Funds Premier League: August review

Trying to anticipate movements in stockmarkets, indices and currencies in the current climate is nigh on impossible; it has certainly been a volatile few months. And continued volatility reinforces the point that past performance is a risky basis on which to assess your investments.

The Japanese Nikkei 225, for example, rocketed in April following positive announcements by the Bank of Japan, the country's central bank, on tackling deflation - only to later plummet 20% over the month to mid-June. The FTSE 100 had a stellar first quarter of 2013 but recorded its first fall for more than a year in the second quarter. Meanwhile, the Dow Jones fell after the US Federal Reserve indicated it would begin tapering its programme of quantitative easing, highlighting just how irrational markets can be. Second-guessing these indices is no mean feat.

The Money Observer Funds Premier League aims to assist, by focusing on consistent performance among hundreds of funds. We look at 11 popular sectors for open-ended funds and calculate the top performers, based on consistent high returns.

As we have seen in recent months, it is very easy for investors to be lured in by an index or fund that is having a particularly impressive short-term period of performance, only to see that performance subsequently plummet. By looking for consistency of returns over longer timeframes, we hope to minimise this risk by selecting funds that can perform in a variety of market conditions to produce solid returns.

The Premier League is measured every three months across three discrete one-year time frames. If a manager falls into the third or fourth quartile in the most recent period, they are ejected and replaced with the manager at the top of that sector (in terms of first-quartile returns and a high three-year return).

The parameters of the league dictate that the manager must have been running the fund for at least three years - this is after all a league of managers and not investment houses - and have at least £10 million of assets under management.

This quarter we have seen a number of changes to our league of top performers. Usually there are just one or two changes in the table but this month we welcome five new managers to the group - a reflection of the challenges faced by managers in the difficult markets of recent months.

Asian consumer win

Ejected from the league is the Threadneedle European Select fund run by David Dudding, which fell to a lowly 65th out of 95 funds in its sector over the past year. It's a sharp turn in fortunes for the fund, which has outperformed its peer group in nine of the past 10 years. With a strong bias towards consumer goods and to Germany, the lack of financials in the fund's portfolio may have hurt it of late.

In its place we welcome the GAM Star Continental European Equities fund, a newcomer managed by Niall Gallagher since December 2009. The fund is 13th in its sector over the past year, making it a first-quartile performer within this relatively large peer group. Gallagher cites his "eclectic" mix of holdings, including Ryanair, Wirecard, Henkel, Continental and Duerr, as prime contributors to the fund's success. He also believes a decision to shift from so-called stable stocks such as Nestlé, which have underperformed, has helped. The Threadneedle fund, by comparison, has Nestlé in its top 10 holdings.

Cementing positions

Stuart Rhodes's M&G Global Dividend and Stephen Rodger and Torcail Stewart's Baillie Gifford Corporate Bond funds both remain steady in the league, cementing the positions they have held since our November 2012 review, and making this a fourth quarter in the table for both.

John McClure of the Unicorn UK Income fund also retains top spot with a particularly successful history in our league. Though Unicorn was knocked out of the table for two quarters in 2012, it has otherwise been a mainstay for more than two years. The fund is sixth in a peer group of 96 over the past year, having returned 41.5%. It has a huge leaning towards the support services sector, which accounts for more than 30% of the fund.

For more on the Unicorn UK Income fund's holdings and co-manager Simon Moon's thoughts on them, read:Shares to buy, hold and sell.

The Cazenove UK Smaller Companies fund, run by Paul Marriage, reappears in our table. It first featured in May of this year and has retained its position with a return of 41% after one year, putting it fifth in the 56-strong UK smaller companies sector. A weighting of 31% to industrials has steered the performance of this fund .

To find out more on how Marriage is fighting the view that the UK manufacturing industry is in on the skids, read:Star manager Marriage: Small UK companies are among world leaders.

Elsewhere in the table the First State Global Emerging Market Leaders fund takes over from Aberdeen Emerging Markets. Winner of the Money Observer Best Larger Fund award this year, Jonathan Asante, manager of the First State fund, says he is focused on "finding quality companies with strong business franchises, excellent management and robust company finances trading at reasonable valuations". He thinks the merging of the developed and developing worlds is an important consideration when looking at companies.

Stephen Thomber's Threadneedle Global Equity Income fund has ousted the Newton Global High Income fund after three successive quarters for the latter in the global equity income sector's top spot. The Invesco Perpetual Global Equity Income fund had actually performed better than both, but manager Nick Mustoe is a relatively new recruit to the fund, having only taken over in December 2012, so he does not fulfil our three-year management criteria. Threadneedle's Thomber has come back from a loss in the 2011/12 year with a return of more than 32% in the past year, ranking the fund fifth in its sector.

Concentrated portfolio

Sean Ashfield's Practical Investment fund replaces McInroy & Wood Balanced in the mixed investment 40-85% shares sector, a tough category comprising some 136 constituents. Ashfield has a concentrated portfolio, holding around 30 investment companies, with a bias towards trusts currently trading on a discount.

Old Mutual North American Equities, another Money Observer award winner, replaces the GAM North American Growth fund, perhaps outstripping the latter due to its heavier exposure to the consumer discretionary sector. Despite similar sectoral weightings within the two portfolios, they do not share any of their top 10 holdings, and the Old Mutual fund has been better placed to take advantage of an increasingly buoyant financial market in the US. It has returned 31.8% in the past year, coming 16th in a sector of 89, while the GAM fund has slipped into the third quartile with a return of 26.8% over the same period.

Finally, in the fifth change this quarter, Neptune UK Mid Cap has relieved Liontrust Special Situations of the spot it held for the previous three quarters. Mark Martin has run the Neptune fund since its December 2008 inception, returning 91.6% after three years and 39.3% in the past year.

It will be interesting to see whether the next round-up brings a little more performance stability back to our Premier League.