Stocks staged an impressive recovery in 2011's final quarter, but the year was still a disappointing one for many holders of equity funds. Many U.K. equity funds struggled to keep up with the FTSE 100, as the blue-chip dividend payers that dominate the index thumped most other types of stocks in a nervous market environment. Further afield, global equity funds had their own set of problems, ranging from the eurozone crisis to concerns about slowing growth in emerging markets.
Yet the equity fund universe wasn't without at least a few success stories in 2011: Some funds managed to beat the index and deliver robust returns. To highlight those few, I used our Fund Screener to home in on large offerings that fared just fine last year. I started by searching for equity funds with asset bases of more than £3 billion, to ensure that our screen's output wouldn't be dominated by smaller funds that might be heavily concentrated in a specific pocket of the market. To ensure that at least some funds would make it through our screen, I set a relatively modest performance hurdle: a return of 5% or better in 2011.
Illustrating the fact that equity-fund returns were no great shakes last year, the resulting list was severely anaemic. Only two distinct portfolios cleared our performance hurdle: one hailed from Morningstar's UK Large-Cap Value Equity category; one was a Consumer Goods & Services Equity Sector offering. Both funds can be held within an ISA wrapper.
Invesco Perpetual Income (Rated Gold by Morningstar Analysts)
Manager Neil Woodford has rewarded patient, long-term investors once again, delivering a positive absolute return to investors in a period where markets have been weak. The fund returned 8.6% in 2011, outperformed its UK Large-Cap Value Equity category average by 11.2%, and outshone the MSCI UK Value index by 3.4%. It's also started 2012 on the up, posting a year-to-date return of 0.63%.
As noted earlier on, blue-chip dividend payers were responsible for much of 2011's equity returns in developed markets and IP Income's five largest holdings (as of 30 November 2011) are testament to this. Woodford's leading holdings are AstraZeneca (AZN), GlaxoSmithKline (GSK), Reynolds American (RAI), British American Tobacco (BATS) and Vodafone (VOD), all five of which are covered by Morningstar equity analysts (click on a company ticker to read the research report). The fund's performance also confirms the long-held belief that 'boring is best' when seeking dividend payers.
IP Income has long since held Morningstar fund analysts' highest qualitative rating. The Morningstar Research report notes that Woodford's offering is suitable as a core holding for a UK-based investor with a total-return mindset. Woodford manages a significant pool of assets, which limits his ability to be nimble or invest meaningfully in smaller-cap stocks. However, Morningstar analyts point out that his "long-term focus, contrarian style, and concentrated portfolio mitigate this to a certain extent." Moreover, whilst our research team acknowledges the challenge, they think Woodford has "shown an ability to manage such a large asset base well."
Morgan Stanley Investment Funds Global Brands
The other distinct portfolio to pass our test was the MS INVF Global Brands fund, which falls into the Morningstar category Sector Equity Consumer Goods & Services. Peter Wright and team have secured solid fund returns for the past three years running, though the fund underperformed the category average in 2009 and 2010. Our analysts do not cover the fund at present, but its relatively low risk rating has earned its a 4-star Morningstar quantitative rating--our risk-adjusted performance metric (click here to see our methodology).
MS INVF Global Brands achieved returns of 9.1% in 2011 and outperformed its category average by 14.2% that year. As with Woodford's IP Income, blue-chip dividend payers again feature heavily among the top holdings and again tobacco manufacturers are favoured here. Wright et al's five largest holdings as at 30 November 2011 were British American Tobacco, Nestle (NESN), Reckitt Benckiser (RB.), Philip Morris International (PM) and Imperial Tobacco (IMT).
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