Funds rated Gold by Morningstar analysts have proved resilient in recent weeks, with just three underperforming their peers in the year to date.
Morningstar Direct data shows the majority of Gold-Rated funds have outperformed the average return delivered by their category in the first quarter of 2020.
The coronavirus pandemic has seen global stock markets endure some of their worst falls on record as it has spread across the globe, and there has been little place for investors to hide. The FTSE 100 and Dow Jones indices both plunged more than 20% as investors panicked about the economic implications of a full-blown lockdown in many countries.
And while few funds have proved immune as the virus has spread, some have held up better than others. We analysed the performance of 18 Gold-Rated funds with a five-year track record against the average performance of their peer group since the start of the year. Just three have underperformed their peers.
The Trojan fund is the standout in the group, down 1.67% in the first quarter of the year, it has outperformed its peer group by an impressive 11.54 percentage points. Other top performers include the ASI UK Smaller Companies fund, which is down 25.44% year to date but has beaten its category average by 4.4 percentage points, and Stewart Investors Asia Pacific Leaders, down 11.79% in the first quarter of the year, but up 4.43 percentage points on its category average.
Jonathan Miller, director of manager research at Morningstar, is not surprised that many of the most highly rated funds have proved to be the most resilient. “To earn a Gold rating, a fund must distinguish itself: it should have a seasoned, talented and successful manager; a sound, thoughtful investment process that has been executed skillfully and consistently; and a portfolio that is in harmony with that process and is capable of delivering a reward for investors for the risk it takes.”
Not all Gold-Rated funds have outperformed, however. The weakest of the bunch is First State Greater China Growth, which was down 11.41% in the first quarter of the year, some 6.11 percentage points lower than its peer group average. China funds were the first to be hit as the country was the source of the coronavirus outbreak, but decisive action by the government has meant the economy could already be showing signs of recovery. The fund is one of the few China-focused options without Alibaba in its top 10 holdings, which could have hampered performance at a time when households are on lockdown and relying on e-commerce sites in order to buy goods.
Miller says: “First State Greater China Growth has been at the lower end of its peer group recently, but over longer time frames the fund has shone. We see Martin Lau as a top-notch manager, backed by a strong investment team and a time-tested investment process.”
Cash and Gold Provide Protection
With a cautious remit to beat inflation, the Trojan fund is designed to be resilient at times of uncertainty. It can invest across equities, government and corporate bonds, precious metal and cash to deliver a return in line with inflation over a five-to-seven-year period. The manager of the fund, Sebastian Lyon, has voiced concerns in recent months about investors being complacent, and has said he expects volatility to increase – but he admits he could not have predicated the coronavirus outbreak.
The fund entered the year with its exposure to equities close to all-time lows, making up just 33% of the portfolio. This can be seen in the chart below, which shows the proprtion of the fund invested in equities (yellow), bonds (green), cash (red) and other assets (blue) over the past three years.
Meanwhile, the proportion of the fund in cash has remained at around 30% or more and gold at around 12%, both of which have helped to protect investors’ money in recent weeks while stock markets have plunged. Miller says: “In this most recent sell-off, there has been little place to hide but we would expect a fund like Trojan to hold its own and it has.”
