Best in class: funds and investment trusts with stamina and strength
'Form is temporary, class is permanent’ runs the old adage often used to describe sportsmen and sportswomen, though the maxim can also be applied in the investment industry, where you’ll find a cohort of collectives that consistently do the business for their holders.
Funds that routinely outperform over economic and stock market cycles must be pursuing a winning process that should pique the interest of investors. Once you find such a fund, you can feel more confident your hard-earned savings will be delivering stellar returns year in, year out.
While fund factsheets contain one, three and five year performance data, that isn’t enough information if you want a more accurate gauge of how a product performs over the longer term. The stock market might have been in a rising trend for that entire period, so it would be easy for an investment collective to also turn in a good performance.
A better way of judging quality is to look at the 10-year track record, as this should include both good and bad times for the market and should help you see how a product performs through the course of a full economic cycle.
With the help of FE Fundinfo, Shares has found a group of products we think have the hallmarks of being super-consistent performers. Though there is no guarantee they will always deliver positive results in the future, their track records are so good that they merit further investigation.
We crunched the data to identify retail funds and investment trusts ranked first quartile (see Why being quartile counts) over the one, three, five and 10 year periods to 27 October 2021 from across the entire universe of sectors compiled by the Association of Investment Companies (AIC) and The Investment Association (IA).
Outperforming year in, year out is no easy feat, so we’re confident that the funds populating the tables can be considered the best of the best within their respective sectors.
From this list we have identified six collectives – three funds and three trusts – which we think look particularly attractive. These selections are balanced across different parts of the market, different investment styles and different asset classes.
Our filter generated a diversified list of products, though we were able to discern one or two themes from the list. One is the presence of some super-consistent Europe-focused funds that have benefited from their ‘quality growth’ focus.
These include the £357 million Allianz Continental European (B3Q8YX9), a large cap-focused fund invested in the likes of luxury goods leviathan LVMH, semiconductor equipment maker ASML and world-class health name Novo Nordisk.
Also confounding the perception that the US stands for quality growth stocks, while Europe stands for cheap cyclicals, is BlackRock Continental European (B4VY989) or which more later.
Another top quartile star turn is Marlborough European Multi-Cap (B90VHJ3), the David Walton-managed fund with a large weighting to small and micro caps, while the presence of both Stewart Investors Asia Pacific Leaders Sustainability (3387476) and mixed asset fund Liontrust Sustainable Future Managed Growth (3002962) in our list demonstrates there has been real money to be made from funds with a focus on sustainability themes.
Within our investment trusts screen, two stars from the Baillie Gifford stable are noteworthy for continuing to set the performance standard, namely retail investor favourite Scottish Mortgage (SMT) and Asia Pacific trust Pacific Horizon (PHI).
Investors have long been starved for yield, so it is reassuring to see a select band of income-focused funds and trusts among the ranks of consistent first quartile performers. Their number includes the likes of the near-£1.4 billion Schroder Sterling Corporate Bond (0937937) fund, which pays quarterly distributions and is diversified across 269 holdings. Other ultra-consistent plays include Rathbone Ethical Bond (B77DQT1), a £2.7 billion fixed interest fund with a long-run record of outperforming the IA Sterling Corporate Bond sector. And within the investment trusts universe, both Law Debenture (LWDB) and Henderson High Income Trust (HHI) are ranked first quartile over all four time periods.
Why being first quartile counts
While the fortunes of, and sentiment towards, themes, geographic markets and industry sectors will wax and wane, super-consistent funds are likely to outperform sector peers on the way up and/or preserve investors’ capital better on the way down.
This is the reason why quartile rankings are so important. They provide a measure of how well a fund has performed against all other funds in its category, with rankings ranging from ‘Top Quartile’, often referred to as ‘First Quartile’, to ‘Bottom Quartile’, over various time periods.
Put simply, quartile rankings are used to compare returns of funds in the same category. For instance, if a given fund category has 100 funds, each quartile will be made up of 25 funds. And the 25 funds with the highest returns will belong to the top or first quartile, while the next best 25 funds will inhabit the second quartile and so on.
BlackRock Continental European Fund Acc (B4VY989) £47.88
The fund, run by the experienced duo of Stefan Gries and Giles Rothbarth, invests in high-quality growth companies with a focus on capital appreciation rather than dividends.
The managers take a high-conviction approach and hold a very limited number of stocks which they consider to be not just ‘best in class’ in Europe but in their global sector.
At present the portfolio consists of just 35 stocks, with the top five holdings – Dutch semiconductor equipment maker ASML, French luxury goods house LVMH, Swiss pharmaceutical firm Lonza, fellow Swiss specialty chemicals firm Sika and Danish shipping group DSV – comprising more than a quarter of the fund.
Total returns have been impressive over one year (31.2%), three years (19.9% annualised), five years (17.6%) and 10 years (15.5%).
The fund also performs well on sustainability metrics, with no exposure to thermal coal, oil sands, tobacco, firearms, nuclear or other controversial weapons, and no holdings in companies which violate the principles of the United Nations Global Compact.
As a result, it gets the highest possible score on the MSCI ESG fund rating chart of AAA to CCC out of 421 funds in the European ex-UK equity sector. The ongoing cost is 0.92%. (IC)
Henderson Opportunities Trust (HOT) £13.73
The £109 million trust has consistently beaten the FTSE All-Share over many years, and we believe the managers’ diversified approach and flexible mandate means it has the potential to continue to perform well under varying market conditions.
Managers James Henderson and Laura Foll deliberately construct the portfolio to achieve a high level of diversification by dividing it into seven different classifications of buckets.
The seven buckets are early-stage companies, small and medium sized compounders, fast growing smaller companies, large companies, special situations, natural resources, and companies that are in recovery.
The trust holds between 20%-and-40% in the compounders bucket, comprised of companies that consistently grow their profits and have high margins.
Up to 20% of the portfolio is held in recovery stocks which are generally out of favour with investors. The team will only hold firms where they have identified a specific catalyst to unlock value or where there is a clear route to profitability.
One common theme that runs through the portfolio is a focus on companies which have the potential to become the next leaders in their field.
Impax Environmental Markets (IEM) 528.8p
Shares in green investment trust Impax Environmental Markets (IEM) may have exploded into life of late as ESG (environmental, social and governance) issues have moved up the agenda for investors.
However, the fund is not some Johnny-come-lately when it comes to investing in this space having been established back in 2002 and it has an enviable track record over the last 10 years at least.
Managers Bruce Jenkyn-Jones and Jon Forster take a selective approach, avoiding investment in big electric vehicle plays like Tesla and China’s Nio, for example, citing their failure to meet strict ESG criteria.
The current COP26 summit in Glasgow should set the agenda for at least the next decade of investment in green infrastructure by governments across the world providing a boost to the trust’s portfolio.
The focus is on clean energy and energy efficiency, water treatment and pollution control, waste technology and sustainable food. It is a reasonably concentrated portfolio given this wide remit, with 64 holdings as at 30 September 2021.
It is a fund for capital growth rather than income with a very nominal yield of 0.4%. The trust has an ongoing charge of 0.95%, not unreasonable for a fund with a specialist focus. (TS)
Law Debenture Corporation (LWDB) 774p
This investment trust is a rare beast, combining a professional legal services business with a large portfolio of equities professionally run by an outside management team.
The mixture clearly works as the half-year results in July showed. Over one year the net asset value total return has been 41.7% against 21.5% for the FTSE All-Share, over five years it is 75.6% against 36.9% and over 10 years it is 167.5% against 85.5%.
The share price total return has been even better at 184%, meaning £10,000 a decade ago would be worth £28,400 as of July against £18,550 for the All-Share.
Its history goes back much further however, to its founding in 1889 by a group of lawyers and businessmen including Edwin Waterhouse, one of the progenitors of today’s PWC.
As well as capital growth, the trust has a strong belief in paying a rising dividend, which it has for the last 42 years including during the pandemic making it one of the Association of Investment Companies’ longest-serving ‘Dividend Heroes’.
The fund management team of James Henderson and Laura almost need no introduction, with Henderson having run the fund since 2003 and Foll joining in 2011 and becoming joint manager in 2019. The ongoing charge is a very reasonable looking 0.57%
The duo take a multi-cap approach seeking out companies whose growth prospects are being under-priced by the market and therefore come with a ‘margin of safety’ in valuation terms. (IC)
Rathbone Ethical Bond Fund (B77DQT1) 244.66p
Top quartile perennial Rathbone Ethical Bond (B77DQT1) is a near-£2.7 billion fixed interest fund with a long-run record of outperforming its IA Sterling Corporate Bond sector.
Managed by Bryn Jones with assistance from Noelle Cazalis, the fund seeks to generate a greater total return than the sector, after fees, over any rolling five year period. When selecting investments, Jones and Cazalis assess the economic environment to determine which industries they want to own as well as the duration of their investments.
They then use their ‘Four Cs Plus’ approach to evaluate creditworthiness, weighing up the Character of a company’s managers, Capacity, to ensure it isn’t over-borrowing and has the cash to pay its debts, a group’s Collateral, to check it has assets to back the loan, as well as the Covenants, which are the loan agreements that set out the terms of the bond. Conviction is the ‘Plus’ part of the assessment.
As the factsheet explains: ‘We think differently to the market; sometimes contrarian, sometimes sceptical of orthodox thinking, but always opinionated’.
Rathbone Ethical Bond boasts an attractive historical distribution yield of 3.1% and a competitive ongoing charges figure of 0.65%. At the end of September, the fund was reassuringly diversified across 266 holdings. (JC)
Slater Recovery Fund (B90KTC7) 433.37p
Shares extolled the virtues of the Mark Slater-managed Slater Growth Fund (B7T0G90) here, although sister vehicle Slater Recovery (B90KTC7) is another consistent, first quartile performer.
Slater Growth is a ‘pure’ growth fund famed for utilising the price-to-earnings growth (PEG) ratio. Yet while Slater Recovery’s core is formed of companies with low price-to-earnings ratios relative to earnings growth and cash flows, star manager Slater also uses a secondary recovery investment screen to find turnarounds and companies trading at discounts to net asset value or cash, with a focus on companies with strong balance sheets, powerful competitive positions and high returns on capital. The ongoing cost of Slater’s expertise is 0.77%.
A multi-cap fund, Slater Recovery has a track record of outperforming the IA UK All Companies sector and making money in rising and falling markets alike, delivering capital growth in the good times and protecting investors’ cash in the bad.
As of the end of September 2021, top 10 holdings ranged from media group Future (FUTR) and groceries goliath Tesco (TSCO) to outsourcer Serco (SRP), insurer Prudential (PRU) and pharmaceutical services play Clinigen (CLIN:AIM), not to mention AIM star turn Next Fifteen Communications (NFC:AIM) and Jubilee Metals (JLP:AIM). (JC)