Fund Management Equity Index 2016

The index shows a significant gap in performance between the best and the worst fund groups, and highlights those that consistently deliver outstanding performance for their clients.

• The average fund’s outperformance from the top group, Unicorn, was 50% higher than the average fund’s results from the bottom group, NFU Mutual.
• Growth fund groups (e.g. Baillie Gifford, AXA Framlington) and small-cap specialists (e.g. Unicorn, Marlborough) have performed well over the past five years, helped by a strong rally in global equities and growth stocks.
• Value funds and fund groups with a value bias (e.g. M&G Investments, Aberdeen Asset Management) have struggled over the past five years.
• Fund managers that focus exclusively on active fund management do best – meaning, they don’t also do investment banking, insurance, retail banking or passive investing.
• Retail banks typically perform worst (e.g. Halifax, HSBC and Santander) and most were in the bottom quartile of the index.

Fund group highlights

As you can see in the table above, some fund groups delivered outperformance across all, or the majority of, their funds, while other fund groups saw a lower percentage of their total funds outperform.

This means that in some cases, fund groups’ average performance was significantly assisted by particularly strong performance among a few of their funds. And vice versa – some fund groups’ average performance was dragged down by one or two funds’ particularly poor returns.
For example, among the large groups with at least 8 funds, JOHCM, Artemis, Baillie Gifford, Aviva Investors, Schroder and Invesco Perpetual all saw at least 85% of their funds outperform. But, in terms of average fund performance, JOHCM was one of the biggest fallers in ranking from last year, down 18 places in the index.

• The biggest improvers in ranking from last year were Aviva (+25), Alliance Trust Investments (+18), Man GLG (+15), Newton (+15) and Barclays (+13)
• Five fund groups had every qualifying fund outperform over the past five years: Unicorn, Stewart Investors, T Rowe Price, Rathbone and SVM
• The biggest fallers were JOHCM (-18), Scottish Widows HIMFL (-11), Aberdeen (-11) and Lazard (-10)Read more fund group highlights

How last year’s top 10 fared

Nine out of last year’s top ten groups went on to outperform over the following 12 months by an average of 3.5%.

68% of funds within these fund groups also continued to outperform over the year.

Fund managers are far from equal and choosing the right fund group can make a huge difference to your returns.

FundCalibre’s 2016 Fund Management Equity Index* shows a significant gap in performance between the best and the worst groups. Here, we look in a bit more detail at the top five groups, and the biggest gainers and losers in the index this year. Percentage figures show the average fund’s 5 year outperformance for each fund group.

Top five equity fund managers

Unicorn – 36% outperformance

Small-cap specialist Unicorn topped our index for a second year in a row. 2015 was another great year for Unicorn with all their qualifying funds making double digit returns for their investors. All their funds comfortably outperformed their peers except for the UK Smaller Companies, which was in line with its Investment Association (IA) sector average.

Stewart Investors – 28% outperformance

Stewart Investors (formerly First State Stewart) are specialists in Asia and Emerging markets. In 2015 the team was re-structured and split in two. They were worried that their teams were becoming too big and Stewart’s philosophy has always been that, ‘scale is the enemy of performance’. Despite the changes it has been another solid year with all their qualifying
funds outperforming their sector averages.

Old Mutual – 23% outperformance

Old Mutual is again the first manager to feature in our index that is not just a specialist in one area. Their average fund outperformed by an exceptional 23%. Old Mutual had 17 qualifying funds, one of the highest number, so their performance was incredibly consistent. Their performance was led by their traditionally strong UK mid and small cap funds.

T Rowe Price – 20% outperformance

T Rowe Price gained six places on last year to break into the top five of our list. T Rowe is a large global asset manager with over $750bn under management. Their performance was consistently excellent with all their funds outperforming their peers. Four of T Rowe’s funds are in the IA North America sector, where there performance was particularly strong.

River and Mercantile – 20% outperformance

River and Mercantile are a small boutique asset manager that mainly focus on UK equities. Their stand out fund is Philip Rodrig’s smaller companies fund, which is 70% ahead of its peers over the past five years, helping propel the group to fifth place in our index.

Biggest gains in the index

Aviva Investors – up 25 places

Aviva Investors have to be happy with their recent performance. All but one of their qualifying funds beat their sector average in 2015. That led them to jump 25 places in our index from 49th to 24th place. Mark Denham’s European equity fund was the best performer. Impressively, 86% of funds beat their peers over the past five years.

Alliance Trust Investments – up 18 places

Alliance Trust Investments has been in the papers a lot after a long-running dispute with activist investors Elliot Advisors. Ms Garrett-Cox, former CEO of the fund management arm, has left the company. However fund performance improved markedly over the past year. Alliance Trust Investments jumped from 38th to 20th place. All their four qualifying funds beat their peers during 2015.

Man GLG – up 15 places

Man GLG jumped 15 positions in our index to 17th place with their average fund now 8.66% ahead of the market over the past five years. The improvement was almost entirely driven by Rory Powe’s Continental European Growth fund, which returned an impressive 31% in 2015. The UK Income funds also had very good performance last year.

Newton – up 15 places

Overall Newton had an excellent 2015 and jumped 15 places in our index to 25th position. Newton’s global and UK funds all performed particularly well despite some weaker performance in Asia. The flag-ship Newton Global Income fund had another strong year, beating the sector by 8% despite a change in manager. Paul Stephany delivered strong performance for Newton’s UK funds.

Biggest fallers in the index

JO Hambro Capital Management (JOHCM) – down 18 places

It was a disappointing year for JOHCM, which was the biggest faller in our list, dropping from 5th place to 23rd. The long-term five year track record for JOHCM is still extremely strong with the average fund beating the market by 7% and 89% of funds outperforming. JOHCM did see exceptionally strong performance for its two Asian funds last year but these two funds don’t yet have a five year track record and are currently excluded from the index.

Aberdeen – down 11 places

Sadly Aberdeen continues to struggle and fell further down our league table to 63rd place. Aberdeen’s struggles have been well documented in the press and they have not been helped by weak emerging markets, an area in which they are traditionally strong. It is worth remembering that the long-term track record of Aberdeen in Asia and Emerging Markets is still good.

Scottish Widows HIMFL – down 11 places

Scottish Widows HIMFL funds were taken over by Aberdeen in 2014. The funds remain under the Scotish Widows HIMFL brand and are therefore considered seperately. Weak performance in Asia offset better performance in Europe in 2015.

Lazard – down 10 places

Lazard fell back in our index after a mediocre year the fund finished in 37th place. However the avearage fund continues to outperform by 3% over the past five years. The Lazard European Smaller companies fund continued to do particularly well and returned 27% for investors in 2015.

FundCalibre bases the main results of the index* on fund outperformance. However, we have also included some risk-adjusted data for investor interest.

Top ten fund groups – risk-adjusted

Why look at risk-adjusted returns?

Risk-adjusted performance is important, because if fund managers are taking more risk, you would expect them to achieve a higher return. This is definitely something to look out for with fund selection. Funds that are taking excessive risk but only delivering average returns may be ones to avoid.

In particular, funds with higher risk levels will probably perform badly during times of crisis. Funds that are less risky may perform better in times of crisis.

Our risk-adjusted index uses the Sharpe ratio. It is one of the most widely used metrics for measuring a fund’s risk-adjusted performance.

Very simply, higher performance and a lower volatility gives a higher Sharpe ratio (meaning a better risk-adjusted investment).
We compared each fund’s Sharpe ratio with their average Investment Association fund sector Sharpe ratio.

How do the risk-adjusted results differ?

• Five groups had 100% of their funds outperform over the past five years on a risk-adjusted basis: Unicorn, Stewart Investors, T. Rowe Price, Rathbone and SVM
• Of the larger groups with at least eight qualifying funds, T. Rowe Price, Baillie Gifford, Invesco Perpetual and Investec all deliver risk-adjusted returns in over 80% of their funds
• Other large groups that performed very well (between 65% to 75% of their funds outperforming) included Threadneedle, Fidelity, Schroders, Allianz and Jupiter
• Most fund groups had a similar number of funds outperforming on a risk-adjusted basis compared with simple outperformance, but there were a few exceptions
• For example, on a risk-adjusted basis, 71% of Marlborough funds outperformed over the five years. In the main index, 57% of its funds outperformed

FundCalibre’s Fund Management Equity Index looks at all actively managed equity funds recognised by the Investment Association and compares them with their sector averages over a five year time frame*.

Each fund group’s funds are then collected together to calculate the group’s average fund performance. Fund groups must have a minimum of four qualifying funds to be included in the index.

Funds excluded from the index**

• Passive funds
• Fixed interest funds
• Multi-asset funds
• Multi-manager funds
• Funds in the specialist or unclassified sectors
• Institutional funds
• Charity funds
• Funds with a track record of less than five years
• Funds not in an Investment Association (IA) sector
• Specialist funds in the global sector (e.g. Energy, Biotech and Healthcare)
• Fund houses with fewer than four qualifying funds

Steps to creating the index

• We created a list of qualifying funds (See exclusion list above)
• We measured every qualifying fund’s out or under performance after fees against its respective IA sector average over the past 5 years. (We use main units as defined by FE Analytics not clean share classes)
• We collected each asset managers funds together
• We worked out each asset managers average funds out or underperformance
• We calculated what percentage of each groups funds outperformed
• We calculated what percentage of each groups fund beat the average funds Sharpe ratio

Breaking down asset managers into fund groups

Where appropriate we have broken down fund houses into different fund groups. Some asset managers operate independently, but remain part of a wider group. For example, Stewart Investors is part of First State but is considered separately. This is because it operates as its own autonomous unit.

• AXA Framlington from AXA Rosenberg
• Stewart Investors from First State Investments
• Clearbridge, Martin Currie and IF QS are split out from the wider Legg Mason group
• Scottish Widows, Scottish Widows HIFML, Halifax are split from Aberdeen
• Marlborough have asked to be considered as a group, which is a change to our previous index when we split some teams out.

Risk-adjusted measures of performance

Although our main index looks at sector outperformance, we also wanted to assess groups on a risk-adjusted basis. We looked at various methods of doing this. By far the most consistent and fair metric, in our view, was the Sharpe ratio. The Sharpe Ratio is one of the most recognised risk-adjusted performance measures in the industry.

We concluded that looking at fund houses’ mean (average) Sharpe ratios on an absolute basis was unfair. This is because some sectors have much higher Sharpe ratios than others. Therefore a fund house with lots of funds in one sector with a high Sharpe ratio would be more likely to rank highly on our index.

In our view a fund group can only provide the best risk-adjusted returns for the part of the market they sit in. Therefore, a much fairer measure was to consider each fund’s Sharpe ratio versus the mean Sharpe ratio in its Investment Association Sector.

The asset managers that had a high percentage of funds with Sharpe ratios higher than their sub-sectors were delivering consistently good risk-adjusted performance.

Sharpe ratio in more detail

(annualised return – risk free rate)/annual standard deviation The annual return was compiled using 5-year daily data from FE Analytics. The annual standard deviation data was compiled using 5-year weekly data from FE Analytics. The risk free rate was taken to be the shortest dated government bond. Since this is primarily an index of UK funds, we decided that the 1-month UK T-Bill was most appropriate. The annual return of the risk free rate was therefore calculated as 0.35%, from data provided by FE Analytics.

Weaknesses of the index

The index does not account for survivor-ship bias. Funds which have been closed down or which have been merged with other funds are not included in these results.

*All data used to compile the Fund Management Equity Index is taken from Financial Express Analytics.

**Please note FundCalibre has included or excluded funds in very few cases at its discretion, based on what it believes will provide the fairest comparison of each fund group’s performance over the time period.