Fund Management Equity Index 2017

We often forget that the asset management industry is one of this country’s strongest sectors.

• The consistent outperformance, shown in this index, of many of the UK’s top fund groups over the past five years is outstanding. As ever, the index also demonstrates the huge difference in performance between the best and worst groups.The average fund’s outperformance from the top group, River & Mercantile, was 68% higher than the average fund’s results from the bottom group.
• Consistently good active management is not a myth – nine out of last year’s top ten groups retained their Elite Provider status this year, and six groups have held top ten places in the index in each of the past three years.
• It’s not just the boutique firms with a small number of funds doing well – some of the bigger global asset management companies have proven that they can produce the goods over a large number of funds.
• This consistently suggests a high degree of skill among these companies’ fund management teams.
• Groups with more of a ‘value’ bias in their investment process, which have struggled in the past few years, have had a particularly strong 12 months, as their style of investing has started to come back into favour. JOHCM and M&G are such companies and are among the biggest risers.
• Those groups that specialise in asset management continue to typically perform better than those whose businesses span a range of financial sectors.

Fund group highlights

As was the case last year, 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, for example Man GLG with its Continental European Growth fund and Old Mutual Global Investors with its UK Dynamic fund.

Particularly impressive is the performance of a number of larger groups: 11 out of the top 20 companies have more than 10 funds and nine of these companies had more than 70% of their equity funds outperforming. Schroders, for example, has 43 qualifying equity funds, 88% of which have outperformed their peers over five years. Fidelity has 38 qualifying funds, 74% of which have outperformed over the same period.

The index shows a significant gap in performance between the best and the worst groups. Here, we look at a few fund houses in a bit more detail. Percentage figures show the average fund’s 5 year outperformance for each fund group.

River and Mercantile – 51% average outperformance

River and Mercantile leaf-frogged into first place this year having been fifth in the 2016 Index. It is a small boutique asset manager that mainly focuses on UK equities. Their two ‘Recovery’ funds had particularly strong years, as their value style came back into favour.

Stewart Investors – 33% outperformance

Asia and Emerging markets specialists Stewart Investors have had another good year, holding second position and improving their average outperformance by 5%. All ten of their qualifying funds did well versus their peers over this period.

Unicorn – 32% outperformance

Although pushed down into third place this year, small-cap specialist Unicorn topped our index for two years in a row. The past 12 months have still been good for the company and it has maintained an impressively high level of performance across their funds.

Baillie Gifford – 25% average outperformance

Last year was another strong year for this Scottish fund manager and it has moved up from 10th place to 4th on our list. Recent performance was particularly impressive given Baillie Gifford is usually known as a growth house and 2016 was a year in which value outperformed. Outperformance was led by the highly regarded Elite Rated Baillie Gifford Japanese fund, which was the number one fund in the IA Japan sector in 2016.

Old Mutual – 25% average outperformance

Old Mutual Global Investors is the largest group in the top five, with 24 qualifying funds. 67% of these funds outperformed their peers and the average performance improved slightly on last year’s results. Old Mutual’s UK Smaller Companies funds had a particularly strong year.

Top five newcomers

Charlemagne – in at 15
Hermes – in at 18
Matthews Asia – in at 25
Davy – in at 29
Polar Capital – in at 32

Among the top five newcomers this year, there were two overwhelming themes: the majority are specialist investment houses with a focus on country or sector specific funds, which were added to the analysis in 2017, and all had a number of funds celebrating a five-year track record, which means more houses met the qualification criteria.

Matthew Asia, for example, has a range of Asia country specific equity funds and Polar Capital has a range of very good sector specific funds.

The index also looks at funds’ performance against their sector’s average Sharpe ratio to see which fund groups are achieving the best risk-adjusted returns.

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?

• Seven groups had 100% of their funds outperform over the past five years on a risk-adjusted basis: Artemis, Premier, Rathbone, River and Mercantile, Stewart Investors, SVM and Unicorn.
• Of the larger groups (with ten or more qualifying funds), Artemis, Baillie Gifford, Invesco Perpetual, Schroders, Stewart Investors and T. Rowe Price all delivered risk-adjusted returns in more than 75% of their funds.
• Other large groups that performed very well (between 65% to 75% of their funds outperforming) included Columbia Threadneedle, Fidelity, Henderson, JOHCM, Jupiter, Newton and Standard Life Investments.
• 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.

Top ten fund groups – risk adjusted

Fund Management Equity Index 2016

Fund Management Equity Index 2016

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
• All non-equity funds
• Multi-manager funds
• Institutional funds
• Charity funds
• Funds with a track record of less than five years
• Funds not in an Investment Association (IA) sector
• Fund houses with fewer than four qualifying funds
• Some specialist funds in the IA Specialist sector which are difficult or impossible to compare including energy, agriculture and mining 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). For some specialist funds we created our own sub-sector or measured against an appropriate benchmark
• 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
• Some decisions taken in the production of this index are inevitably subjective and are based on FundCalibre’s own opinion. Every effort is taken to be as fair and accurate as possible. All data is sourced from FE Analytics

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, AXA Framlington and AXA Rosenberg are presented separately.

Changes to the Fund Management Equity Index 2017

• This year we have included some funds in the specialist sector including, but not limited to, Indian equity funds, Latin American equity funds and healthcare and biotech funds
• Including more funds should make the index fairer and more accurate. There is now a higher number of groups in the index as more groups have met the four fund minimum criteria
• We have also added some funds from the IA Unclassified sector and compared them with peers where appropriate. For example, where a fund has the same benchmark as other funds in a different IA sector
• This year is the first year we have used ‘clean’ share classes. This is in line with FE Analytics who have now updated their ‘main units’ to clean share classes, rather than commission included share classes.

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.

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 that have been closed down or that have been merged with other funds are not included in these results.However, a list of those funds which have been closed or merged are below for information.

Funds closed or merged since the 2016 index: Franklin European Growth, Franklin Global Growth, Franklin Mutual European, Gam Star Gamco US Equity, Man GLG American Growth, Neptune Greater China Income, Sarasin Equisar Thematic Opportunities, Scottish Widows HIMFL Emerging Markets Focus, Scottish Widows HIMFL European Focus, Scottish Widows European Strategic, Scottish Widows Far Eastern Focus, Scottish Widows Japanese Focus, Scottish Widows UK Focus, Scottish Widows UK High Income, Scottish Widows UK Smaller Companies Alpha, Scottish Widows UK Strategic, Scottish Widows US Focus, Scottish Widows US Strategic.

*All data used to compile the Fund Management Equity Index is taken from Financial Express Analytics. All cumulative statistics % change bid to bid, net income reinvested, five years to 31/12/2016.

**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. These funds are listed above, under ‘Weaknesses of the index’ sub-heading.

These are purely statistical charts. While every effort has been made to ensure the accuracy of this information, FundCalibre takes no responsibility for any errors, omissions or inaccuracies therein.

Please note the Fund Management Equity Index does not constitute investment advice. If you are in any doubt as to the suitability of any investment you should seek professional advice. An appearance of any fund on this index is not an indication it should be bought, sold or switched.