How to analyse investment funds

Whether you are selecting your own funds or have an adviser do it for you, an insight into how the experts do it will help. Stephanie Spicer writes.

 Fund Analysis

Many investors have their own methods of analysing the companies and funds they invest in. Here, we ask two industry experts how they rate the funds they invest in: Darius McDermott, managing director of FundCalibre, an independent online research centre and fund ratings agency; and Ben Willis, head of Portfolio Management at Chase de Vere. And the Association of Investment Companies offers some suggestions for investors not sure which investment trusts to select.

Analysing similar funds

There are many investment sectors in which funds are grouped provided they meet the criteria for the sector.

If you are interested in investing in China, emerging markets, global funds, North America or the UK, to name a few, and you can find sectors which group together funds which invest in these areas. But thereafter how do you choose between the funds within any one sector? Some investment sectors have hundreds of funds while others have just a handful.

What Investment asked Ben Willis at Chase de Vere, how he analyses funds within a particular investment category and how investors can make a choice.

“Our starting point whenever we look at an asset class or region is: can we gain the requisite exposure via a passive fund? If the view is that a passive fund does provides us with the exposure we need then it is a simple screen on what funds are available, what are they tracking and how much they cost.

“For example, it has been difficult for active fund managers to consistently outperform US equity markets and so often passive funds are used to gain core exposure to US markets. If we wanted to gain exposure to the S&P 500, then we would look at those passive funds that track the S&P 500 as not all US tracker funds do. The next screen we would employ would be to identify which funds were the cheapest and how well they have tracked the index over multiple time periods on a relative basis.

“This is what happened when we were looking to add a tactical position in infrastructure equity to our portfolios early last year. We examined both the passive options and analysed the actively managed funds available. The conclusion was to buy the L&G Global Infrastructure Index fund, which is a passive fund, as it was providing a similar risk- adjusted return profile and yield compared to the best of the actively managed funds but at more than half the cost.”

Sometimes it makes sense to focus on the value you get and not just the price you pay, stressed Willis.

“If we have conviction on an asset class or equity market we may want to gain exposure via an actively managed fund. We adopt a more granular view in this instance and, in most cases, screen the IA sector universe and rank funds on a discrete, rolling 12 months performance basis, looking back over at least five years. This would help us identify consistent performers within their sector.

“We currently use investment research and analysis tools FE Analytics and FinXL to screen funds and once we have run our performance screen we can then identify those funds that are ranked first quartile on performance and then examine these further on other factors such as drawdown, volatility, upside and downside capture ratios and their information ratios. Ideally, we are looking to come away with three to five funds which warrant further investigation.

“Once we have finished our quantitative screens, we then conduct our quantitative analysis where we examine the fund manager or management team’s investment philosophy, investment process, portfolio construction and positioning. Ultimately, we will seek an interview with the fund manager or management team to question their portfolio and get their current outlook.”

This is exactly the process Chase de Vere conducted prior to investing in Miton European Opportunities recently.

“As we had become more positive on Europe, we researched the IA Europe ex UK sector.

The Miton fund fulfilled our quantitative criteria and also ‘fitted the bill’ as we favoured gaining exposure to a fund which was focused on mid-cap stocks, with a high growth approach. So we sought a meeting with management team, grilled them face-to-face and, having been satisfied, we then invested in the fund,” said Willis.

“Where we have high conviction on an asset class or region, we will invest in both active and passive funds in order to gain meaningful exposure to a market. A good example of this would be the UK, where we hold passive UK index trackers to provide broad market exposure, but also invest in actively managed funds alongside this.

“These actively managed funds include UK smaller companies, as there is no index tracking UK smaller company funds, so the only way to counterpoint the primary exposure to large caps within the index funds, with meaningful exposure to potentially higher growth areas of UK smaller companies, is with an actively managed fund.

“From combining this quantitative and qualitative approach we aim to blend funds together to find the best combination of passive and actively managed funds that meet our asset allocation criteria. Due to our size, brand and relationships with the fund providers, we can gain a level of access that ordinary investors would find very hard to replicate and which hopefully provides us with a competitive edge.”

Looking for consistency

Most investors want some consistency in their investment returns, ideally consistently good performance not bad.

FundCalibre is a rating service that agrees. It rates funds and investment trusts it considers to be ‘Elite’. This it says, means its list of ‘best of breed’ products is much shorter than many of its peers. From the 3,000+ funds and trusts available to UK retail investors, it only rates a maximum of 10% in each sector – often far fewer.

Darius McDermott, managing director at FundCalibre said: “Our fund analysis is robust and pure. At the very first part of our process, we use a filter: we measure the past performance of all funds and trusts, and then strip out the market movement so that we can see what a fund manager has actually added in terms of value.

“Say, for example, the UK stock market has risen by 6% over the past three years and a fund has risen by 10%. When the market is taken out of the equation, it leaves a 4% difference. We then look to see if the manager has been lucky or skilful.

“One way of distinguishing this is to look at the consistency of performance: did the manager add all that 4% in one year, or was it more like an extra 1% or so in each of those three years? Our process prefers consistency over erraticism.”

McDermott added: “We then use some clever maths to work out the probability of that manager adding value in the future. It is only if a fund passes this filter that we will even contemplate meeting the fund manager to do further assessment.

“At this second stage, we like to meet fund managers, look them in the eye, and grill them about their investment process.

“We have been doing this kind of qualitative research for more than 20 years and, over the two decades, and have got quite skilled at working out who is talking sense and who is – frankly – blagging it. If we leave this meeting convinced the fund and manager are good, we then put it forward to our investment committee to debate whether or not it is just good, or Elite.”

Concluding, McDermott pointed out: “We do not give financial advice, but the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own investment decisions.”

Adding value

Each year Fund Calibre carries out the 2020 Fund Management Equity Index Survey, which looks at the entire range of equity funds run by the company and identifies which ones have demonstrated they can add value for all their equity investors year in, year out. The table below shows the top 10 fund groups.

FundCalibre's Equity Fund Management Index 2020: top ten fund groups

Rank 2020 (2019)Fund Group5 year average outperformance (%)% of funds outperformingTotal no. of funds
1 (1)Morgan Stanley44.5883.336
2 (3)Baillie Gifford31.7193.3315
3 (2)Man GLG24.0975.004
4 (New)Wellington24.01100.007
5 (4)T. Rowe Price22.6786.6615
6 (37)Unicorn19.98100.004
7 (7)Comgest18.3766.6712
8 (8)Marlborough17.79100.009
9 (6)Polar Capital16.3166.679
10 (12)Ardevora15.8660.005
Source: What Investment, Morningstar


A number of key findings of the survey are worth noting:

  • Two companies shine over a decade. Baillie Gifford and T. Rowe Price, have been among the top 10 companies in each of the six annual surveys conducted. In second and fifth place respectively this year, this means that both asset management businesses have equity teams that have outperformed for a decade. Both are also larger groups with 15 qualifying funds a piece. Maintaining such a level of consistency across that many products is extremely impressive.
  • Five asset managers see all of their funds outperform. Wellington, Unicorn, Marlborough, Hermes and SVM have managed to produced outperformance across all of their qualifying funds in the past five years, indicating, Fund Calibre said, a high level of skill amongst their equity teams.
  • Unicorn surges into the top 10. Although the top 10 remained largely unchanged, there were “a few movers in shakers in the past 12 months”, most notably Unicorn Asset Management, which rose 31 places to return to the top 10 in sixth place. Fund Calibre said the asset manager has traditionally been a top 10 provider, having topped the list in 2016, but fell markedly last year. The chief contributor to its success has been the performance of its UK Growth fund in the past five years. Other notable movers up the list included Legg Mason Martin Currie (+26), Allianz (+18), SVM (+17) and GAM (+16).
  • Fund research is crucial. The index 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 74% higher than that of the bottom group. So good fund research is key to maximising the potential of your portfolio.
  • Specialist funds are the best performers in the past 10 years. Specialist equity vehicles dominated the list of best performing individual funds in the past five years, re-affirming the importance of portfolio diversifiers. There were four Russian funds and three technology funds in the top 10. The top performer was the Legg Mason IF Japan Equity fund, which returned 195.5% over the past five years.

McDermott said: “Markets had a roller-coaster ride in 2019, with geopolitical uncertainty resulting in sharp gains and losses throughout the year. Despite seeing some life in value investing for the first time since 2016, the past 12 months were once again driven by growth, and that is supported by some of the top performers and big movers in the list. We also have a real mix of larger and smaller businesses at the top end of the list, indicating success can be found across different business models.

“Size really does not matter. The top 10 groups were a mix of small boutiques and big global asset managers. However, the best companies have a focus on investment management; companies that have a wider overall remit – like banks – continued to disappoint.”

Choosing Investment Trusts for different stages of life

The Association of Investment Companies, the trade association for the investment trust industry, acknowledges that, with over 300 trusts to choose from, it can be hard to know where to start.

To make things easier it spoke to financial advisers to discover which investment companies they would recommend at three different stages of an investor’s life. Here they are:

For millennials

Jim Harrison, director at Master Adviser, said: “An investment trust which feels ‘zeitgeisty’ and might appeal to younger investors with a long investment horizon and a taste for something other than vanilla is Hipgnosis. Hipgnosis purchases songs and the associated intellectual property rights, and receives the three streams of royalties: mechanical, when a copy is made, for example a CD or a permanent download; performance, when it is performed live, broadcast or streamed online; and synchronisation, when it is used on TV, or in a video game for example. Like an infrastructure fund, it is mainly a capitalisation of cash flows, although the catalogues and individual songs can be sold on.

“It is not without risk – the music industry has always been vulnerable to having their product distributed for free, and today’s chart topper can quickly fade. Once the income stream from a song dries up, it is hard to see it holding its capital value. Hipgnosis has a dividend yield of 4.9%, but is trading at a noticeable premium to NAV, so investors might want to wait until this reduces. I would not put a whole ISA contribution in here, but it could be an interesting diversifier for a portfolio.”

For middle-aged investors

Philippa Maffioli, senior adviser at Blyth-Richmond Investment Managers, said: “I recommend JPMorgan Claverhouse to middle-aged investors because of its strong dividend growth, whilst also allowing investors to benefit from capital appreciation. It is good for relatively young retirees because they can benefit from the yield of 4.4% as well as capital growth which makes it a good long-term holding.

“I have been recommending F&C Investment Trust for over 20 years. Due to its pedigree and the ongoing commitment of the management, I believe it is an essential component of everyone’s portfolio regardless of stage in life. I am keen to see it in a middle-aged person’s portfolio because of its sheer size and resulting diversity. With its potential for capital growth and modest dividend, it is good for retirement, saving for school fees and leaving a legacy.

“A dividend hero of 36 years, with a yield of 4.5% and a five-year dividend growth rate of 5.7%, Temple Bar will spend potentially lengthy periods where the share price suffers, but manager Alastair Mundy pays you handsomely to wait. If the dividend growth rate is maintained, it is more than possible that by the time you come to retire your yield-to-cost is high enough for you to disregard the day-to-day fluctuations of the share price.”

For retirees

Paul Chilver, Associate & Financial Planning manager at Birkett Long, said: “Retirees are more likely to require an income from an investment and with that in mind a suggestion would be Temple Bar managed by Investec’s Alastair Mundy who is known for his contrarian investment approach which has been out of favour in recent years. However, having this value bias means that the investment will provide diversification to an individual’s portfolio and it is currently paying a dividend of over 4% pa. With a slightly lower dividend yield of 2.1%, Finsbury Growth & Income is a good option for a retiree and its investment approach would blend nicely with Temple Bar.”

Comments (0)