No fund manager can get it right all the time, so it is only natural that even the best come under fire now and again. Sometimes, selling after a sustained period of underperformance is the right thing to do, especially if the manager tries to force an improvement by overhauling their focus or style.
However, automatically selling out of a fund just because it has underperformed – either on a relative or absolute basis – is a recipe for further disappointment. It’s key to find out why the manager has had a tough time and what this means for future returns.
In the last of a three-part series, we highlight three open-ended funds that are proving problematic with our readers.
Liontrust Special Situations
Perhaps surprisingly, a number of FE Trustnet readers flagged up FE Alpha Manager Julian Fosh and Anthony Cross's Liontrust Special Situations fund as one they are concerned about.
The five crown-rated fund has been accused of "treading water" by one individual, given that it has underperformed the All Share over a one-year period.
The fund’s longer-term record remains stellar, especially given that it has been considerably less volatile than both the index and its peer group.
Performance of fund vs sector and index over 5yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) |
|---|---|---|---|
| Liontrust - Special Situations | 20.86 | 82.24 | 130.09 |
| IMA UK All Companies | 27.01 | 44.03 | 53.27 |
| FTSE All Share | 22.17 | 42.35 | 51.77 |
Source: FE Analytics
Tim Cockerill (pictured), head of research at Rowan Dartington, rejects criticisms of the fund based on a one-year period, and urges investors not to jump ship.
"People who look at this fund and have a problem with it don’t understand it," he said. "They have a very well documented process at Liontrust, which leads them to certain types of businesses.""I’d agree with them that the companies they invest in will outperform over the long-term, but anyone who has been in the market for a long time knows that it has its favourites at certain times. This is a fund that will underperform when the market favours more cyclical companies."
"Just because it has underperformed for one year does not suggest the process has broken or the managers have lost their touch."
Fosh and Cross focus on companies that distinguish themselves based on three main characteristics: a strong research and development culture that will keep the firm in front of its competitors; a good distribution network; and a transparent and stable income stream.
Such a focus on quality leads the fund to underperform when more cyclical areas such as banks and housebuilders do well.
"Investors in this fund shouldn’t be under any illusion that it will lead in a strongly rising market," said Cockerill. "This is a long-term play."
Liontrust Special Situations actually beat its sector and benchmark in the rising markets of 2009 and 2010, but Cockerill plays down this occurrence, insisting that it is unlikely to beat the All Share during a sharp recovery.
The £931m fund requires a minimum investment of £1,000 and has ongoing charges of 1.88 per cent.
Schroder US Smaller Companies
Jenny Jones’ £540m fund is the largest and highest profile in the IMA North American sector, thanks to its strong track record going back to the early 1990s.
However, in recent years, FE Alpha Manager Jones has struggled to add value to her Russell 2000 benchmark, and has lagged her peer group as well.
Our data shows that the fund has strong absolute returns of 86.71 per cent over a five-year period, but this is around 14 percentage points less than the index.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Cockerill says underperformance over such a significant period is concerning, but does not think investors should write off Jones just yet.
That said, he prefers the Threadneedle American Smaller Companies portfolio to get his exposure to the US small cap market.
"Jones has a very strong track record and has been operating in this area of the market for a long time, but after meeting with them recently it’s clear they’ve had a number of stock-specific calls that haven’t worked out for them," he said.
"For me, it’s one to place under review. It’s good that they’ve acknowledged they’ve made mistakes and as far as I can see there aren’t any structural issues, but underperformance over such a period is a concern."
"I’d like to think it can make a comeback, but at the moment it is a concern."
Cockerill says the considerable size of the US small cap market means that the fund's AUM shouldn’t hamper performance.
Schroder US Smaller Companies requires a minimum investment of £1,000 and has ongoing charges of 1.67 per cent. It only has one FE Crown.
Artemis Strategic Assets
William Littlewood’s £901m fund was launched to much fanfare back in 2009, but many of our readers have been disappointed by its performance so far.
The fund attempts to beat both cash and equities over a rolling three-year period, but has consistently underperformed the latter. Our data shows it is currently up 29.44 per cent over a three-year period, falling short of the MSCI AC World index by around 12 percentage points.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Cockerill believes dissatisfaction with Artemis Strategic Assets is reasonable given that it has consistently fallen short of one of its objectives, but he thinks the fund’s targets are unrealistic anyway.
"The problem with this fund is that like Jupiter Absolute Return, investors were expecting fantastic things from a manager that was returning to the retail world from exile," he said. "The fund was custom-designed for him, and people were expecting great things."
"For me, I never thought that this was the kind of fund that could beat equities in a rising market. I see it as a fund that looks to outperform on the downside and capture some of the upside, given that it is a multi-asset portfolio."
Cockerill adds that investors in the fund have to be on board with the opinionated views of Littlewood.
He commented: "This is a very idiosyncratic fund – if you like William Littlewood and his views then you should stick with it, but if not then you might want to look elsewhere."
"That said, if you don’t agree with him, then it could be a good insurance policy. If you turn out to be wrong, then everything else in your portfolio might not do well, but at least this will hold up."
Cockerill points out that the fund has a significant short position in government bonds, which has weighed heavily on performance until recently.
"This is a high-conviction move, and shows that investors in the fund have to buy into the manager’s take on the world," he added.
Artemis Strategic Assets requires a minimum investment of £1,000 and has ongoing charges of 1.59 per cent. Littlewood previously headed up the Jupiter Income fund in the 1990s.
In the first article in the series, FE Trustnet analysed the underperforming investment trusts our readers are worried about.
