How Money Observer chose its 2015 Rated Funds
Our starting point in the Rated Funds process is to create specific asset class groups by which member funds can be categorised, and which private investors can more easily understand. Primarily this helps to demystify investment options for private investors.
Because we consider actively managed open-ended funds as well as investment trusts (and other closed-ended investment companies) for Rated Fund status, the official sector names are not always appropriate and can sometimes be baffling.
An example of potential confusion is the Investment Association's three 'mixed investment' sectors, where funds can appear in '0-35% shares', '20-60% shares' or '40-85% shares' sectors. We define these sectors more simply as Mixed asset - lower risk and Mixed asset - higher risk.
These two groups also include multi-asset investment trusts - such as RIT Capital Partners or Cayenne, which do not have their own defined official sector (they are constituents of the Association of Investment Companies' global sector).
The other Rated Funds groups we adopt are intuitive: global emerging market equities, global bonds, sterling bonds, UK smaller companies, property, commodities, global equity and global equity income. For specific regional exposure to equities we have grouped our Rated Funds into Asia, Europe, Japan and US.
There is also a Specialist group, which captures strategies as diverse as biotechnology, clean energy and financials.
Within most of these sectors we've also sought to identify a Rated Fund that could be regarded as adopting ethical or socially responsible investment principles.
How we select the Rated Funds
The Rated Funds committee consists of Andrew Pitts (editor), Faith Glasgow (managing editor), Rebecca Jones (funds writer) and our consultant Helen Pridham (funds industry expert and freelance journalist).
Our first port of call is to include almost every fund or trust that features within the 12 Money Observer Model Portfolios; these portfolios are tradeable as single entities on our sister website Interactive Investor.
Rated Funds may alternatively (or also) have won or been commended in Money Observer's annual fund and trust awards, or have qualified for inclusion in our occasional 'Consistent 50' fund rankings or our Premier League of funds. In most cases they are selected because they have delivered consistently good returns.
We may also select funds and trusts for Rated status if we believe they are relevant for current market conditions, or where the fund manager has a compelling track record at a different asset management firm.
Monitoring Rated Funds
We first introduced Money Observer Rated Funds in 2013 and steadily added to the original list throughout the year. In 2014 we removed 53 funds from the list, although only 11 were due to disappointing performance; a similar number have been chopped this year as well.
Other reasons for a fund losing Rated Fund status can include lack of capacity (leading to new investments being discouraged); a high premium to net asset value on investment trusts, an investment remit that is not well suited to prevailing market conditions; a significant change in fund manager; or disastrous performance.
Although we monitor the current performance of our Rated Funds, we would hope not to make any changes to our range before 2016 unless there are exceptional circumstances.
Changes since last year
This year we introduced a limit to the constituents in each Rated Fund group. Not only does this help us to concentrate our minds when selecting members, but it also narrows the choices for investors. The upshot is that we have 169 funds and trusts qualifying for Money Observer Rated Fund status in 2015, compared with more than 200 in 2014.
In the selection process we have made 71 deletions and 37 additions, split between 109 funds and 60 investment trusts.
Why are there still poor performers in the 2015 list?
Some of this year's Rated Funds could be classified as poor performers - either because the asset class is out of favour (for example commodities), or because the fund's strategy has not delivered the results expected.
When we analysed 2014 Rated Funds for continued inclusion or removal, we took these factors into account. For example, the fact that commodities in general have lost investors money over the past three years does not mean they (particularly contrarian investors) should be deprived of choices in this asset class.