The FE Select 100 is a quantitatively driven list, with the calculation taking into consideration past performance, risk-adjusted returns and manager ratings, among other metrics.
A "hold" rating has been included for the first time at this rebalancing, while offshore-domiciled funds are now being considered.
The five crown-rated, €332m MFS Meridian European Smaller Companies fund, managed by FE Alpha manager Peter Fruzzetti, was the only offshore-domiciled fund to qualify at the first time of asking.
Data from FE Analytics shows that it has made 66.14 per cent over the past three years while the average IMA European Smaller Companies fund has made just 45.4 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund’s outperformance was largely driven by its strong performance in 2011 when it held up well but the market suffered.
It is a concentrated portfolio with a high weighting to the UK, which has helped it outperform its sector.
The hold-rating was introduced to help reduce portfolio turnover. A buy-rating indicates that FE considers the fund to be one of the best available within its asset class, while a hold-rating is now given to any fund that previously held a buy-rating, but no longer meets the very highest criteria.
Current investors would be needlessly churning their portfolios if they were to switch from a "hold" into a similar fund with a buy-rating.
However, new investors would be better off considering a fund rated "buy" rather than "hold".
In the September 2013 rebalancing, 16 funds have been put on hold and 14 have been removed from the FE Select 100.
The risk-rated FE Select Portfolios are drawn from the FE Select 100, with funds selected through bespoke optimisation software to meet five different levels of risk.
Each risk level has a portfolio for an investor with a short-term horizon, a medium-term horizon and a long-term horizon.
Adjustments are made every six months to maximise diversification benefits and ensure the targeted level of risk is being met.
The latest rebalancing saw a number of changes at each level, aimed at retaining the risk profile and ensuring the portfolios are constructed with the current state of the markets and funds taken into consideration.
Cazenove UK Opportunities, managed by FE Alpha Manager Julie Dean, was added to the Risk Level 2 short-term and long-term portfolios, to Risk Level 3 short- and medium-term portfolios, and the Risk Level 5 medium-term portfolio.
Invesco Perpetual Income was introduced for Risk Level 1 long-term, Risk Level 2 medium- and long-term, and Risk Level 5 short-term portfolios.
JP Morgan US Equity Income was incorporated into Risk Level 3 medium-term.
In the bond sectors, Fidelity Strategic Bond entered the fray at Risk Level 2 medium-term while M&G Global Macro Bond was added to the short-term options for both Risk Level 1 and 2.
Rob Gleeson, head of research at FE said: "M&G has always had a high profile in UK fixed income investing; however, the global focus of the M&G Global Macro Bond fund offers a different skill-set."
"With its unconstrained mandate, this five crown-rated fund is a top-quartile performer over both one and three years, exhibiting a strong risk/return profile."
Data from FE Analytics shows that the fund has returned 14 per cent over the past three years while the IMA Global Bond sector has made 7.29 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Absolute return funds were introduced for the first time into the portfolios at the lower risk levels to provide an alternative to cash.
Insight Absolute Insight was added to the three lowest-risk portfolios, while Standard Life Investments Global Absolute Return Strategies was a new entrant in two of the medium-risk portfolios.
The funds bring significant diversification benefits, while providing greater upside potential than cash.
Our data shows that both have outperformed the average IMA Targeted Absolute Return fund over the past three years, and the Insight fund has been much less volatile.
Performance of funds vs sector over 3yrs
Source: FE Analytics
Among the new entrants to the FE Select 100 are GAM North American Growth, Royal London UK Equity Income, GLG Japan Core Alpha and Somerset Emerging Markets Dividend Growth.
FE Trustnet will look at these funds in more detail in future articles. Log in on Wednesday for a full day of coverage on the latest rebalancing, featuring the funds that made the cut and the themes that are driving FE Research’s asset-allocation decisions.
