Sterling Bond Fund Shake Up Contributes to High Turnover of Funds in FE Invest Approved List

LONDON, 29 OCTOBER 2018: There has been a high turnover (21.5%) of funds in the latest FE Invest Approved List rebalance, with sterling bond funds seeing the biggest churn. The changes are intended to help investors protect capital from unpredictable markets and increase portfolio diversification.

FE Invest updates its list of preferred funds twice a year.  During this review 19 new funds join the list and 20 leave (see notes to editors for full list).

Rob Gleeson, FE head of research, said: “The six months since our last rebalance has followed a pattern of strong equity growth punctuated by brief periods of extreme volatility. Uncertainty over how much of the current growth is dependent on monetary policy and how much on the economy, very much defines this period for investors.

“The question will be resolved eventually, probably with a market correction but predicting when is futile. Significant headwinds are building including Britain’s drawn-out exit from the European Union and US president Donald Trump’s keenness for trade wars, with allies and adversaries alike. It is impossible to know when the tipping point will come, so diversification remains an investor’s best defence. The latest changes to our FE Invest Approved List reflect the funds we believe have been best at their respective strategies across various scenarios.”

A churn in the number of sterling bond funds has contributed to the high turnover of funds at this rebalance with five funds added to the list and six removed[1].  See table below.

FE research manager, Charles Younes, comments: “The last 12 months have proven to be extremely challenging for bond fund managers. They have really seen their capacity to protect from the downside tested and many managers have fallen short in their attempts.”

The Invesco Perpetual Corporate Bond fund has been removed due to poor credit picking. The Blackrock Corporate Bond fund has been added to the FE Invest Approved List because its performance is mainly driven by bond selection, with the manager not taking large duration or macro calls. The Man GLG Strategic Bond fund’s dynamic duration management is the reason it has been added.  This has been a key performance driver over time, helping to offset losses when credit spreads widened.

Funds In (For the full table of funds in and funds out, see notes to editors)

Two Global Emerging Market funds ­─ Allianz Emerging Markets Equity and Artemis Global Emerging Markets ─ have been added for the different approach the managers take compared to most peers. Younes explains: “The two funds have distinguished themselves with their quant driven approach rather than a focus on bottom-up stock selection and on only identifying companies whose growth is linked to the rise of a middle class in emerging markets, to drive returns.”

Man GLG UK Income and CFP SDL UK Buffettology are the two UK Equity funds to be added. Younes explains: “The funds operate based on completely different investment strategies. Despite the stark difference, the two managers have produced an outstanding track record over the last three years and have raised a lot of assets.”

In the Targeted Absolute Return sector, Winton Absolute Return Futures joins the list based on its impressive investment process. Younes explains: “Winton has made its hedge fund strategy available to retail investors, with targeted volatility of five per cent, providing access to an outstanding investment process.”

Funds Out (For the full table of funds in and funds out, see notes to editors)

Three long-term FE Invest Approved List constituents­ ─ Schroder US Mid Cap, M&G Index Linked Bond and Fidelity Moneybuilder Income ─ have been removed following periods of poor performance and concerns about the ongoing viability of the strategies.

Younes explains: “Both the Schroder and Fidelity funds are designed to be defensive, but this does not justify recent underperformance. Poor stock picking and credit picking respectively have led to us removing the funds. The announcement of Ian Spreadbury’s retirement also adds uncertainty to the future of the Fidelity bond funds, although Fidelity has clear plans for his succession. In the case of the M&G Index Linked Bond fund, it has become less active since the departure of Mike Riddell. The team now has less flexibility in terms of duration and ability to play the yield curve.”

Two IA UK All Companies funds­ ─ Invesco Perpetual UK Focus and Invesco Perpetual UK Strategic Income ─ have been removed, reflecting the lowest FE Crown score of one that both were awarded in the July Ratings Rebalance. Younes explains: “Across the Invesco UK Equity desk we have highlighted some weakness in stock picking, which is why we have sold all exposure to it.”

FE Invest Approved Passive List

Following the recent FE Passive Crown Rating rebalance, the following changes have been made to the FE Invest Approved Passive List:

Gleeson commented: “We have used the latest FE Passive Crown ratings to determine which funds to add and remove from our passive approved list. The ratings check how well a passive fund is doing its job at tracking its benchmark over three years, which is a guide to how well that group will track an index in the future.

“The dispersion in quality among passive funds is almost as great as it is among active funds and poor tracking and high charges can cause major underperformance. It is important to put as much effort into identifying a good passive fund, as a poor choice can be just as destructive to wealth.”

[1] The sterling bond funds are constituents of the following IA sectors: Sterling Corporate Bond, Sterling High Yield and Sterling Strategic Bond

For information on the methodology behind the FE Invest Approved List, see notes to editors.

-ENDS-

NOTES TO EDITORS

Funds in and out by sector:

FE Invest Approved List Methodology

FE considers all funds available for sale in the UK for the FE Invest Approved List. FE data and ratings are used to identify a shortlist of top performing funds. Qualitative selection criteria are then applied to produce the final recommended list.

FE accepts no payment from any of the fund managers for their participation in the ratings or review process, or for their inclusion in the shortlist.

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