Most investors dream of backing a star fund manager in the making, benefiting from the early stage of their stellar performance. That is why the case for smaller funds, run by up-and-coming fund managers is often put forward.
However, there’s also something to be said for experience. Although it is close to impossible for fund managers to sit at the top of their sectors 100% of the time, there are a handful of seasoned investors with solid track records through bull and bear markets.
What’s more, they have done this with billions under management, overcoming the potential constraints associated with size.
Jonathan Miller, Morningstar’s director of UK manager research, says these fund managers are a rare breed – so it is important to consider a number of factors before investing in larger funds. Firstly, what can you gauge about the group behind the fund?
“Ask yourself; is it an asset gatherer or are they more investor-led? Do they have a history of controlling the fund size when it gets big?” he suggests.
It is also important to understand what differentiates the fund manager from competitors. This could be their stock selection in a certain area or getting asset allocation calls right. If they start to deviate from this, Miller advises to steer clear.
He also warns against investing in the most popular fund at a certain time, following three or five years of strong performance. This is because you may be “coming to the story late”, just in time for a period of underperformance.
A manager’s longer term track record, beyond five years, is important because it tells you how they have performed in different market cycles.
Here are five ‘supertanker’ funds that have generated excellent returns through the years.
M&G Optimal Income
Bronze rated M&G Optimal Income certainly fits this category, with £15.4 billion in assets. Manager Richard Woolnough has steered the fund through challenging markets and a two-year period which saw £10 billion of outflows.
Fortunately, performance has remained strong. Since January 2007, M&G Optimal Income has returned 200.4%, ahead of 160% by the average manager in the Investment Association’s Strategic Bond sector.
“Richard Woolnough is very forward-thinking in terms of asset allocation. When a fund is big, you have got to get the macro right because that asset allocation is a key driver of performance,” explained Nathan Sweeney, a senior investment manager at Architas.
Stewart Investors Asia Pacific Leaders
Simon Evan-Cook, manager of the Premier Multi-Asset Growth & Income fund, highlights the £9.3 billion Stewart Investors Asia Pacific Leaders.
“This is probably one the best examples of a process that has carried on and the style has suited it,” he said.
David Gait, manager of the Silver rated fund continues to adopt a high conviction approach. For example, the top two holdings - Oversea-Chinese Banking Corporation and Unicharm - make up 10.4% of the portfolio.
Over 10 years, the fund has returned 318%. This compares to 238% by the Asia Pacific Excluding Japan sector average. The fund is soft-closed to new investors.
CF Woodford Equity Income
Neil Woodford has a track record of generating healthy returns whilst managing billions. When he left Invesco Perpetual in October 2013, he was responsible for £26 billion across the Invesco Perpetual Income and High Income funds, alongside the Edinburgh investment trust. Over 10 years, he returned 224% with the Income fund.
Since setting up his eponymous boutique, Silver rated CF Woodford Equity Income fund has attracted £9.6 billion in assets. Since launch in June 2014, it has returned 28.2% versus 16.3% by the UK Equity Income sector average. The fund has a historic yield of 3.4%.
Woodford takes a high conviction approach allocating to – or often avoiding – sectors, so it is important to understand how this can affect performance in different market conditions, Sweeney points out. For example, one-year performance has been hit by a zero weighting to oil and gas.
JOHCM UK Equity Income
This is one of Sweeney’s favoured funds. At £2.8 billion in size, Silver rated JOHCM UK Equity Income is currently soft-closed to new investors.
Sweeney notes the fund has performed well through a combination of stock selection and macro calls, under managers Clive Beagles and James Lowen.
Over the past 10 years, the fund has returned 214.6%, which compares to 117% by the UK Equity Income sector average.
M&G Global Dividend
Although it hasn’t been plain sailing the whole time for this £6.4 billion fund, Miller notes that investors’ patience will have paid off over the longer term.
The Silver rated fund is managed by Stuart Rhodes. Following a period of underperformance between 2014 and 2015, the fund bounced back last year with a 40% return. This compares to 23% by the sector average.
Since launch in July 2008, the fund is up 262.7%, ahead of the 225.7% by the average fund in the Global Equity Income sector.
Miller notes that investors may well have piled into the fund during its early period of outperformance and sold when performance slipped. However, patience is crucial. Those who sold out will have missed the impressive bounce back.
