The study, which looked at bottom quartile performers with at least £1bn assets under management (AUM), highlights the poor one year returns of some of the biggest names in the industry.
In total, 57 actively managed multi-billion pound funds achieved bottom quartile returns in their relevant sector over one year.
Though it is worthwhile to examine how funds perform on an annual basis, it must be noted that a one year track record is not a sufficient amount of time to judge a manager – especially since the vast majority of funds that have underperformed this year were still able to generate positive returns.
M&G Recovery is one of the best known funds that falls into this category, even though it has delivered 7.42 per cent to investors.
Performance of fund versus sector over 1yr
Source: FE Analytics
A recent FE Trustnet study revealed that the £7.5bn fund has registered a bottom quartile performance over three years as well.
Manager Tom Dobell says that he hasn’t seen enough positives to move into higher-risk stocks, which goes some way in explaining the portfolio’s recent underperformance.
"While the equity market has had a decent rally this year, it still does not feel like there has been a significant shift away from risk aversion and through this period, M&G Recovery has struggled to perform,” he explained.
“We have had some tremendous success stories this year but unfortunately not enough to outweigh the headwinds we have encountered.”
“The main detractor for us this year has been stock selection. Over 2012, we had a few larger weighted stocks that struggled with specific issues. While we are long-term investors we are not complacent at all and we very actively engage with the management teams running the companies we invest in.”
He added: “In each of the major detractors this year, we have discussed their issues closely with them and remain confident that these are temporary setbacks and continue to back the companies concerned.”
Investors with a longer term horizon will be pleased to see that M&G Recovery does boast top quartile performances over five and 10 year periods.
The £9.2bn Invesco Perpetual Income fund has also been a bottom quartile performer over the last year.
The fund is headed by star manager Neil Woodford, who has run it since 1990. Like Dobell’s fund, Invesco Perpetual Income has made money over the last 12 months.
Performance of fund versus sector over 1yr
Source: FE Analytics
The fund is currently yielding 3.79 per cent – below average for the sector. Invesco Perpetual was unavailable for comment.
Nigel Thomas’ five-crown rated AXA Framlington UK Select Opportunities is another that has registered bottom quartile returns this year.
The £3.3bn fund has delivered 11.38 per cent this year – well short of its sector, which has returned 16.95 per cent.
Though the fund has slipped down the rankings this year, AXA Framlington UK Select Opps remains a top quartile performer over three, five and 10 years.
FE Alpha Manager Thomas (pictured) blames recent underperformance on the success of the financial sector this year; a sector which he is avoiding.
“The AXA Framlington UK Select Opportunities fund is underweight financials – a long term trend in the portfolio, which has proved to be the greatest drag on the fund’s performance year-to-date,” Thomas said.
“In particular, the banking sub sector hurt the fund’s performance in relative terms, as banks rallied strongly on the back of supportive initiatives taken in Europe.” “However, we believe that for the long term there are investment opportunities with more transparency in other sectors.”
CF Ruffer Total Return is another high profile name that has been a bottom quartile performer this year. The £2.4bn portfolio, which sits in the IMA Flexible Investment 20%-60% Shares sector, has returned 2.4 per cent.
In a recent FE Trustnet article FE Alpha Manager Steve Russell said that the fund has long term bets on high inflation and Japan, which have not worked out for the portfolio yet.
It’s a similar story for Sebastian Lyon’s Trojan fund, which is a bottom quartile performer in its IMA Flexible Investment sector over one year, with returns of 2.63 per cent. Lyon remains defensively positioned, with a sizeable portion of his portfolio in cash. In a recent interview with FE Trustnet, he said the surge into risk assets at current valuations was “irrational.”
In the fixed interest space, the £3.3bn Fidelity Moneybuilder Income fund is one of the standout poor performers.
It has returned 10.66 per cent over the last year, which places it in the bottom quartile of the IMA Sterling Corporate Bond sector.
Performance of fund versus sector over 1yr
Source: FE Analytics
FE Alpha Manager Ian Spreadbury, who runs the portfolio, says that his underweight position in financials has been the main reason for the funds relatively low returns; but he still stands by this position.
“The main detractor of performance versus benchmark has been the fund’s underweight in financial bonds,” Spreadbury said.
"We continue to invest in a world with significant macro risk and financial bonds would be hit hardest if some of the worst outcomes occur. The sector remains highly volatile and highly correlated to risk sentiment; I continue taking a cautious stance to financials and instead prefer to focus my credit risk on corporate issuers.”
“Yields may be lower, but they still offer good value in the context of a low rate world and against the backdrop of strong company balance sheets. In a market rally led by financials, this conservative approach can lead the fund to underperform against peers, but I accept those hopefully short periods for a better risk-adjusted return over the course of a market cycle,” he added.