Fewer than 10 per cent of funds in major market sectors have delivered above median returns in each of the past three 12-month periods to last quarter-end, according to BMO Global Asset Management.
The third quarter findings revealed a drop in above-average performers compared with Q2, falling from 11.5 per cent to 9.6 per cent.
According to the findings, the most consistent sector was the IA UK Smaller Companies sector, where 21.7 per cent of funds outperformed the median in each of the past three 12-month periods.
The least consistent performer, meanwhile, was the IA UK Equity Income sector where just 1.3 per cent of funds beat the median over three consecutive 12-month periods.
The asset manager also found a smaller pool of funds were able to generate top quartile returns over three years compared with the second quarter of 2017. Of 1,129 funds, just nine – or 0.8 per cent – were able to consistently deliver top quartile returns over three years to the end of Q3 2017.
Source: BMO Global Asset Management
Kelly Prior, investment manager in BMO Global Asset Management’s multi-manager team, said: “Building on the previous quarter, the number of funds generating consistent returns continues to deteriorate.
“Over nine in 10 funds failed to consistently generate above average returns over a three-year period, with vicious sector rotations and gyrating yield curves creating a lack of consistency from funds.”
She added: “Our survey shows that the last three years have rewarded the brave, although the investment backdrop is not an easy one to navigate as we live in curious times with volatility eerily absent.”
Below, FE Trustnet looks at some of the most consistent sectors and funds outperforming the sector average over rolling 12-month periods to the last quarter end.
IA UK Smaller Companies
The two most consistent IA UK Smaller Companies funds, outperforming over the most consecutive 12-month periods, are Invesco Perpetual UK Smaller Companies Equity and Old Mutual UK Smaller Companies.
The £1.3bn four FE Crown-rated Old Mutual fund has been managed by FE Alpha Manager Dan Nickols since 2004. The three crown-rated £660.8m Invesco Perpetual fund, meanwhile, has been overseen by Jonathan Brown since 2011.
Both funds have generated rolling 12-month returns ahead of the benchmark average going back to 2014.
Performance of funds vs sector over 3yrs
Source: FE Analytics
Over three years the Old Mutual fund has been the better performer, rising by 90.12 per cent, while the Invesco fund has recorded a 77.47 per cent gain. Both are ahead of the 58.70 per cent return for the average IA UK Smaller Companies sector fund.
The team behind the Old Mutual fund – led by Nickols – picks stocks based on three criteria: sustained above-average growth, profit upgrades, and the opportunity for shares to be re-rated higher.
“The stock selection process does have a growth bias in it but the team's top down view guides them towards more cyclical or defensive companies at appropriate junctures,” noted analysts at Square Mile Research. “Such pragmatism has been adopted to ensure that the fund performance is more consistent.”
Meanwhile, Invesco’s Brown focuses on identifying quality businesses with strong balance sheets, deemed capable of self-help rather than being overly reliant on the wider economy to stimulate growth.
The Old Mutual fund has an ongoing charges figure (OCF) of 1.03 per cent, while the Invesco fund carries a 0.92 per cent charge.
IA Asia Pacific Excluding Japan
The next most consistent sector over rolling 12-month periods is IA Asia Pacific Excluding Japan, where 15.7 per cent of funds outperformed the median. Two funds in particular stood out: Old Mutual Asia Pacific and Fidelity Asian Special Situations.
The five crown-rated £346.8m Old Mutual fund is overseen by Amadeo Alentorn, Ian Heslop and Mike Servent and runs a diversified portfolio of 216 holdings.
Stock selection by the team is based on five criteria: dynamic valuation, market dynamics, sustainable growth, analyst sentiment and company management.
Its run of consecutive 12-month performances stretches back to June 2012. Indeed, over five years the fund has returned 127.65 per cent, compared with a 73.91 per cent rise for the average sector fund.
Performance of fund vs sector over 5yrs
Source: FE Analytics
However, the team recently noted that 2017 had been a challenging year for the region with the unwinding of the ‘Trump trade’ and instability in the market during the third quarter, as the market continues to undergo a series of style and sector rotations.
The fund has an OCF of 1 per cent.
The four crown-rated Fidelity Asian Special Situations fund, meanwhile, is overseen by Suranjan Mukherjee and was also among the most consistent performers with consecutive 12-month sector outperformance since September 2013.
The fund invests in special situations stocks with valuations attractive in relation to net assets or with earnings potential with additional factors that may have a positive influence on the share price. It can also invest in smaller growth companies in the region.
The fund has an OCF of 1.94 per cent.
IA Global
The third most-consistent sector was IA Global where 13.6 per cent of funds outperformed the median over three consecutive 12-month periods.
It was also the most consistent sector for top-quartile returns over rolling three-year periods, with 2.5 per cent of funds outperforming the median.
The $458.8m GS Global Small Cap Core Equity Portfolio stands out for the most consecutive rolling 12-month periods, which stretch back as far as September 2009.
The fund is managed by Goldman Sachs Asset Management’s Quantitative Investment Strategies Group and uses Goldman Sach’s CORE strategy, a multi-factor proprietary model which aims to forecast returns on securities.
The CORE strategy considers the momentum, value and profitability characteristics behind a stock’s performance. Momentum involves identifying trends within global economic cycles, industries, companies and analyst reports, while the value focus seeks to identify stocks trading at attractive prices relative to peers. Finally, the CORE strategy’s profitability aims to pinpoint companies with compelling profitability characteristics by evaluating balance sheet health.
The fund has an OCF of 0.85 per cent.
Performance of fund since September 2009
Source: FE Analytics
The $180.2m three crown-rated Hermes Global Equity fund was also a consistent performer. The fund is managed by Geir Lode, who is supported by Lewis Grant and Louise Dudley, its of the sector average stretches back to March 2010.
Under Lode, the team assesses stocks value, growth and quality characteristics along with market sentiment towards the company to find those with the optimum combination.
Over three years the fund has returned 57.66 per cent, compared with a 46.43 per cent rise for the average sector fund.
The fund has an OCF of 0.66 per cent.