2015 Fund Awards: Regional

Best North America fund

Legg Mason Opportunity

The US economy has performed well over the past few years and this has been reflected in its stock market performance. Many investors who were underexposed have been topping up their fund holdings.

Those who chose our winning fund in this category, Legg Mason Opportunity, would have done particularly well. Not only does it have a good risk-adjusted return via its Sharpe ratio but more impressively it has also achieved very strong returns.

It has been managed since inception in February 2009 by Samantha McLemore. She says Legg Mason believes that although markets broadly reflect company values, inefficiencies occur, and her job is to exploit these "mispricings".

The evaluation process she uses, therefore, focuses on factors that are central to long-term performance, such as competitive strategy analysis and financial and managerial assessment.

McLemore says Legg Mason's research process has been one of continual evolution since the inception of the firm in 1982. It has moved from a traditional methodology in the 1980s to a more rigorous valuation process in the 1990s, to an analysis that now includes a focus on non-valuation-focused drivers of risk and return.

Behavioural finance is one of the tools the group uses in its stock selection and portfolio positioning. "The one aspect of markets that remains constant over time is the tendency of big groups of people to behave similarly," McLemore says.

Legg Mason does not believe in constructing or managing portfolios to track or model a particular benchmark. "We do not feel it is necessary for a portfolio to be exposed to a particular company, industry or sector simply because it is represented in an index," she avers.

"Instead, we examine the correlation of its investments along with the drivers of risk and return, and construct the portfolio to optimise future returns given those correlations."

She points out that the Opportunity fund has an "active share" of over 90%. Active share is a measure of the amount a portfolio differs from the market index, and is considered an indicator of potential success. Academic studies show that portfolios need an active share of at least 60% to not be considered 'closet index trackers'.

Looking back over the past three years, McLemore says there have been a number of drivers to the fund's performance, picking out airlines as particular contributors. 'We believed that the capacity consolidation in the US, along with a shift in focus to a return on capital, created a much more rational industry structure with better economics,' she says.

'Profits have benefited significantly, with the companies reporting record earnings. The stocks we own went up on average approximately 80% per year between 2012 and 2014. We continue to like the stocks as they still trade at the bottom of their historical range, meaning the market has not yet accepted what we believe is the new paradigm.'

The 'A' share class was monitored for this award, with a three-year return of 124.52%.

Highly commended

Fidelity American Special Situations

Our highly commended fund in this sector was the top scorer in terms of its Sharpe ratio but was pipped at the post by the better return produced by our winning fund, though it still ranked third for performance among our eligible funds.

Fidelity American Special Situations has been managed since December 2012 by Angel Agudo. He can invest in companies of any size but the fund has a bias towards medium-sized and smaller companies.

Agudo describes his investment philosophy as "a high-conviction, contrarian value approach", through which he aims to successfully exploit inefficiencies in the US market. He says his main aim is "to identify stocks for the portfolio which offer an asymmetric risk-reward profile - in other words, investments where I believe the potential for upside far outweighs the prospect of future declines".

Despite a period of strong performance by US shares, he says that the positive economic growth in the US - coupled with the sheer size and diversity of the US equity stock market - means that detailed research and fundamental analysis can still uncover attractively valued companies where the market is overlooking or failing to recognise the potential for future returns.

He points out that even some of the most well-known and widely covered US companies can still offer investment potential that the wider market is failing to fully appreciate or recognise.

Investing in out-of-favour stocks requires in-depth company research, and Agudo points out that he is fortunate to be able to leverage the ideas of the company's 22-strong US equities team.

The 'Acc' share class was monitored for this award, with a three-year return of 80.22%. On Interactive Investor the fund's 'W Acc' share class is available, which returned 83.76%.

Best Europe excluding UK fund

Artemis European Opportunities

Despite regular scare stories about the fate of the euro and the European economies, stock markets in Europe have performed well over the past three years, which has rekindled investor interest.

Our winning fund, Artemis European Opportunities, was set up in October 2011, just before the market started to recover, although its managers Mark Page and Laurent Millet have longer experience.

There was no question about the fund's winning position. Not only did it score the best risk-adjusted return as measured by the Sharpe ratio, but it was in the top three eligible funds for performance.

The managers have achieved their good returns by running a focused portfolio of no more than 60 high-quality European shares. But they also have considerable experience in using derivatives to reduce the volatility of returns, and they use the fund's derivatives overlay to mitigate risk and generate income.

It should also be pointed out that it was the sterling-hedged share class in the fund which earned the managers their accolade. This share class allows sterling investors worried about exposing themselves to currency risk to still gain European exposure.

The managers are firm about the type of companies they will invest in. They must have strong balance sheets and the ability to grow their businesses profitably, and they must be available at the right price. Page says: "We only invest in companies we understand, and where we value the strategy and the management. Our portfolio is diversified across countries and sectors."

Companies are chosen on their own merits, irrespective of their domicile. The managers look for high-quality businesses that can grow over long periods of time irrespective of what is happening in the wide economy.

Page says: "We are agnostic about size, country of origin or sector. However, our stock-picking style will produce biases of which we are clearly aware, in particular a medium-sized company bias."

They select the stocks they believe - on reasonably conservative assumptions - have the potential to generate a decent five-year compound return through a combination of earnings growth and dividend yield.

They also take a pragmatic approach. If the prime companies they would like to buy are over-priced, they will invest opportunistically in stocks that are too cheap to ignore. However, the limit of 60 on the number of shares they hold ensures that any new entrant must be more worthy than an existing holding, which acts as an effective buy/sell discipline.

Looking back at investment decisions that have worked well for them over the past three years, Page says: "Our stock approach had positioned us well for what turned out to be a strong domestic rally as Europe stepped back from Armageddon."

The 'I Hedge' share class was monitored for this award, with a three-year return of 72.12%.

Highly commended

Henderson European Focus

Our highly commended fund in this category is no stranger to the limelight: Henderson European fund won the best larger fund award last year, and the best smaller fund award the year before.

The manager, John Bennett, who is director of European equities, has always been of the opinion that there are plenty of good companies in Europe to choose from. And with this fund he has plenty of scope, as it is a concentrated 'best ideas' portfolio with the flexibility to invest across all industries anywhere in Europe.

Bennett particularly likes to blend sector themes with company specifics. He likes to have a sector framework and he says that avoiding certain sectors can be crucial to generating good long-term returns.

Two of the sectors that have served the fund extremely well over the past three to five years have been healthcare and smart cars. Although the valuations in these sectors have risen and Bennett thinks they are now looking stretched, he says they will remain durable themes in the fund and continue to be firm foundations.

In 2014 he brought a new theme into the portfolio - domestic retail banks. He particularly likes this sort of bank in Scandinavia and the Benelux region.

He is expecting the European markets to become more volatile in the future, and would be pleased if markets fell because he would be able to find more value.

The 'A' share class was monitored for this award, with a three-year return of 67.67%. On Interactive Investor the fund's 'I' share class is available, which returned 72.51%.

Best Japan fund

Baillie Gifford Japanese

There has been a resurgence of interest in Japan since prospects for Japanese shares improved under Japan's current prime minister, Shinzo Abe. However, the managers of Baillie Gifford Japanese, Sarah Whitley and Matthew Brett, have never lost faith in quality Japanese companies.

This award makes it a hat-trick this year for Baillie Gifford's Japan team, which is led by Whitley and also won Money Observer's award for best Japanese investment trust as well as the highly commended accolade in the same sector.

To find promising companies to invest in, Whitley and her team conduct their own research. Their focus is at a company level - they do not base their choices on the prospects for particular sectors or industries.

However, once they have found businesses, they assess how economic conditions are likely to affect those companies when analysing their positions. Once they have made their choices, they back their judgement by running a concentrated portfolio with relatively low turnover.

Whitley says: "We aim to identify businesses with attractive industry backgrounds, strong competitive positions, high-quality earnings and favourable attitudes towards shareholders. The financial factors considered include earnings growth, cash generation, profitability, return on capital and balance sheet strength.

"We take a three to five-year view when investing in stocks. Consequently, turnover tends to be around 25% a year. We believe our long-term investment approach differentiates us from most managers investing in Japanese equities."

She concedes that the longer-term approach means the fund's performance can be volatile over the short term, but she argues that the strategy of investing in businesses with higher-than-average growth prospects pays off over time.

Two particular successes for the fund over the past three years were investments in car manufacturers Fuji Heavy Industries and Mazda towards the end of 2012. The fund's managers believed these businesses would benefit greatly from a more favourable industry background as a result of the weakening yen and a recovery in demand.

They also identified and exploited specific growth drivers for each company. Mazda made a technology breakthrough with its "skyactiv"platform, which improves the fuel efficiency of conventional petrol engines.

The managers felt this could transform the perception of Mazda and underpin a sharp recovery in profitability. Fuji stood to benefit from a strong franchise in the US as the market there recovered, and to enjoy a surge in sales and record operating margins.

As far as risk is concerned, Whitley says: "The biggest risk we run is misunderstanding investments we make." The fund avoids this by categorising holdings in thematic groups based on their expected growth.

Shinzo Abe's reforms are undoubtedly benefiting the fund, but the managers insist it is the success of the individual businesses they invest in that drives performance.

The 'A' share class monitored for this award returned 66.67% over three years. The fund's 'B' share class, available on Interactive Investor, returned 70.79%.

Highly commended

M&G Japan

Our highly commended fund, M&G Japan, is about to acquire a new manager, which would normally lead to our qualitative filters disqualifying it.

However, if we believe a fund has benefited from a team approach and the new manager is going to follow the same investment approach as the previous manager, we may waive our objection - as we have done with this fund.

In this case, Johan Du Preez will be replacing Dean Cashman, who has managed the fund from Singapore for the past nine years.

Du Preez comes from the same team at Eastspring Investments as Cashman, and he will be running the fund in the same way, so we feel our highly commended award is justified. The main difference will be that Du Preez will run the fund from London.

The fund takes a value approach to investing, which means the manager looks for shares in companies that are on cheap valuations relative to the returns he expects them to generate over the medium to long term.

These companies are quite often out of favour with the market for one reason or another. The fund's investment strategy therefore tends to be contrarian in nature.

The rationale behind this approach is that the market can, and often does, mis-price companies. Emotions and biases such as fear and greed may prevent investors from assessing investments rationally.

As a result, market prices do not always reflect fundamental values. The fund's managers are able to exploit such behavioural biases in Japan's equity markets.

The 'A' share class monitored for this award produced a three-year return of 50.99%. The fund's 'I' share class, available on Interactive Investor, returned 53.51%.

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.