Fund Management Equity Index 2019

1. Consistency shows high level of skill not luck

While the debate about active vs passive funds rages on, what this survey highlights is that consistent outperformance of active equity fund managers is not a myth – but it is difficult. Five out of last year’s best ten groups remain at the top and, impressively, two of these companies have been in the top ten in each of the past five annual surveys. This means that their funds have been outperforming for ten 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 highlights that there is a huge difference in performance between the best and worst groups. The average outperformance of top group, Morgan Stanley’s funds, was almost 70%* higher than that of the bottom group. So good fund research is key to maximising the potential of your investment portfolio.

3. Size doesn’t matter

Finally, size really doesn’t matter. The top ten groups were a mix of four smaller equity franchises and six larger ones. The bottom ten consisted of four big international companies and six smaller boutiques. The only common denominator among the worst performers was that a number are, primarily, banking organisations, which suggests companies should perhaps concentrate on what they are good at, rather than trying to be all thing for all men.

Fund group highlights

There were nine newcomers to the table this year. Comgest and Alliance Berstein both debuted in the top ten at numbers seven and nine respectively. Ardevora came in at number 12, Miton at number 14, BNY Mellon at 24, Guinness at 27 and Oldfield at 39. All were in the top half of the table. Making their entrance in the bottom half, however, were Amundi at 63 and New Capital at 83.

The biggest climbers this year (excluding the new comers) were Octopus (+41 places), Newton (+28), Sarasin (+25), BMO (+23) and Polar Capital (+19). Octopus is best known for its VCT and IHT products, but is now putting more of an emphasis on the fund side of its business. This seems to be paying off. Its UK Micro cap fund had a particularly strong 2018. Newton enjoyed a turnaround in fortunes for its Asian Income fund, after a difficult period, while its Global Income fund goes from strength to strength being one of the most consistent funds in its sector.

Two fund groups had every qualifying fund outperform over the past five years: Man GLG’s four funds and Stewart Investors 11 funds. Both have managed to outperform, despite ongoing headwinds for their investment styles.

The biggest fallers were Standard Life Investments (-41 places), River & Mercantile (-41), Smith & Williamson (-39), Legal & General (-38) and Invesco (-35). River and Mercantile has struggled over the past couple of years, as its value-style has been very much out of favour. Despite the drop, average performance remains positive.

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 – 42.06% average outperformance

Having come from nowhere to number one last year, Morgan Stanley has managed to retain its top spot. Strong across its entire equity range, the stand out product was Morgan Stanley Global Opportunities, which returned 90%* more than the average global equity fund over the five year period.

Man GLG: 24.84% average outperformance

Building on its success last year, Man GLG has risen another two places to second position. All four of its funds outperformed, with its best performer being the European fund, which is 44%* ahead of its peer group.

Baillie Gifford – 24.19% average outperformance

Baillie Gifford is the largest group in the top ten and has provided another strong year of outperformance. 14 of its 15 eligible funds outperformed with its American fund beating its sector by 65%*.

T. Rowe Price: 21.80% outperformance

T. Rowe Price continues to reaffirm itself as one of the premier active managers in the UK. 11 of its 13 funds outperformed with its US Large Cap Growth fund leading the pack, returning 50.81%* more than its peer group. Global Focused Growth Equity was close behind outperforming by 49.95%*.

Stewart Investors: 19.94% outperformance

Having fallen slightly from grace last year, Stewart Investors is back with a vengeance. A top ten company in 2015, 2016 and 2017, the company fell to 23rd last year but has regained 18 places. All of its 11 eligible funds outperformed, giving it the best overall consistency, and it was the only company in the survey to also have all of its funds outperform on a risk-adjusted basis.

We also look at the best risk-adjusted returns in our annual Fund Management Equity Index, to see how much risk funds take in order to produce their 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.

How do the risk-adjusted results differ?

One group – Stewart investors – had 100% of its funds outperform over the past five years on a risk-adjusted basis. As we highlighted last year, 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 (which we experienced at the end of 2018). This makes their risk-adjusted performance very strong.

Miton and Newton, while further down the main table in 14th and 21st place respectively, made it into the top ten on a risk-adjusted basis. Comgest – a
newcomer to the main table – also made it into the risk-adjusted top ten. It’s a lesser-known asset manager, but obviously one that warrants further evaluation.

Fund Management Equity Index 2018

Fund Management Equity Index 2017

Fund Management Equity Index 2016

Fund Management Equity Index 2015

Our annual 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 asset manager’s funds are then grouped together to calculate its average fund performance. Companies 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
• When creating the risk-adjusted returns 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 like to assess groups on a risk-adjusted basis. While there are various methods of doing this, by far the most consistent and fair metric, in our view, is the Sharpe ratio. The Sharpe ratio is one of the most recognised risk-adjusted performance measures in the industry.

We concluded that looking at an asset manager’s mean (average) Sharpe ratios on an absolute basis was unfair. This is because some sectors have much higher Sharpe ratios than others. Therefore a company 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 an asset manager can only provide the best risk-adjusted returns for the part of the market they sit in. Therefore, a much fairer measure is 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 0.32%, 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 2018 index:

GAM International Growth & Value, Fidelity Pan Europe, Janus Henderson World Select, JPM Hong Kong, JPM US, M&G European Smaller Companies, M&G Pan European Dividend, M&G Strategic Value, Principal GIF Emerging Markets Equity, Threadneedle Pan European, Threadneedle Pan European Smaller Companies.

*All data used to compile the Fund Management Equity Index is taken from FE Analytics. All cumulative statistics % change bid to bid, net income reinvested, five years to 31/12/2018.

**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.