All active fund managers are judged on their ability to outperform the market and show superior stock-picking skills that justify the higher fees incurred by investors.
That skill is known in market lingo as alpha. It’s no easy task, a key reason why most fund managers don’t beat the market. We screened for funds that have the highest levels of alpha and found that five showed superior outperformance over one year:
- Jupiter India Fund (GB00B4TZHH95)
- WS Morant Wright Nippon Yield Fund (GB00B42MKS95)
- WS Morant Wright Japan Fund (GB00B1XFJS91)
- Ninety One UK Special Situations Fund (GB00B1XFJS91)
- Artemis SmartGARP European Equity Fund (GB00B2PLJD73)
What is Alpha?
Morningstar’s glossary defines alpha as “the amount by which a fund has outperformed its benchmark, taking into account the fund's exposure to market risk (as measured by beta). Alpha is also known as the "excess return" or "residual return".
So alpha is defined in relation to “beta”, the second letter of the Greek alphabet, and a proxy for the benchmark and/or market return. Beta is “a measure of a fund’s sensitivity to market movements”, our glossary explains. Beta is usually defined as a number rather than as a percentage.
“The beta of the market is 1.00 by definition. A beta of 1.10 shows that the fund has performed 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant.”
Index tracking funds and ETFs are effectively offering beta, which explains the much smaller fees in comparison with active funds.
Beta Can Be Easy, And Good Luck Runs Out
When markets are in record territory, as the UK is currently, achieving beta can be enough for investors looking to beat inflation and the returns on cash and bonds. High exposure to hot stocks like Tesla (TSLA) and Nvidia (NVDA) can also boost returns for active managers if their portfolio weighting is above the benchmark. Clever timing - or what some might call "good luck" - can matter as much as superior stock-picking in some cases. Alpha doesn't distinguish between "good luck" and "superior judgment", although the former doesn't often persist over long periods.
In market downturns, investors particularly value active stock picking. These periods can often make the reputation of active managers who face much tougher conditions than when a "rising tide lifts all boats" in bull markets.
But as Morningstar's Active/Passive barometer regularly shows, the majority of active funds do not achieve alpha over the long term, across many market cycles, when fees are taken into account.
How Morningstar Calculates Alpha
Morningstar Direct data calculates alpha by taking the excess average monthly return of the investment over the risk-free rate and subtracting beta times the excess average monthly return of the benchmark over the risk-free rate.
Five UK-domiciled funds with the highest alpha over one year are shown below. However, 31 funds have achieved alpha above 10%, including one bond fund, Man GLG Sterling Corporate Bond, which is number six overall.
Five Funds with High Alpha
Jupiter India Fund
• Morningstar Medalist Rating: Neutral
• Morningstar Category: India Equity
• Ongoing Charge: 0.99%
• One-year alpha: 24.27%
Jupiter India is up 59.42% over the past year, outperforming the average fund in the India equity category, which rose 30.57%. The £1.5 billion fund has gained 15.69% over the past five years, while the average fund in its category is up 11.74%.
The fund’s one-year alpha is 24.27% as of the end of April. The portfolio aims to beat the MSCI India Index over the long term – at least five years. The strategy remains in the hands of a veteran investor Avinash Vazirani, who has been leading it since its inception in 2008. It is co-managed with Colin Croft, who has been a portfolio manager for 16 years.
WS Morant Wright Nippon Yield Fund
• Morningstar Medalist Rating: Gold
• Morningstar Category: Japan Flex-Cap Equity
• Ongoing Charge: 1.18%
• One-year alpha: 17.73%
The £760.7 million WS Morant Wright Nippon Yield fund rose 28.89% over the past year. The gain on the fund beat the 10.18% gain on the average fund in the Japan flex-cap equity category. Over the past five years, the Morant Wright fund is up 10.33%, while the average fund in its category is up 3.9%.
The fund measures performance against the TOPIX Total Return JPY benchmark and has achieved an alpha of 17.73% as of the end of April. Ian Wright, the longest-tenured manager on the strategy, offers over 25 years of listed portfolio management experience. In addition, the fund’s managers include Richard Phillips, Stephen Morant, Tom Mermagen, Andrew Neil Millward, and Denis Clough.
WS Morant Wright Japan Fund
• Morningstar Medalist Rating: Gold
• Morningstar Category: Japan Flex-Cap Equity
• Ongoing Charge: 1.17%
• One-year alpha: 17.04%
The £676.5 million WS Morant Wright Japan fund, the second from Morant Wright in this article, rose 29.57% over the past year. The gain on the fund beat the 10.18% gain on the average fund in the Japan flex-cap equity category. Over the past five years, the fund is up 8.35%, while the average fund in its category is up 3.9%.
The fund’s one-year alpha was measured as 17.04% at the end of April and is measured against the net return version of the TOPIX Net Return JPY benchmark. It is managed by the same team as the Nippon Yield fund.
Ninety One UK Special Situations Fund
• Morningstar Medalist Rating: Neutral
• Morningstar Category: UK Flex-Cap Equity
• Ongoing Charge: 0.85%
• One-year alpha: 16.37%
Over the past year, the Ninety One UK Special Situations fund rose 25.66%, while the average UK flex-cap equity fund gained 6.53%. The £458.2 million fund has climbed 7.71% over the past five years, outperforming the average fund in its category, which rose 3.5%.
Ninety One uses the FTSE All-Share Total Return GBP as benchmark, and has achieved an alpha of 16.37% for the fund. It is managed by Alessandro Dicorrado and Steve Woolley, who together have an average of eight years listed portfolio management experience.
Artemis SmartGARP European Equity Fund
• Morningstar Medalist Rating: Silver
• Morningstar Category: Europe ex-UK Equity
• Ongoing Charge: 0.87%
• One-year alpha: 12.72%
Artemis SmartGARP European Equity is up 26.37% over the past year, outperforming the average fund in the Europe ex-uk equity category, which rose 8.9%. The £201.8 million fund has gained 10.54% over the past five years, while the average fund in its category is up 8.2%.
The fund’s one-year alpha is only one basis point behind the Morant Wright fund, at 12.72%. Its primary prospectus benchmark is the FTSE World Europe Ex UK Total Return GBP. The fund is managed by Philip Wolstencroft and Peter Saacke, who together average 22 years of listed portfolio management experience.
