.
How to find Rated Funds that might suit you
Within each asset group, and where appropriate, we have selected constituents to suit a range of individual investor preferences. Rated Funds that focus on income or smaller companies are often highlighted separately. Three of our asset groups have a broader range of funds and trusts, reflecting not only the larger number of potential members for the groups, but also the variety of strategies they adopt.
Those groups have been split into ‘core’ and ‘adventurous’ subsections. Mixed-asset funds are split into three categories that broadly reflect their equity content.
Most of the Rated Funds groups include at least one constituent that takes a socially responsible or ethical investment approach. In most cases, they have been accorded Rated Fund status not simply because of their ethical or green credentials, but also because their performance compares favourably against other funds considered for that asset group.
Many of these funds are also members of interactive investor’s ACE 30 ethical fund list.
Why are some poor-performing funds included?
Poor performance of an individual fund in isolation does not necessarily make it a bad choice, if the asset class or the fund’s strategy has recently been out of favour or less successful than others. For example, funds that focus on defensive areas of the markets or have a mandate to protect investors’ wealth will perform comparatively poorly in a strong bull market. But they would be expected to show up comparatively better when markets are weak.
Although most Rated Funds have performed very respectably against their peers, there are also a few ‘contrarian’ or ‘wild card’ choices. Such funds may qualify for inclusion because the selection committee recognises that the investment style pursued by the manager has not been in favour, but where past performance or the current investing environment suggest that inclusion is warranted.
Will the 2020 Rated Funds list change?
The entire Rated Funds list is monitored for major changes that may affect a constituent’s status. Examples of such changes include fund manager moves, soft-closures (where a fund has indicated it has reached capacity), a significant divergence in tracking errors for passive funds, a persistently high share price premium to net asset value (NAV) on investment trusts, or a major shift in rating from external or internal sources. Most funds that have experienced such events are likely to be placed under watch initially. The next stages are formal ‘under review’ status and/or potential suspension of the rating.
The selection committee meets quarterly to review the list and monitor performance. All active and passive Rated Funds are included in this assessment.
Inevitably, funds have periods of out- and under-performance, but this approach allows us to track rated funds that are struggling over an extended period, or to identify funds that may be failing to carry out their stated strategy to our satisfaction. Any recommendation for change is also discussed and ratified by interactive investor’s investment sub-committee.
Do Rated Fund pay for inclusion on the list?
No. The selection of funds for Rated status is not influenced by any commercial considerations whatsoever. However, some fund promoters may choose to display a Rated Fund logo on promotional material, for which a licensing fee is payable.
What do the Rated Funds tables and charts show?
Each asset group includes tables showing the official industry sector that each constituent (fund or trust) belongs to; its size (market capitalisation for trusts and ETFs, or assets under management for open-ended funds) and current yield. The percentage return figures assume that income is reinvested. These show discrete annual performance over each of the past three years, plus three-year and five-year performance; and the quartile rank in its official industry sector for each of those periods.
We also quote the FE Risk Score (FERS) produced by data provider FE, which shows how risky an investment is relative to the FTSE 100 index. Funds and trusts more volatile than the FTSE 100 have a score above 100 and vice versa. is score provides an indication of a fund’s relative risk. It is not a measure of absolute risk.
This year we have also included, where appropriate, a Rated Fund’s ‘equity style’. Data provider Morningstar analyses a fund’s underlying portfolio and places the fund’s style on a matrix. One axis measures the size of portfolio holdings, ranging from small to medium and large. The second measures the underlying financial characteristics, ranging from value to blend and growth.
Man GLG Undervalued Assets, for example, has an equity style of ‘mid value’, meaning the portfolio is largely comprised of medium-sized companies and that, as a whole, the holdings represent value. That could mean several constituent holdings in the fund have, for example, a low price/earnings ratio or a low price-to-book value.
Each of the Rated Fund profiles includes a chart, sourced from FE Analytics, which shows the fund’s return in each of the past three years compared with the average return of the fund’s official industry sector, where this is appropriate (the average return of funds in the Investment Association’s specialist sector, which covers a variety of focuses, is not meaningful).
About the icons accompanying each profile
In each of the fund profiles, we have included ratings from third-party fund analysts FE and Morningstar. We have also identified funds that can be considered as ‘ethical’ options with a green heart.
FE Alpha Manager
FE Alpha Manager ratings rate the performance of fund managers over their career, including all funds they have managed. They are designed to identify fund managers who have consistently performed well in both rising and falling markets over the long term.
FE Crown fund
FE Crown fund ratings are quantitative ratings ranging from one to five, designed to help investors identify funds that have displayed superior performance in terms of stockpicking, consistency and risk control. The top 10% of funds are awarded five FE Crowns, the next 15% receive four Crowns and the remaining three quartiles get three, two and one Crown(s) respectively. We show ratings for funds with three or more Crowns.
Morningstar Analyst rating
Morningstar Analyst ratings are designed to be forward-looking and are based on in-depth analysis and reports produced by the group’s fund specialists. If a fund receives a positive rating – Gold, Silver or Bronze – it means Morningstar’s analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years.
Morningstar Sustainability rating
Morningstar Sustainability ratings are a relatively new way for investors to evaluate how well the companies in a fund’s portfolio are managing the environmental, social, and governance (ESG) investing factors relevant to their industries. They highlight sustainable funds even if they aren’t marketing themselves specifically as products that support a socially responsible investment approach. We show funds that have a high (full green globe) or above average (half green globe) sustainability rating. However, these ratings do not necessarily indicate that a fund pursues an ‘ethical’ investment mandate.
Rated Funds with an ethical, sustainable or ESG (environmental, social and governance) mandate are marked with this icon. Many are members of interactive investor’s ACE 30 ethical list, but we have also highlighted other attractive funds and trusts that take a responsible approach to investing.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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.