This quarter’s report includes the following analysis:
- The CT MM Consistency Ratio – highlighting the surprisingly limited number of funds beating their peers on a regular basis.
- Tops and Bottoms – the ultimate winners and losers over the quarter.
- Sector Skews – the best and worst of the 52 IA sector averages.
- Risky Business – a look at the leading funds for combining first class longer-term returns with the lowest levels of volatility.
The CT MM Consistency Ratio
- The CT MM Consistency Ratio for top quartile returns over three years (to the end of Q4 2021) rose to 2.9% (1% last time) with 31 of the 1,087 funds achieving this feat. This ratio was within the usual historic range of c.2-4%.
- The IA Europe ex UK sector was again the most consistent for top quartile returns with an impressive 8.1% of funds making the cut. It was followed by the IA UK All Companies and IA UK Equity Income sectors which had 4.2% and 3.8% of funds respectively making the grade. The IA Emerging Markets and IA Japan sectors failed to deliver any funds that achieved this level consistently, with three of the IA sectors having just 1 fund achieving the feat.
- Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw 159 of the 1,087 funds delivering above median returns consistently. This means this less demanding ratio rose to 14.6% from 10.2% in Q4.
- All 12 main IA sectors contained funds that met the less demanding above median consistency hurdle. The most consistent sector on this measure was the IA UK All Companies sector with 19.8% of funds performing above median for 3 consecutive years. The IA Europe ex UK and IA £ Strategic Bond sectors were the next best with 18.6% and 16.9% respectively achieving the target, with the IA Emerging Markets sector the least consistent with 5.4% of funds achieving the above median consistency hurdle.
CT MM comment
- Consistency improved in the fourth quarter from the third, though only back to historical norms. A possible cause being the reversion back to growth as a style, though the list of names was less dominated by certain houses that specialise in this style than has previously been the case.
- The fourth quarter also bought with it a continuation of the trend that started in the second quarter of 2021. Namely of Europe ex UK being the most consistent in rolling top quartile terms and the US being among the least (or having no funds achieving this measure as was the case in Q3). For the 5 quarters before this the reverse had been true, with the US taking the lead in the consistency stakes. Europe has always been a rich hunting ground for active managers who have historically been less stylistically skewed managers versus the US where there is a longer history of manager specialisation. As we see increasingly bifurcated markets, the increase in specialism from funds could mean more extreme consistency measures from a broader set of sectors as we see the ebb and flow of performance of more extreme mandates as economic fortunes change.
Tops and bottoms
Identifying the best and worst performers of all funds in the quarter across all 52 IA sectors.
- The £1.2bn FTF Martin Currie Japan Equity fund suffered beyond the falls of the Japanese market in the quarter. Managed by the inimitable Hideo Shiozumi, the fund has a skew to growth companies, with a focused list of holdings. 2020 was a stunning year for the fund in comparison to 2021 where a different style of investing has been in favour.
Source: Lipper, 30-Sep-21 to 31-Dec-21, percentage growth, total return.
Identifying the best and worst performers in the quarter across all 52 IA sectors.
- The IA North American sector topped a table of IA sector averages gaining 7.4% – topping off yet another breath-taking annual performance with a 12-month gain of 26%. The last time the IA North American sector average fell was 2018.
- The IA Commodities and Natural Resources sector (compromising of 13 funds) was next best gaining 7.3%. Thestraggler of the table was the IA Japanese Smaller Companies falling 7%.
- It was a quarter of mixed results for UK equity sectors with the IA UK All Companies sector gaining 2%, and the IA UK Smaller Companies sector falling 1.3%. The IA UK Equity Income sector gained 3.2% in comparison.
- The newly dissected IA Bond sectors lost ground on the whole with only the IA USD High Yield Bond sector gaining 0.2%. The rest lost 1% or less aside from the IA EUR Corporate Bond sector which lost 2.9%.
- The IA UK Gilt sector reversed last quarters falls gaining 2.2%, with the IA Corporate Bond sector next best gaining 0.1%. The IA £ High Yield and IA £ Strategic Bond sectors were essentially flat on the quarter.
- Emerging Market Bonds continued to lose ground in the quarter with both the IA Global Emerging Markets Bond Local Currency and IA Global Emer ging markets Bond Blended sectors losing -1.8%.
- The IA Targeted Absolute Return sector gained 0.8% in the quarter. The 12 month return for the sector was a respectful 3.8% when compared to cash.
- Looking at the Mixed Asset IA offerings, the IA Mixed 40-85% Shares sector was the strongest performer rising 2.8%. The IA Mixed Investment 20-60% Shares returned 1.9% ahead of the 1% gain from the IA Mixed Investment 0-35% Shares.
- The IA Global Equity sector rose 4.6% against a return of 6% for the IA Global Equity Income sector.
- If we look at the 12 months of 2021 we see 15 of these 52 sector averages losing ground. The vast majority of these are bond sectors however the worst fallers were the IA Latin America and IA China/Greater China sectors falling 12.6% and 12.3% respectively. At the top of the table for the same period we find the IA India/Indian Subcontinent sector which beat the IA North American sector with a return of 28.8% against 26.1%. The key takeout from this being to recognise that not all Emerging markets are the same – India and China are vastly different markets, and have offered vastly different returns this year, yet both are significant proportions of the MSCI Emerging markets indices. The same can be said for sectors within single country markets too. There is value to be found in looking within markets at all levels.
Source: Lipper, 30-Sep-21 to 31-Dec-21, Percentage growth, total return.
Source: Lipper, 30-Sep-21 to 31-Dec-21, Percentage growth, total return.
- Measured to the end of Q4 2021, yet again no fund achieved the perfect mix of top of the sector 3-year returns with bottom of the sector 3-year volatility. This mix seems to be becoming ever more elusive.
- The Royal London Sustainable Leaders Trust came close achieved 100th percentile risk, but “only” 8th percentile return. There were no funds with top decile returns and bottom quartile risk over the three years to the end of the quarter. A simplistic observation could be that you have been able to make good returns in these years, but you may have had to weather more volatile performance to achieve it. The middle ground is becoming a crowded place – to achieve long term excellence patience is a necessity.
Looking Ahead – alpha not beta?
- We entered 2021 with the tailwinds of fiscal and monetary policy alongside a new vaccine roll out. 2022 is looking a little different with central bankers withdrawing QE and fiscal policies such as “build back better” in the US facing challenges. Inflation is also the wildcard that every man and his taxi driver have an opinion on. All of which create a myriad of opportunities for those in a position to take them.
- According to Lipper there are 2779 funds in the IA universe with 184 of these being index trackers or 6.6%. This masks a huge variety within sectors with 3 being entirely composed of trackers, while others have none. The largest sectors such as Global Equities and the UK all Companies have 9.2% and 17.2% trackers respectively with a variety of indices being followed in each sector in most cases. We explore this subject more thoroughly in our tracker watch document that will be published in the coming weeks, but when thinking about consistency and performance versus the peer group it is important to understand the breadth of the universe and its make up. As we see this universe change, as it has done in recent years, with more passive offerings and managers increasingly specialise, it becomes increasingly important to know and understand what you are investing in. Remember – you cannot buy the average fund.