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 31 March 2023.
This quarter’s report includes the following analysis:
- The CT 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 57 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
Top quartile performance rolling 3 years: 1.82%
Above average performance rolling 3 years: 10.79%
Source: Lipper, 31.12 22 to 31.03.23, percentage growth, total return.
The CT MM Consistency Ratio
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 1,261 funds with a 3-year track record.
- The CT MM Consistency Ratio for top quartile returns over three years to the end of Q1 2023 remains low but close to the long term trend. Things have again improved from the all-time low of Q3 2022 (0.26%). This quarter 23 funds achieved this feat, which equates to 1.8% of the selected universe, a considerable improvement from the 6 (0.5%) of Q4 2022. This ratio’s typical range over the time we have been running this research is c.2-4%.
- The IA UK Smaller Companies sector had the highest percentage of consistently top quartile funds with 8.7% achieving this feat. The next best was the IA Europe ex UK sector with 5.4% of funds. The IA Emerging Markets and IA £ Corporate Bond sectors failed to have any funds, with the IA £ Strategic Bond, IA North American and IA Global Mixed Bond sectors only having one fund achieving consistently top quartile returns in the 3 consecutive 12 month periods.
- Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw another significant pick up with 136 of the 1,261 funds delivering above median returns consistently, compared to 82 funds last quarter. This means this less demanding ratio rose to 10.8% from 6.7%.
- The IA UK Smaller Companies sector had the most consistently above median funds with 19.6% achieving this feat. The next best was the IA £ Corporate Bond sector with 14.8% of funds. At the other end of the spectrum the IA UK Equity Income sector had the least number of funds achieving rolling 12-month consistency for the 3 years at 6.6%. All sectors had a number of funds achieving above median consistency.
CT Multi-Manager comment
- There was a pick up in consistency, which remained low, but closer to the historical range in number. This occurred during a quarter that saw the return to favour of some of the beneficiaries of a lower rate environment. The volatility in markets and sentiment remains staggering with the outlook as foggy as ever, and we can anticipate further change in quarters ahead.
- There was little by way of trend in the 23 names that achieved consistently top quartile returns aside from them being active, and including some small cap, recovery and income mandates. This I find particularly exciting as these are areas where stock picking is key and just buying the index will rarely work.
- If we broaden the analysis to the whole IA universe there were no passive funds in the consistently top quartile results. Of the universe of 3,248 funds, 413 were above average for the 3 rolling 12 month periods consistently and of these, 19 were index trackers. Of these 19, 7 were equity trackers with the rest tracking fixed income, and mainly government bond indices and in particular Gilts.
Tops and bottoms
Identifying the best and worst performers of all funds in the quarter across all 57 IA sectors.
- The T. Rowe Global Technology Equity fund led the table of IA funds in a quarter that saw a resurgence of popularity for this contentious sector. Managed by Alan Tu and Dom Rizzo this focused global offering looks for superior earnings growth with an overweight in semiconductors and internet related names, with a corresponding underweight in the hardware space. While the 1-year numbers are less compelling, the fund enjoyed a stunning first quarter of the year in absolute terms, as well as relative to the peer group.
- In a quarter that saw ripples echo through the financial sector with the failure of SVB and Credit Suisse amongst others it was unsurprising to find a fund dedicated to this space at the bottom of the IA peer group. The BlueBay Financial Capital Bond run by Marc Stacey, Justin Jewell and James Macdonald felt the brunt of this shift.
Tops and bottoms
Source: Lipper, 31.12 22 to 31.03.23, percentage growth, total return.
Sector skews
Identifying the best and worst performers in the quarter across all 57 IA sectors.
- 46 of the 57 IA sectors made positive ground in the quarter. It was an eclectic list of sectors that faltered, though a link to the impact of the challenging conditions for financials and slowing economic conditions could be made at the margin. There were similarities to Q4 2022 in the pattern, however. The IA India/Indian Subcontinent sector continued to face headwinds after a difficult Q4, sitting at the bottom of the table losing 5.5%, with IA Healthcare sector close behind at -4.6%.
- Europe continued its positive run with the IA Europe ex UK sector’s gain of 7.6% only beaten by the IA Technology and Telecoms sector at a strong 15.3%, with the IA Europe Inc UK sector next best at +7%.
- There were divided fortunes in the UK sectors. The IA UK All Companies sector gained 2.6%, with the IA UK Equity Income sector next best gaining 1.9% – slightly surprising given the hit certain income stocks have taken in the quarter. The laggard was the IA UK Smaller Companies sector which actually fell -3.1%.
- Turning to UK bonds, the positive run continued. Strongest was the IA UK Index Linked sector gaining 5.2%, with the IA £ Corporate Bond sector just beating the IA UK Gilt sector at 2.2% for the former, against 2.1% for the latter. The IA £ High Yield sector gained 1.9% with a disappointing return of 1.6% for the IA £ Strategic sector – reflecting the lack of duration in the most flexible funds in this universe, alongside a preference for financial debt perhaps.
- The IA Targeted Absolute Return sector rose 0.9%, with the 12-month rolling return still negative at -0.4% – this could represent a challenge for the sector given the returns available on cash now.
- The returns for the Mixed Asset IA offerings continued to be tight. The IA Mixed Investment 0-35% Shares sector gained 1.7%, followed by the IA Mixed 20-60% Shares which rose 1.6%, with the IA Mixed Investment 40-85% Shares the best of the three gaining 2.2%.
- The IA Global Equity sector gained 3.6% against a return for the IA Global Equity Income sector of +2.6%. This may in part reflect the reversal of the trend of Q4 with the US reasserting its dominance over Income.
Sector skews
Source: Lipper, 31.12.22 to 31.03.23, percentage growth, total return.
Currencies
The fireworks in the currency markets continued as the range of potential outcomes for terminal central bank interest rates consumed market participants. Sterling was a relative gainer in this environment against all the major currencies on our chart, despite inflation continuing to surprise on the upside. Upbeat comments from Andrew Bailey on the economic outlook undoubtedly helped the relative mood music for the pound.
Major currencies relative to sterling
Source: Lipper, 31.12.22 to 31.03.23, 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 Q1 2023, the M&G Short Dated Corporate Bond Sterling came the closest to securing the elusive crown of achieving top sector 3-year returns with bottom of the sector 3-year volatility with 99th percentile volatility and 2nd percentile returns within its peer group (the IA £ Corporate Bond sector). Run by Matthew Russell the fund has a global focus investing predominantly in investment grade companies, with the aim of outperforming the Markit iBoxx EUR Corporates 1-3 year (GBP Hedged) Index. It is telling that a 6.6% return was enough to secure it one of the strongest returns in its peer group, where the average fund over the 3 years fell by -6.5%.
Looking ahead - and looking within...
- “The fed will keep hiking until something breaks” has been a common call and this seems to have been the case now with recent US and Swiss bank troubles. While it feels like (say it quietly) things have stabilised post the SVB/CS failures, markets still feel jittery. The final week of the month was eerily quiet – perhaps the Easter break started early for many – but generally it feels like the rocks are quietly being turned to check for more issues in the new higher rate environment.
- Tech returned to the spotlight again, with value, financials and energy creeping back into the cold shadows. I heard a fantastic quote with reference to the US banking system – “whales need plankton to survive” and the shift of liquidity from regional banks who are the lifeblood of regional America as savers seek safety over better deposit rates for their nest-eggs may have consequences yet. I think the same could be said for tech firms. We are entering a slower time for economic growth, with all tightening their belts and their marginal spend. While the banks continue to trim the excesses of easier times to ultimately improve on their return on capital as that capital becomes more expensive, we also need to remember – who are their customers?
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.
