We assess the prospects for current Rated Fund laggards and update the status of funds previously flagged for issues of concern.
In the six months since our Rated Funds were introduced at the end of January, 14 out of the 267 passive and actively managed funds, investment trusts and exchange traded funds have lost money.
The worst performer, perhaps unsurprisingly, is the crisis-ridden Woodford Patient Capital trust, down 44.9% (see commentary below).
Other funds that focus on smaller companies, predominantly UK, have also suffered: Diverse Income, Rights & Issues and Miton UK MicroCap investment trusts are down 2.9%, 6.9% and 18.1%, respectively, with lacklustre performance at the portfolio level exacerbated by a widening in discounts to net asset value (or a move from a premium rating to a discount).
Elsewhere, M&G Japan Smaller Companies fund has also disappointed so far in 2019, down 9.1% over six months.
Funds with a distinct approach to unearthing value among UK stocks have suffered more than most: the three Schroder-badged funds – Income Maximiser, Recovery and Income – have fallen between 0.8% and 1.5%.
UK commercial property is not proving a profitable asset class either, as the Brexit stasis rumbles on. Two of the four funds that invest directly in UK bricks and mortar are so far proving to be lacklustre.
Kames Property Income fund is barely in positive territory, mainly because the monthly income it pays out is accounted for as income reinvested over the six-month period. However, monthly income reinvested was not enough to boost the performance of BMO (formerly F&C) Commercial Property. It has fallen 10.2% over six months, exacerbated by a large move in its rating: the discount to NAV has more than doubled to just over 20%. The rise in discount has had one beneficial effect, boosting the yield on the shares from 4.7% in January to 5.6% currently.
The property pain is not limited to bricks and mortar funds. iShares UK Property, which invests in listed UK property companies, is barely above water, having gained 0.2% over the period.
iShares £ Ultrashort Bond and SPDR Bloomberg Barclays 1-5 Year Gilt – two ETFs that invest in short-dated UK government bonds – have, unsurprisingly, failed to shoot the performance lights out, having returned between 0.7% and 1.3% to investors to date.
Below, we provide an update on the Rated Fund status of some of the above funds and those that we’ve been monitoring since the previous review.
Rated Funds under review
Woodford Patient Capital – rating removed
At the time, we expressed concern about the high level of cross-holdings between the two funds; the potential for the discount to net asset value to widen further; and the prospect of the open-ended fund needing to sell its substantial holding in the investment trust, potentially creating a share overhang.
Since then, further concerns have arisen, not least the stability and commitment of the management group, the huge funding requirements of holdings in WPCT such as Proton Partners and the listing status of its two largest holdings – Industrial Heat and BenevolentAI – which were delisted from the International Stock Exchange in Guernsey.
On Monday 31 July, the trust’s board took the unusual decision to announce that Neil Woodford had belatedly informed it, on Saturday 27 July, that he had sold 60% of his own shares in the trust in the first week of July. Woodford said he sold the shares for personal financial obligations, including the need to pay a tax bill.
While not obligated to inform the board of the share sale, we find it surprising that Woodford failed to inform the board in a timely fashion of the sale of 1.75 million shares, effected at prices of between 56.6p and 58p, for a consideration of around £1 million.
Unsurprisingly, Woodford’s share sale further dented confidence in prospects for the crisis-hit trust and the shares dropped to a new low of 45.4p on Friday 2 August, which represents a discount to estimated NAV of 45%.
Given these recent worrying developments, the Rated Funds investment committee has decided not to continue keeping WPCT’s rating under review and has now removed its Rated Fund status.
Fidelity American Special Situations – placed ‘under review’
In the April review, we placed Fidelity American Special Situations under ‘performance watch’. We noted that manager Angel Agudo invests in companies that are undervalued but have strong balance sheets and unrecognised potential. Unfortunately, investors are having to wait some time for that unrecognised potential to become apparent in market beating returns, as it has underperformed the S&P 500 index benchmark in each of the past four years to end June.
The fund is heavily overweight in the financials sector, illustrated vividly by its large holding in Warren Buffett’s Berkshire Hathaway, which represents 6.6% of the portfolio. Overall, the fund has 25% of its portfolio in financials compared with a 13% index weighting.
The £910 million fund remains stuck in the third or fourth quartile of the North America funds sector across all performance periods we monitor up to five years.
JPMorgan Global Growth & Income IT – retain ‘under review’ status
The Rated Funds investment committee placed this member of the Global Equity Income group under review in April following the announcement that Jeroen Huysinga was leaving the fund management industry. Huysinga was the sole manager of the trust from September 2008 until August 2017, when he was joined by Timothy Woodhouse as co-manager.
Rajesh Tanna and Helge Skibeli have since joined Woodhouse as co-managers. Huysinga is supporting the new team through the summer and the investment process remains unchanged.
The trust has returned 8% over the previous quarter, broadly in line with other global equity income funds, but we would like to see how the trust performs once Huysinga has left the scene and therefore our investment committee is retaining the ‘under review’ status.
Jupiter UK Smaller Companies – retain ‘under review’ status
Manager James Zimmerman left the firm in April to return to the US and the fund has since been run on an interim basis by Richard Curling. Jupiter has hired Matt Cable from M&G to run the fund and he is set to take over imminently.
In the past quarter, the fund has lost 2%, broadly in line with other UK smaller company funds. We retain its current status until we can see what the new manager does with this previous top performer.
Renewables Infrastructure IT – rating suspended
The premium to net asset value on Specialist selection Renewables Infrastructure IT (TRIG) has risen to 15% and has been as high as 20% in recent weeks. While the current premium is average for investment trusts in the renewable energy infrastructure sector, the Rated Funds investment committee views this premium as excessive and is therefore suspending the trust’s Rated Fund status until the premium narrows to a more acceptable level.
Premiums have risen across the sector primarily due to increased awareness of renewables as a relatively safe asset class and the recent global collapse in UK and global bond yields, leading investors to renew their search for ‘secure’ sources of income.
For new investors in TRIG, the main risk to capital is clearly a collapse in the premium. This has risen from around 6% since January, contributing to a total return on the shares of 16% in the year to date. A narrowing premium would not affect dividend income, but has a bearing on yield, dependent on the price paid by investors. The current yield is still an appealing 5.3%. However, lower power prices will potentially have an effect on income – these have fallen substantially since the peak in the fourth quarter of 2018, according to stockbroker Stifel. In June, Stifel issued a negative note on renewables – a contrarian call on the sector as a whole, but maintained a positive rating on TRIG. However, on 18 July, the broker changed its rating to negative.
Rated Funds on performance watch
The UK-focused funds and trusts that we placed under ‘performance watch’ at the last review continue to prove relatively disappointing. However, they were selected initially due to the calibre of their managers and the strategies – mainly value-based – that they adopt.
Since the previous review there has been a change of leadership in the Conservative government, the outcome of the 2016 Brexit referendum remains highly uncertain, and a snap general election is in the offing.
The Rated Funds investment committee would prefer to take a ‘wait and see’ approach before considering whether to move the funds we highlighted off performance watch – by either reaffirming their Rated Fund status or placing them formally under review.
The latter-named duo also manage Miton UK MicroCap IT, which has a large slug invested in Aim-listed shares (80% of the portfolio), and continues to struggle at the share price and net asset value level.
Elsewhere, we note that the Artemis fund duo that we placed on performance watch – Artemis Global Income and Artemis Global Growth – have made decent returns in the past quarter without breaking into the top half of their peer groups. Both have been Rated Funds since 2014 and have very strong longer-term performance records.
Both portfolios continue to hold medium-sized and smaller companies, as well as having some exposure to companies listed in emerging markets and Europe. They both remain underweight the US stock market, which has continued to make the running in 2019.
Artemis Global Income manager Jacob de Tusch-Lec sees no reason to change his investment philosophy but some fund-watchers claim the fund is losing its attraction as a core value proposition. The specific accusation is that the thinking behind the fund has become confused, with too high a focus on macroeconomic calls.
We are yet to be convinced either way so will be keeping both under performance review until the autumn.
Murray International IT also has a sizeable exposure to emerging markets and very little in the high-octane US market. The £1.5 billion trust regularly trades at a premium to NAV but is now trading a 3.4% discount to NAV.
The overtly value-driven strategy pursued by manager Bruce Stout is delivering positive returns and a dividend that has grown in each of the past 15 years under his guidance. However, the trust’s total return is lagging those of global equity income peers – its 28% three year performance is 11 percentage points below the average for the six-strong AIC global equity income sector, and the underperformance is more marked over five years.
As with other Rated Funds adopting a clear value-oriented investment strategy that has led to relative underperformance, the Rated Funds investment committee is reluctant to place Murray International’s status under review. However, it does believe a period under ‘performance watch’ is appropriate at this juncture.
We are also placing Fundsmith Emerging Equities IT on ‘performance watch’ because lead manager Terry Smith has stepped back from managing the trust.
FEET was a ‘wildcard choice’ for 2019 and internal promotions have resulted in Michael O’Brien and Sandip Patodia being handed the reins as portfolio manager and assistant portfolio manager, respectively, since the end of May.
The well-established and successful Fundsmith strategy that has proved so successful with the group’s open-ended funds (and the relatively new Smithson IT) has not yet been as successful at FEET.
However, with Smith continuing to oversee the trust’s holdings in his role as chief investment officer, we are prepared to take a ‘wait and see’ approach and closely monitor its progress throughout the rest of the year.
15 Rated Funds propping up the tables in 2019*
|Annual return (%) and
quartile rank in year to 31 July:
|Name||Rated Fund group||6-mth return (%)||Qtl rank||2019||Rank||2018||Rank||2017||Rank||3-year return (%)||Rank|
|SPDR Bloomberg Barclays 1-5 Year Gilt||Sterling Bonds||1.3||2||2.0||2||-0.7||3||-0.6||4||0.7||4|
|iShares £ Ultrashort Bond||Sterling Bonds||0.7||3||1.1||4||0.6||2||0.7||2||2.4||2|
|Kames Property Income||Property||0.4||3||-4.8||4||5.1||4||17.5||1||17.6||2|
|M&G Japan Smaller Companies||Japanese Equities||0.4||4||-9.1||3||5.8||3||30.8||1||25.8||4|
|iShares UK Property||Property||0.2||4||-5.9||4||6.2||4||5.3||2||5.3||4|
|Lowland IT||UK Equity Income||-0.8||4||-6.8||3||4.2||3||23.1||1||19.6||3|
|Schroder Income Maximiser||UK Equity Income||-0.8||4||-4.2||3||12.1||1||15.4||1||24.0||1|
|Schroder Recovery||UK Growth||-0.9||4||-5.5||4||9.9||1||19.1||2||23.7||3|
|Schroder Income||UK Equity Income||-1.5||4||-5.7||4||15.6||1||16.9||1||27.4||1|
|Fundsmith Emerging Equities IT||Emerging Markets||-1.9||4||-8.3||4||9.6||1||5.8||3||6.3||4|
|Diverse Income IT||UK Equity Income||-2.9||4||-14.2||4||8.1||2||15.3||3||7.0||4|
|Rights & Issues||UK Smaller Companies||-6.9||4||-15.9||3||10.2||3||53.0||1||41.8||3|
|BMO Commercial Property IT||Property||-10.2||4||-18.4||4||2.5||3||25.2||1||4.7||4|
|Miton UK MicroCap||UK Smaller Companies||-18.1||4||-31.2||4||11.4||3||15.3||4||-11.7||4|
|Woodford Patient Capital||Specialist||-44.9||4||-40.2||4||-24.0||1||14.8||4||-47.8||1|
* Table shows bottom 15 of 267 Rated Funds over six months to 31 July 2019. The quartile rankings refer to a fund's ranking in its official industry sector. Data source: FE Analytics, as at 31 July 2019.