Interactive Investor

Fund soft closures see two managers relegated in Premier League

17th February 2014 17:32

Holly Black from interactive investor

November 2013 saw our new Premier League of star funds and their managers take on a different form. As the previous season's 11-strong "football team" of alumni were ejected, we took on a new cohort in the form of a rugged "rugby team" of 15.

A three-month performance period has since passed so we reviewed our team to see whether the funds continue to make the grade. To gain admission to the league, a fund must have had the same manager at the helm for at least three years and have more than £10 million of assets under management.

It must also have three consecutive years of first-quartile performance in its sector. If that's not available we look for two years of first-quartile and one of second-quartile performance.

The expansion of our league from 11 to 15 constituents meant we were able to include new fund sectors that have seen their profiles rise over recent months. We added Japan, which has attracted much attention thanks to Prime Minister Shinzo Abe's new economic policies and the Japanese market's impressive growth over the past year.

We also included targeted absolute return funds and sterling corporate bonds, as income remains of prime importance to our readers, plus the flexible investment and mixed investment 20-60% shares sectors.

The global equity income sector has been dropped, simply because there are only 20 funds in the sector, making it difficult to carry out viable comparative analysis. League positions are based purely on past performance, which is no guarantee of future excellence - but is nonetheless a good place for investors to start.

New promotions

Three months into the current Premier League season our cohort is, for the most part, looking strong. By maintaining first or second-quartile performance in the year to 1 December, 12 of our 15 funds have earned the right to remain in the group until the next review.

Three funds are being ejected from the league, but some of these expulsions were very tough calls. Henderson UK Smaller Companies fund, managed by Neil Hermon, was our representative in the UK smaller companies sector over the past quarter. But in a peer group that continues to outperform, Hermon's fund has slipped narrowly into the third quartile in the most recent rolling year of discrete performance.

The average performance for the UK smaller companies sector over the year to 1 December 2013 was 37.4%, which Hermon narrowly beat with a return of 37.6% over the period. Ranked 26th among 50 funds over the past year, Hermon's fund has failed to retain its position by the narrowest of margins, but our criteria leave no place for sentimentality.

In place of the Henderson fund, the Discretionary Unit fund is welcomed to the Premier League fold. Manager Simon Knott has looked after the fund for some 14 years, producing an average annual return of 12.5% in that time and ensuring the fund is a stalwart of the top quartile.

Over the past year he has produced a hefty return of 42.9%, compared with a sector average of 37.4%, by focusing on what he describes as "deep value" and ignoring macro issues. Well respected Knott's portfolio is fairly concentrated, with around just 40 holdings and a bias towards high-yielding, small-cap companies.

Index deviation

However, Jason Hollands, managing director of communications at Bestinvest, points out that "given the style bias on the fund, it will tend to deviate considerably from the index and rarely hovers around the middle [of the sector]".

That said, Hollands adds that the Discretionary team as a whole is well respected, having been in place for almost 24 years, with a good long-term record.

"Academic research shows that over the long term small caps have significantly outperformed broader indices and higher-yielding shares outperform lower-yielding ones. Value has a slightly better record than growth as an investment style too. So this fund should have a winning long-term approach," says Holland.

Research shows over the long term small caps have significantly outperformed broader indices and higher-yielding shares outperform lower-yielding ones.Jason Hollands

In the targeted absolute return sector we say farewell to Paul Marriage and John Warren, and their Cazenove Absolute UK Dynamic fund. The fund's ejection from the league is nothing to do with its performance: it has returned 20.6% over the past year, significantly beating the average 6.4% return in its sector, and is ranked fifth out of 60 funds over that period.

It has been ejected because in November, Schroders - which recently acquired the Cazenove suite - confirmed that the fund would be soft closed to protect its performance and because, with more than £387 million under management, it has reached full capacity.

Robin Stoakley, managing director of UK intermediary at Schroders, says the move was part of the "ongoing commitment to maintain the integrity of the investment process of our funds". He adds: "We are always mindful of our duty to protect performance for existing investors and deliver the fund's objectives."

In place of Marriage and Warren's fund, we welcome Ian Heslop's Old Mutual Global Equity Absolute Return, which has returned 14.6% over the past year. This is one of five funds Heslop runs for Old Mutual - you can read more about his strategy in our Buy, Hold or Sell feature, where he discusses the holdings of the North American Equity fund.

Heslop has run the Global Equity Absolute Return fund since 2009 and it has been ranked in the first or second quartile for all of that time, notching up a total return of 32.4% over the past three years, against a sector average of just 12.4%. He has an analytical approach, backed up by a research team, which means he reviews his 550 or so holdings (long and short) daily. The fund aims to stay market-neutral and its model is driven by value, sustainable growth, analyst sentiment, company management and market dynamics.

But despite the fund having a "decent record", Hollands cautions: "This type of fund can be momentum-driven and may therefore struggle when the market rotates aggressively from a macro-driven environment to a stockpicking one."

Asian picture

The CF Odey Absolute Return fund was actually the top performer in the targeted absolute return sector, but the £636 million fund also soft closed in July 2013, introducing a 4% charge for new investors.

Elsewhere, Jason Pidcock's Newton Asian Income fund has slipped into the fourth quartile of the Asia Pacific excluding Japan sector. The fund has returned just 1.5% after a tough year for the region, against an average return of 4.9% for the sector, which leaves it ranked a lowly 59th among 72 funds.

In its place the L&G Asian Income fund comes to the fore. It has been managed by Paul Hilsley since its 2008 launch and has returned 8.1% over the past year. Hilsley has 16 years' experience in the industry, eight of which are with L&G, and he now also manages its Pacific Growth fund.

Patrick Connolly, certified financial planner at AWD Chase de Vere, advises income investors to look at international portfolios, an area where Hilsley "has been quietly building a decent track record". "The fund has a heavy weighting in Australia that provides diversification," he points out. It currently yields 4.1%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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.