Interactive investor boots Liontrust Special Situations and Buffettology from best-buy list

Jupiter UK Special Situations, Ninety One UK Alpha and BlackRock Continental European Income are among the new additions to interactive investor’s (ii) best-buy list (Super 60) as the firm made sweeping changes to start the year.

The firm announced that high-profile incumbents such as Liontrust Special Situations, SDL UK Buffettology and Martin Currie Japan Equity were being axed for a variety of concerns to make way for the new portfolios.

The UK’s second-largest broker made the moves as it appointed Morningstar to oversee the best-buy list, taking the fund selection process away from the in-house research team. Below Trustnet looks at the latest changes.

Out: Liontrust Special Situations

In: Ninety One UK Alpha

Morningstar analysts decided to make the switch away from Liontrust Special Situations despite strong performance. The fund has made top-quartile returns over three, five and 10 years and beaten the average peer over 12 months, but sizing has become an issue, with assets under management swelling from £4bn three years ago to £6bn today.

Liontrust Special Situations’ assets under management over three years

Source: FE Analytics

“The fund is one of the largest UK equity portfolios in the market but maintains a dedicated allocation to small and mid-cap companies. This means that it has to choose between having high ownership of a company or owning smaller portions of more companies,” the Morningstar analysts said.

This suggests that the managers may be unable to continue to buy smaller companies and could end up owning companies in which they have lower conviction, but that are more liquid.

In its stead, Ninety One UK Alpha has been added to the Super 60. The fund is unusual as it assesses the macroeconomic picture to start its investment strategy, before looking for underlying companies that fit the manager’s thesis.

Over one and three years the fund has been in the bottom quartile of the IA UK All Companies sector, but the analysts said: “while we are disappointed with the fund’s recent returns, we continue to believe that it represents a strong option for broad exposure to UK equities”.

Out: SDL UK Buffettology

In: Jupiter UK Special Situations

SDL UK Buffettology has been on the firm’s radar for a couple of months after interactive investors’ experts highlighted potential key-man risk with the fund – a suggestion denounced by fund manager Keith Ashworth-Lord – as well as issues around its size.

Already under review by ii’s in-house team, the Morningstar analysts said: “The fund has grown in size over the past three years based on strong inflows, and our analysis of the liquidity and ownership suggests that if inflows continue then the strategy could either run into problems or have to change how the fund is run.”

Buffettology has had a poor year, ranking in the bottom quartile of the IA UK All Companies sector, but sits in the top quartile over five and 10 years.

In its place, Jupiter UK Special Situations has come in. The fund, managed by Ben Whitmore, has made strong returns over the past year (up 19.4%) as its value style has come into fashion.

He buys companies that are on long-term valuation “anomalies”, calculating this by using the current price-to-earnings (P/E) ratio and 10-year average earnings.

“Despite strong long-term performance, the fund’s value bias and contrarian approach do mean that returns can deviate significantly from those of the index from time-to-time,” the analysts said.

Out: JPMorgan European Income Trust

In: BlackRock Continental European Income

Another strategy already under review by ii, JPMorgan European Income Trust failed to make the cut in the latest rebalance as its merger with the JPM European Growth Trust will take it away from an income-only portfolio into a broader investment strategy.

“Whilst the merged vehicle will maintain a 4% dividend policy to appeal to income investors, the primary objective of the trust will no longer be the delivery of income and, as such, we are removing the trust from the Super 60 list in order to replace it with a purer income-seeking strategy,” the Morningstar analysts said.

BlackRock Continental European Income comes into the list, despite poor returns over the past 12 months as its quality bias has taken a backseat to the value rally.

However, it has beaten its peers and benchmark over three, five and 10 years, returning 207.4% over the past decade.

Total return of fund vs sector and benchmark over 10 years

Source: FE Analytics

“The managers’ approach has led the fund to have a steadier return profile and to outperform during periods of market weakness, with strong risk-adjusted returns when compared to both peers and the benchmark,” the analysts said.

Out: FTF Martin Currie Japan Equity

In: Jupiter Japan Income

Also on the way out was the FTF Martin Currie Japan Equity – formerly Legg Mason Japan Equity – which is managed by Hideo Shiozumi and was in the “adventurous” bucket.

The top-performing Japan fund of the past decade has had a tumultuous year, down 29.2%, as the market has turned towards value and away from its small- and mid-cap growth names.

Total return of fund vs sector and benchmark over 10 years

Source: FE Analytics

“While the FTF Martin Currie Japan fund has delivered strong performance over the long-term, the volatile nature of this fund’s return profile leads us to conclude that investors would be better served with a fund that makes more stable returns,” the analysts said.

In its place, the Lindsell Train Japanese Equity fund has been recategorized as “adventurous”, having previously been a “core” holding.

Jupiter Japan Income has then been added to the “core” list to the Japanese stock market, as it has an “emphasis on well-managed companies” that “demonstrate strong cash flows above cost of capital, good growth prospects and management aligned with shareholders’ interests”.

Out: IFSL Marlborough Global Bond

In: PIMCO Global Investment Grade Credit

In the bond space, IFSL Marlborough Global Bond has been removed following the announcement of the pending retirement of manager Geoff Hitchin.

“Having a stable team and process is a key criteria for us when assessing funds as it gives funds the best chance of consistently delivering good returns. As a result of the recent team change we feel that the fund is no longer a best in class option,” the analysts said.

Instead, PIMCO Global Investment Grade Credit has been added. Manager Mark Kiesel has been at the helm since 2003 and has created a “well diversified” fund that spans across a wide range of issues.

He also makes significant use of credit default swaps in building this portfolio, although the flexible nature of the mandate has “historically resulted in significant off-benchmark positions and in a performance profile that can deviate from that of the index from time-to-time,” the analysts said.

Staying put: TM Crux European Special Situations

After being placed under review by ii experts, Morningstar’s analysts decided to keep the fund on the list despite underwhelming performance over the past five years in which the fund has fallen to the bottom quartile of the IA Europe Excluding UK sector.

“In 2020, poor relative performance resulted from a number of stock-specific disappointments, in addition to broader market dynamics related to Covid. In addition, the strategy is not as exposed to hyper-growth and some deeper value segments of the market, which have driven index returns in 2021,” the analysts said.

However, they have “overlooked” the medium-term performance as they said, over the long run, companies with high returns on capital, strong cash flow and low cyclicality – of which the fund owns – will be rewarded.