Smaller groups dominate new 5-Crown rated funds in latest FE fundinfo rebalance

Amid volatile market conditions caused by the Covid-19 pandemic, funds from traditionally smaller groups have been the surprise performers in the latest Crown rebalance, published today by global fund data and technology leader, FE fundinfo.

Fourteen funds were awarded the highest 5-Crown rating the first time they became eligible, with groups such as AMP Capital, Axiom Investors, Brown Advisory LLC and Gresham House Asset Management seeing their funds gain the accolade.

Newly rated 5-Crown funds

Commenting on one of the new funds to have gained a 5-Crown rating, Sophie Meatyard, Analyst at FE Investments, said:

“Brown Advisory US Sustainable Growth takes a sustainable approach towards investing and is on the FE Investments Approved Responsible list. The fund entered the downturn with significant holdings in Amazon, Microsoft, Visa and a number of healthcare companies. These names held up well during the initial sell-off and have thrived in the current economic environment. Stock picking by the team has been a consistent driver to the fund’s returns. This combined with positive sector allocation – overweight technology and health care – has been reflected in the 5-Crown rating awarded.”

Overall, nearly 360 funds achieved a 5-Crown rating, with 19 moving from the lowest 1-Crown to 5-Crowns since the last rebalance in January this year.

At the other end of the scale, the pandemic has unfortunately had a major impact on the rating of many funds in this rebalance, with 230 funds losing their 5-Crown rating. While funds concentrated in certain sectors such as retail and property have been adversely impacted by market conditions, for others the loss in their Crown rating has been due to other factors.

Charles Younes, Research Manager at FE Investments, said:

“Many funds which have previously done well have suffered this time around by misjudging their timings when it came to the sell-off in March. One example of this is Man GLG’s Strategic Bond fund, which unfortunately has been one of the worst-performers in its sector. Not only did it perform badly in the second half of March, but it also failed to capitalise on the upside in April. Manager Craig Veysey held his hands up and admitted that he got the timings of adjusting the fund’s allocations wrong and this has been reflected in its new 1-Crown rating.”

Sectors

With hopes of a ‘V-shaped’ recovery stalling and the UK economy being one of the hardest hit by the fallout from Covid-19, investors have increasingly looked to traditional ‘safe-havens’ and international markets and this too is reflected by the sector breakdown of Crown-rated funds. Amongst the sectors, the IA UK Index Linked Gilts sector has the highest percentage of its funds given a 5-Crown rating (37.5%), while both the IA North American Smaller Companies and IA North America sectors reflect the strength of US equities in recent months with 31.3% and 18.6% of their respective funds obtaining a 5-Crown status. The IA Sterling Strategic Bond sector meanwhile also demonstrates how much the landscape has changed since January; where it topped the sector charts six months ago with 31.8% of its funds holding a 5-Crown rating, it now only has 8.4% of its funds with the highest rating at this rebalance.

Oliver Clarke-Williams, Portfolio Manager at FE Investments said:

“The recent performance of some sectors is perhaps counterintuitive to what we might expect given the difficult markets. Index linked gilts which have the highest percentage of 5-Crown rated funds are traditionally seen as a very difficult asset class for managers to differentiate themselves in and provide outperformance as their investment universe is so small. Gilts did very well during the Covid-19 selloff and the ratings suggest that some managers had the foresight to see what was coming and reposition the duration positions of their funds to benefit accordingly.

“Similarly seeing the two North American sectors sitting 2^nd and 4^th on the list will be a surprise to many given the assumption that you cannot outperform the US market. The US markets with its high exposure to the technology sector has allowed some managers who anticipated how people’s lives would change under lockdown to produce way above market returns. Finally, it was slightly disappointing to see the sector that topped the rankings six months ago, the Sterling Strategic Bond sector, drop to the bottom of the list. With the high amount of freedom managers have within this sector there was an opportunity to produce high levels of outperformance, ultimately though only a few were able to.”

Groups

While the smaller groups were the surprise success among those funds issued a 5-Crown rating for the first time, among the group tables the larger fund houses once again dominated. Liontrust once again saw the highest number of its funds awarded with 5 Crowns, totalling 13 and representing 29.5% of its funds. Following Liontrust were T.Rowe Price and Aberdeen Standard both with 11 funds gaining 5-Crown recognition and representing 28.2% and 9.7% of their respective totals. BlackRock was in third with 10 funds, representing 7.8% of their total.

Methodology

FE fundinfo Crown ratings are calculated by building up a ‘crown score’. The score is made up of three parts, and each part is calculated by reference to a benchmark for the fund. Once the benchmark is assigned, FE fundinfo then applies three tests (an alpha based test, a volatility score and a consistency score) to the total return history of the fund. Three years of history is required to carry out these scores, so any fund with less history than this will not qualify for a rating.

Funds are assigned ratings based on their total scores, according to the following distribution:

• the top 10% - 5 FE fundinfo Crowns
• the next 15% - 4 FE fundinfo Crowns
• the next 25% - 3 FE fundinfo Crowns
• the next 25% - 2 FE fundinfo Crowns
• the bottom 25% - 1 FE fundinfo Crown

Charles Younes, Research Manager, said: “Now more than ever, in these unprecedented times, quantitative ratings provide a vital way in which investors can compare and contrast past performance. As the Crown ratings consider only those funds with a three-year or longer history, investors can see how these funds have fared in different market regimes, providing a more transparent view, which is something that FE fundinfo actively seeks to offer when it comes to informing investment decisions.

For more information, please visit: www.fe-fundinfo.com