High flying funds: 2007 Moneywise Fund Awards
What kind of shape the markets will end the year in is anybody's guess. At various times in the last year they've soared, plummeted and hovered in uncertain limbo. When it comes to investment, this year has been characterised by a series of mini-crises, each raising fears of a full-blown bear market.
The credit crunch in August saw the FTSE 100 dive from 6624 to 5859 in just three weeks, for example. And while it returned to over 6700 by the end of October, prevailing fears about the US economy caused Wall Street shares to plunge again in early November, with European and Asian markets following suit shortly after.
These recent problems have illustrated the nature of world markets these days, with relatively local problems in the US having repercussions across the globe.
The one exception to date, however, has been the emerging markets. Although they did take an initial hit in August, they rebounded quickly and the sector is now up more than 10% on its pre-slump value. But this doesn't mean emerging markets are the new safe haven. Indeed, the Institute of International Finance has warned that with investment into the sector reaching a record £305 billion this year, it could be building into something of a bubble.
The Moneywise annual fund awards don't reward funds who shoot the lights out one year only to plummet the next. Instead, we've handed our awards to those funds that are turning in a strong performance year after year, while steering safely through the choppy waters of global stockmarkets.
For the vast majority of investors, the first port of call is domestic funds investing primarily in UK companies, and wherever else they invest, these funds are likely to remain at the core of their portfolio.
Most funds focusing on UK companies are found, unsurprisingly, in the UK All Companies sector, which has over 370 funds with wildly varying styles, risk levels and objectives. This doesn't make it easy for the typical investor to work out which funds are the best bet and there's a wide gap between the best and worst in the sector. The best return over five years, for instance, is 264%, the average is 103% and the lowest return is just under 40%. So when it comes to choosing the most appropriate fund for your money, research is important.
The Saracen Growth fund, our winner this year and in 2005, is not one of the sector's household names, but with 201% growth over five years, combined with Lipper's highest scores for both consistency and preservation, it's giving investors all they could ask for. The fund, run by Jim Fisher, takes a long-term stockpicking, buy-and-hold approach, typically keeping companies for an average of four years.
While the All Companies is the biggest group of UK-focused funds, the UK Equity Income sector is perhaps more popular, particularly with financial advisers. Although the average performance is similar to that of All Companies, it combines growth with dividend income, making it ideal for investors with an eye on retirement.
It also means the companies in which the funds invest tend to be large and established, giving a degree of consistency, if not the promise of eye-popping growth. The sector includes some of the biggest and most successful UK funds, none more so than our winner, the Invesco Perpetual High Income fund run by Neil Woodford.
If the average IFA were asked which fund managers they rated most highly, Woodford would feature very prominently, which is why the fund now has over £8 billion invested in it. And the longer he's in charge, the better his fund becomes, claims Frank Cochran, managing director of Wolverhampton-based IFA FSC Investment Services. "He's in a rich vein of success and he's got a system that works. He's not scared to be adventurous, but in a constructed way. The more money the fund's got coming in, the more adventurous he can be, and that's paid off for investors."
UK corporate bonds
Invesco Perpetual also comes out on top in the Corporate Bond category, a success Cochran believes is partly a consequence of Woodford's success with the income funds. "Managers Paul Causer and Paul Read are spinning off the back of that and, as corporate bond funds go, this has been very aggressive," explains Cochran. "The research is good, the choices have been good and they're willing to move up and down the risk scale."
The last couple of years have been difficult for these funds, as corporate bonds fall as interest rates rise, and vice versa. However, the probability that the UK is currently at the top of its interest rate cycle promises better times ahead for the corporate bond market.
At the other end of the UK risk scale are those funds investing in smaller companies. While the largest companies are relatively easy to research and are therefore more predictable, there's less information out there about smaller firms, creating an extra layer of risk. But with greater risk comes the potential for greater returns and some UK smaller companies funds have thrived in recent years, like our winner, the Investec UK Smaller Companies fund.
The sector is perceived as being high risk, but Juliet Schooling, head of investment research at Chelsea Financial points out that its volatility rating is only marginally higher than that of the UK All Companies sector. However, she adds that investors need to know what exactly they want before dipping into the sector. "It's diverse because some funds focus on small and mid cap companies while others look towards the really small companies, which are riskier, so you need to know what you're looking for and where funds invest."
Europe excluding the UK
This is one sector that deserves much more attention than it receives. In recent months, more money has been leaving Europe ex UK funds than coming in. Yet with the average fund growing 80% and 138% over three and five years respectively - the best averages of any UK sector - it's worth looking at, reckons Schooling. "Europe is being overlooked, but now is the time to make sure you've got enough of it, as most economists and experts are very bullish about it. With the UK and US markets wobbling and emerging markets always volatile, it's a good story."
This is largely because the economy across Europe is not only strong but also diverse, with hundreds of outperforming companies that remain fairly cheap for investors. European companies increasingly diverge from their domestic markets too, providing extra diversification.
Asia Pacific excluding Japan
Like many investment sectors, the Asia Pacific (ex Japan) market is being driven by the continued and rapid growth of China. While China isn't the be all and end all of this sector (with India having a similarly compelling growth story and other countries in the region benefiting as a result), our winner this year (and the runner-up in 2006) is the Gartmore China Opportunities fund which, as its name implies, focuses directly on China.
While managers would have to be "daft" not to make money in China right now, as Cochran puts it, Charles Awdry's fund has consistently done so more impressively than its peers. If you'd invested in the fund five years ago you'd have already made a 471% return on your money - against 200% for the average fund in the sector - performance that Cochran attributes to sheer knowledge of the region.
Global emerging markets
Emerging markets - like Asia Pacific (ex Japan) - remains something of a risk, and is driven not only by China and India but, increasingly, by Brazil. While western stockmarkets have felt the repercussions of concerns about the health of the US economy in recent months, emerging markets have escaped largely unscathed. If you had invested £1,000 in the average fund in this sector a year ago, you'd now have a healthy £1,414 to show for it, a return bettered only by the average Asia Pacific (ex Japan) fund.
This prompted even more investors to dip their toes into the exotica of emerging markets - with more funds launching as a result. However, no-one can accuse the winner of this award of jumping on the bandwagon. The AXA Framlington Emerging Markets fund was launched back in 1992, while manager William Calvert's experience in the sector goes back to the mid 1980s.
"Framlington has got its feet well and truly under the table with funds in Japan, Asia and other emerging markets, and it's been doing very well," says Cochran. "In areas like emerging markets you need to have your managers on the ground in the relevant regions, and William Calvert's experience is invaluable in this kind of market."
Although it's been around a while, it's a small fund, with £128 million invested in it, meaning it can be flexible and focus on small and medium-sized companies with the greatest growth potential. Despite his high returns, Calvert is a fairly cautious manager, largely steering clear of companies or countries where the potential risk is too high.
The fund, commended in last year's awards, has not only returned 328% over the last five years, but is top rated by Lipper for consistency, a telling accolade in an inherently volatile sector.
For investors wondering where their money should go, this sector isn't an easy one to judge. It contains funds that invest at least 80% of their assets in equities, with no more than 80% in the UK, and with the primary objective of growth of capital - so it doesn't matter what kind of company it's invested in, what size of company or where it is, making comparison almost pointless.
However, this gives the best managers in the sector the freedom to pick out the stocks they like from a large pool of industries and regions, something the winner this year, M&G Global Basics, has done to full effect, says Gavin Haynes, director of Whitechurch Securities. "It's not a traditional fund but manager Graham French's stockpicking has been very successful."
The fund, also the global growth victor last year, is fairly unusual in that - as its name suggests - it invests in primary industries that work with raw materials. Consequently, it has benefited from the commodities boom, says Haynes. "With stocks in sectors like mining and materials it's in the right place. It's thrived on the back of commodities and because it's had a very low weighting in areas that have had a tough time, such as financials."
Like global growth, this sector makes life difficult for investors wanting to compare funds, as its constituents are so diverse, ranging from Latin America and property to natural resources and pharmaceuticals. In fact, it can be viewed as the sector for funds without a natural home.
A big plus point is that the average return - 121% over five years - puts it among the best sectors, making it the best-selling sector for virtually every month over the last two years. This is largely because it's home to commercial property funds, which investors have, until recently, been piling into like there's no tomorrow.
But it's the Latin America funds that are posting the most eye-catching returns, and one, the Scottish Widows Latin American, takes the spoils in this category. With 550% growth in just five years, investors willing to invest directly in the region through Jeffrey Casson's fund have been richly rewarded.
Dominated by the US, this is the world's biggest and most diverse marketplace, with hundreds of world-leading and profitable companies to choose from. For the average investor this should mean opportunities aplenty, but in reality the average North American fund performance has fallen well short of virtually every other sector.
"It's traditionally a tough market in which to outperform, and finding good quality UK funds investing in it can be hard," says Gavin Haynes. However, that's not to say this is a sector to ignore, as Haynes points out that regardless of the credit crisis, the good quality managers have a massive market of strong companies with robust earnings outlooks from which to pick their winners.
This means it's a case of ensuring your money is trusted to managers who can do this, such as Tom Walker and David Forsyth - the latter appointed co-manager in June - at the Martin Currie North America fund, winner both this year and in 2005. "Tom Walker has done a very good job with a focused portfolio of 40 to 50 companies, mostly large cap, from a huge market."
About a fifth of the fund is invested in information technology firms, including Cisco and AT&T, while 15% - less than many North America funds - is in financials, a sector that's had well-documented problems in recent months in the US. A five-year return of 76% is more than double the sector average, illustrating the wide disparity in the quality of UK funds focusing on North America.
We selected the winning unit trusts and open-ended investment companies (OEICs) firstly by aggregating their performance over the last three, five and seven years (bid-to-bid, net income reinvested). All funds are available to the public and require no more than a £3,000 minimum investment.
These were then filtered to remove any that weren't consistent, and to disqualify any that didn't effectively minimise losses in a downturn. Consistency was rated using the Lipper Leaders formula, which recognises strong performance and low volatility. The formula takes a fund's average monthly return over and above its benchmark over the different time periods, and divides it by its volatility. Only the most consistent were considered.
The ability to minimise losses in a downturn was measured using the Lipper Leaders preservation ratings, which consider the difference between the highest and lowest three monthly period over the relevant time periods. Funds with large differences were excluded. The other factor taken into consideration was the fund's charges, to give us an idea of its value for money.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
This refers to a market situation in which the prices of securities are falling and widespread pessimism causes the negative sentiment to be self-perpetuating. As investors anticipate losses in a bear market and selling continues, pessimism grows. A bear market should not be confused with a correction, which is a short-term trend of less than two months. A bear market is the opposite of a bull market.