Fund Management Equity Index 2018

The index demonstrates that:

1. Consistently good active management is not a myth

What this survey shows with great clarity is that consistent outperformance of active fund managers is not a myth. Eight out of last year’s best ten groups remain at the top and even more impressively, five of these companies have been in the top ten in each of the past four annual surveys. This means that their funds have been outperforming for nine full years. That level of consistency is far from being down to good luck – it is skill.

2. Fund research is crucial

The index also demonstrates the huge difference in performance between the best and worst groups. The average fund’s outperformance from the top group, Morgan Stanley, was 67% higher than the average fund’s results from the bottom group. Although at the bottom, however, 12% of Aberdeen’s funds still outperformed – there are good funds still to be found. This proves that good fund research is key to maximising the potential of your investment portfolio.

3. Big can mean better

The index also highlights that it’s not just boutique firms that can do consistently well – big companies can too. This consistency, over such large numbers of funds, suggests a high degree of skill among these firm’s fund management teams.

Fund group highlights

There were six newcomers to the table this year, with Morgan Stanley being the standout, coming straight in at number one. Robeco debuted at number 34, Standard Chartered at 48, Majedie at 57, Mirabaud at 63 and FP Octopus at 70.

The biggest climbers this year (excluding Morgan Stanley) were Kames (+22), UBS (+21), Smith & Williamson (+18), JP Morgan (+14) and Hermes (+14).

Five fund groups had every qualifying fund outperform over the past five years: Capital Group, Premier Asset Management, River & Mercantile, SVM and Unicorn.

The biggest fallers were Davy (-36), Barclays (-31), EdenTree (-23), Stewart Investors (-21) and Waverton (-17). Stewart Investors was in the top ten in terms of risk-adjusted performance, however, indicating that they perform well whilst exhibiting lower volatility. And, while their margin of outperformance has fallen, more than 90% of their funds have still done better than the average in their sector.

Top five equity fund groups

We take a look at the top five fund houses in a bit more detail. Percentage figures show the average fund’s five year outperformance for each fund group.

Morgan Stanley – 46.46% average outperformance

Morgan Stanley have come from nowhere to number one this year, thanks to a number of their equity funds accumulating five-year track records. Two funds in particular (out of six that qualified for the survey) were standout performers: Morgan Stanley Global Opportunity was the second best performing fund overall, while Morgan Stanley US Growth was also in the top 20 at number 16 (see table below).

River and Mercantile – 37% average outperformance

River and Mercantile was knocked off the number one spot this year, but is still showing excellent outperformance. It is a small boutique asset manager that mainly focuses on UK equities. The company is also top in terms of risk-adjusted performance.

Baillie Gifford – 36.6% average outperformance

Baillie Gifford is the largest group in the top five, posting another strong year of outperformance and climbing a place higher. Outperformance was led by the highly regarded Elite Rated Baillie Gifford Global Discovery fund, while Baillie Gifford Japanese Smaller Companies fund was also in the top 20 table for individual funds.

Hermes – 30.71% average outperformance

Hermes was one of the highest climbers this year, rising from eighteenth place in the 2017 survey to fourth this year. Elite Rated Hermes Asia ex Japan Equity led the charge, being the seventh best performing fund overall.

Unicorn – 30.03% outperformance

Although pushed down into fifth place this year, boutique small-cap specialist Unicorn has been in the top five since this survey began, maintaining an extra-ordinary high level of outperformance across its funds. It is also in second spot in terms of risk-adjusted performance.

Top 20 funds over five years

When it comes to individual fund outperformance over the period, it was a mixed bag overall, but Old Mutual stood out, with four of its UK equity funds in the top 20.

The Fund Management Equity Index also looks at fund group performance against the funds’ sector average Sharpe ratio to see which companies are achieving the best risk-adjusted returns.

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: Premier, River and Mercantile, Stewart Investors, SVM and Unicorn.

Of the larger groups (with ten or more qualifying funds), Artemis, Baillie Gifford, Investec, JOHCM, Stewart Investors and T. Rowe Price all delivered risk-adjusted returns in more than 75% of their funds.

It is worth highlighting that Stewart Investors’ investment style is generally less risky than that of other funds investing in the region and the team tends to underperform in strongly rising markets (which we experienced in 2017) and outperform in falling markets. This makes their risk-adjusted performance very strong. In the main table, while their margin of outperformance has fallen (12%), the number of funds doing better than the sector average remains high (90%).

Why look at risk-adjusted returns?

We believe that risk-adjusted performance is important because, if fund managers are taking more risk, you would want them to achieve a higher return. If funds are taking more risk but only delivering average returns they may be funds investors wish to avoid.

Something else to bear in mind is that funds with higher risk levels will probably underperform during times of crisis while funds that are less risky may do better in times of crisis.

Fund Management Equity Index 2017

Fund Management Equity Index 2016

Fund Management Equity Index 2015

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 and agriculture funds

Steps to creating the index

• We created a list of qualifying funds (see exclusion list above)
• We measured every qualifying fund’s over or underperformance after fees against its respective IA sector average over the past five 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. IA Unclassified equity funds are also compared against an appropriate benchmark or peer group
• We collected each asset manager’s funds together
• We worked out each asset managers average fund’s over or underperformance
• We calculated what percentage of each group’s funds outperformed
• We calculated what percentage of each group’s funds beat the average fund’s Sharpe ratio in each sector
• 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.

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 five-year daily data from FE Analytics. The annual standard deviation data was compiled using five-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 0.28%, from data provided by FE Analytics.

Weaknesses of the index

The index does not account for survivorship 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, merged or no longer recognised by the IA since the 2017 index:

Baillie Gifford Long-Term Global Growth, Old Mutual Equity 2, GS Core European Partners, Fidelity Moneybuilder Global, Threadneedle European (ex UK) Growth, Threadneedle Japan Growth, Threadneedle Pacific (ex Japan) Growth, Threadneedle UK Growth, JP Morgan Turkey, JP Morgan Blue Chip Equity, Royal London UK Ethical Equity, JGF-Jupiter North American Equities, Baring Emerging Markets, Baring Global Growth, Baring UK Growth, Baring MENA, GAM Star European Growth & Value, Allianz Oriental Income, Allianz UK Unconstrained, Legg Mason Martin Currie Global Alpha, HSBC GIF Brazil, HSBC GIF BRIC markets, HSBC GIF Chinese, HSBC Euroland Equity and Aberdeen UK Enhanced Equity.

*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 31/12/2017.

**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