The full methodology behind this year’s awards explained.
• Funds, including offshore-domiciled funds, must be members of an Investment Association (IA) sector and offer a sterling or hedged-to-sterling share class. All charity, institutional and private funds are excluded, as are all passive index-tracking funds.
• Each fund must have at least £15 million of assets under management (AUM) as at 31 March 2019, and have at least a three-year qualifying history (no breaks in its history due to any material change in fund structure, objectives or governance). Contenders for best smaller fund awards are those with AUM of £15 million to £150 million. Contenders for best larger fund awards are those with AUM of £150 million-plus.
• Awards are assessed within specified IA sectors. UK equity growth, UK equity income, global equity income and property categories are assessed by also referencing Morningstar sectors.
• For these awards we assess the most relevant private investor share class to measure performance. This is the Investment Association’s primary share class: the highest-charging unbundled share class freely available in the retail market.
Data for the awards was provided by data provider Morningstar. Charts accompanying the awards profiles were sourced from FE Analytics.
The filtering process
The funds are ranked from best to worst across two main measures.
First, an overall average is calculated by weighting the first and oldest discrete year with 20% (to 31 March 2017), second discrete year with 30% (to 31 March 2018), third most recent discrete year with 40% (to 31 March 2019) and the three-year total return with 10%.
Second, risk-adjusted returns are analysed over three years to 31 March 2019, as defined by the Sharpe ratio. This measure calculates the level of a fund’s return over and above the return of a notional risk-free investment (in this case the ICE GBP Libor 1 Month index). The difference in returns is then divided by the fund’s standard deviation – its volatility, or risk measurement.
Contenders are then filtered to include only those funds which maintained their position in one of the top three quartiles in their sector for each of the last three years across the following measures:
• Three discrete annual periods of one-year risk-adjusted returns, as indicated by the Sharpe ratio.
• Three discrete annual periods of relative performance versus the fund’s IA sector.
This filters out weak performance, in terms of either weak risk-adjusted returns or weak returns relative to the fund’s sector.
‘Socially conscious’ fund awards
Morningstar defines a ‘socially conscious’ fund thus: funds that make investments based on such issues as environmental responsibility, human rights, or religious views. A socially conscious fund may take a proactive stance by selectively investing in, for example, environmentally friendly companies, or firms with good employee relations. This group also includes funds that avoid investing in companies involved in promoting alcohol, tobacco, or gambling, or in the defence industry.
Using the same filtering process as above, contenders are derived from the following IA sectors: equity – any equity-oriented sector; mixed asset – the three mixed investment sectors; bond – UK corporate and UK strategic bond sectors.
For this new award, funds in the targeted absolute return and volatility managed sectors were assessed. Contenders are first ranked by their annualised three-year volatility. The winning fund (after satisfying other quantitative and qualitative measures) has the best return among funds in the first quartile of volatility (i.e. the lowest volatility). The highly commended fund comes from funds in the second quartile of volatility.
• Fund manager’s tenure. We favour those with a history of at least three years managing the fund.
• Access to the fund by a wide spectrum of retail investors, thus excluding ‘soft-closed’ funds which could levy an initial fee.
• The fund’s strategy broadly tallies with retail investors’ expectations for the award category.
• Where a fund’s three-year performance (after satisfying the filtering requirements) is significantly superior to another fund with a better three-year Sharpe ratio, Money Observer may favour the higher-performing fund if its Sharpe ratio is not significantly lower.