Interactive Investor

UK smaller company funds surprise - Rated Funds 2015 half-year review

26th August 2015 17:40

Rebecca Jones from interactive investor

Global markets have had a rough time so far this year as the latest instalment in Greece's economic crisis, the rise and fall of China's stockmarket and continued speculation over the timing of the US Federal Reserve's first interest rate hike since 2006 have kept investors on edge.

On a regional view, Europe and Japan have proved reasonably resilient throughout the turmoil as supportive central bank policies have buoyed their respective stockmarkets.

However, toppy equity valuations have kept US markets flat, while Asia and emerging markets have broadly disappointed thanks to investors' aforementioned fear of the Fed and tumbling commodity prices.

Resilient

Accordingly, Japanese and European investment funds and trusts have performed relatively well this year. In the six months to 30 June, the average fund in the Investment Association (IA) Japan sector returned 13.4% compared to just 2.8% from the average global fund, while European smaller companies funds delivered more than 10%.

Japanese and European investment trusts fared even better, with the average trust in the Association of Investment Companies (AIC) Japan sector returning 18% in total share price returns over the first half of 2015, while European smaller companies trusts returned an average of 17.1%.

The more surprising success story this year has been the UK smaller companies sector, confidence in which was significantly boosted by the Conservative election win in May. This put an end to a disappointing 12-month period for UK smaller companies funds and trusts, most of which made a net loss during 2014.

Within the fund space, the UK smaller companies sector was the fourth-best performer in the six months to 30 June with an average return of 10.7%, while the AIC's equivalent sector was the third-best performer with an average share price return of 14.8%.

Rated hits

Reassuringly, these wider trends were mirrored among Money Observer's Rated Funds. In the six months since we introduced our 2015 list based on 31 January data, the best-performing Rated Funds are predominantly Japanese, European and UK smaller companies vehicles.

The best performer overall is Baillie Gifford Shin Nippon trust, which delivered an impressive 29.8% in share price returns over the six months to 31 July. Managed by a house renowned for its expertise in Japan, the smaller companies-focused trust is a consistent outperformer.

Launched in 1985, it has been one of the few Japan funds to ride out the country's 20-year funk with strong returns, delivering 250% in share price growth between July 1995 and July 2015.

The second-best performing Japan fund and the third-best performer overall is Aberdeen Japan investment trust with a share price return of 23.3% over the six months to 31 July.

Interestingly, this is one of the few Rated Funds managed by Aberdeen to enjoy success this year, as the emerging market specialist continues to suffer heavy outflows as investors flee the region.

Legg Mason Japan Equity also performed well, returning 18.7% thanks to manager Hideo Shiozumi's high-conviction style; this makes it the only open-ended fund in the top 10.

Other notable success stories include the Henderson TR European Growth trust, which delivered more than 22% in share price returns between February and the end of July, helping to boost its one-year return to 22.4% after a disappointing 2014.

In the UK smaller companies space the Henderson Smaller Companies investment trust enjoyed a particularly strong start to the year, returning close to 20% in share price gains in the six months to 31 July.

This marks a welcome turnaround for the trust, which shed 0.5% in 2014 after a sharp sell-off in the UK smaller companies sector in the second half, and is testament to longstanding manager Neil Hermon's stockpicking abilities.

GVQ-managed Strategic Equity Capital also enjoyed a strong period, returning close to 18% in share price gains as the trust's highly concentrated, private equity style continues to pay dividends and boost its share price premium to net asset value (NAV).

Outside the three strongest sectors, a few Money Observer Rated Funds have managed to buck wider trends and deliver good returns despite significant headwinds.

These include Pacific Assets trust, which returned 2.15% in share price gains over the six months to 31 July - making it the only Asia-focused trust to deliver a positive return within both Money Observer's Rated Fund selection and the AIC's Asia Pacific ex Japan sector over the period.

It is worth noting, however, that this reflects strong demand for shares rather than NAV growth, which actually shrank by 3.9% over the period.

Elsewhere in emerging markets BlackRock Frontiers also had an impressive start to the year, delivering a 6.9% share price return over the six months to 31 July. Henderson Opportunities also impressed with a 28.5% return over the same period compared to just 9.9% from the AIC UK all companies sector.

Within fixed income, PFS TwentyFour Dynamic Bond made a positive return in a negative environment, delivering 2.7% between January and July, compared to a loss of 0.9% from the strategic bond sector.

Rated misses

Perhaps unsurprisingly, the worst performers among Money Observer's Rated Funds so far this year are largely Asian, emerging markets or commodity-focused vehicles.

The most disappointing return came from BlackRock Gold and General, which shed more than 30% in the six months to 31 July as the price of gold hit a six-year low in July at $1,085.93 per troy ounce.

Guinness Global Energy and BlackRock Natural Resources Growth & Income fared a little better in the commodity rout, shedding 13.3% and 10.4% respectively over the six months to 31 July; for those looking to gain exposure to the asset class these remain good options.

Templeton Emerging Markets was the second-worst performer, shedding close to 17% in share price terms over six months, which pushed the trust's five-year loss out to 11.2% after a lengthy period of underperformance.

The investment trust was retained as a Money Observer Rated Fund in our global emerging market equities group for 2015 due to promising six-month NAV growth in the second half of 2014 and the reputation of its manager, Dr Mark Mobius.

However, its large exposure to commodity and value stocks means the trust has continued to disappoint; moreover, Mobius announced in July that he is stepping down as lead manager in October. As a consequence we have placed the trust under review.

A change in manager has also led to Newton Asian Income being placed under review. Jason Pidcock, who has managed the fund since launch in November 2005, announced his departure from Newton in May.

The fund was handed over to a newly restructured team headed by Rob Marshall-Lee, manager of the Newton Global Emerging Markets fund, with Newton announcing a shift away from a single lead manager approach.

News that Richard Buxton is to take on the role of chief executive officer at Old Mutual while retaining lead responsibility for his funds has also spurred a reconsideration of Old Mutual UK Alpha.

Over the past year the fund has returned a third quartile 5%, while over six months it has returned just 0.7% compared to 4.5% from the sector.

While long-term focused equity managers such as Buxton do go through periods of underperformance, UK Alpha's Rated Fund status will be placed under review until the extent of his new role becomes clear.

Fellow UK growth vehicle Artemis Alpha trust has also been placed under review due to significantly weak share price and NAV performance over the past year.

In the UK equity income sector there are two funds under review: Temple Bar and Close OLIM UK Equity Income. Managed by Investec's head of contrarian investing Alastair Mundy, Temple Bar has historically been included within our Rated Fund selection due to its high conviction, against-the-grain approach.

However, with five years of consistently poor returns now behind it, our faith in Mundy's approach is being tested.

Similarly, the Close OLIM fund has ranked at the bottom of the UK equity income sector in each of the past two years to 31 July, prompting a reconsideration of Angela Lascelles' concentrated, value-driven approach in current markets.

In the property sector Custodian Reit has been placed under review as the trust is no longer a member of the AIC, is a Reit and is AIM-listed, making it an arguably risker choice for private investors.

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.