Rated Funds: The funds placed ‘under review’ after first quarter

Andrew Pitts delivers a review of <em>Money Observer</em>’s Rated Funds for the first quarter of 2018.

Each quarter Money Observer takes a look at our active Rated Fund list, providing a breakdown on a sector-by-sector basis. 

Funds that are placed ‘under review’ are highlighted. This could be down to a manager change, performance concerns or a ‘soft closure’. We also keep an eye on high premiums and place investment trusts that look expensive under 'Premium Watch'. Being placed ‘under review’ is not a sell recommendation, as the fund or trust remains a Rated Fund. It does, however, indicate that our investment committee has some concerns and therefore does not view the fund as a ‘buy’ for new investors. 

The review (and performance figures contained within) covers the start of January 2018 to 31 March 2018.

Asian Equities

Asian markets tracked western developed markets down over the quarter. The FTSE Developed Asia Pacific ex Japan index lost 6.1 per cent. Emerging Asian markets fared better: the FTSE Emerging Asia Pacific index lost 2.9 per cent. The broader FTSE Asia Pacific ex Japan index lost 4.4 per cent. On a country-specific basis China fared far better than India.

Best performers in the wider asset group were Fidelity Emerging Asia (-1.1 per cent) and Smith & Williamson Far Eastern & Growth. This fund, which includes Japan in its remit, lost 1.88 per cent.

The worst performers in this pan-Asia cohort were investment trusts Scottish Oriental Smaller Companies (-8.4 per cent) and Invesco Asia (-7.4 per cent). Both trusts are conservatively run but both have significant exposure to India, which was very weak in the first quarter. However, it is the persistent and disappointingly poor performance of Scottish Oriental Smaller Companies that leads us to place the trust under review this quarter. 

Our single country focus funds for India and China had a very contrasting quarter. Both investment trusts outperformed their open-ended counterparts. The MSCI India index fell 10.3 per cent over the quarter, but the Jupiter Indian fund dropped by 15 per cent. Should underperformance persist it will be placed under next quarter. Aberdeen’s New India trust was better insulated against the falls – it dropped by 8.5 per cent and its one-year loss of 3.5 per cent is far better than the Jupiter fund, down 11.9 per cent.

Fidelity China Special Situations was the only member of the group in positive territory with a 1.5 per cent gain. In contrast Janus Henderson China Opportunities lost 2.4 per cent. The longer-term record for both remains very good.

Trust under review: Scottish Oriental Smaller Companies 

European equities

The quarter’s index performance broadly reflected the wider world: the FTSE Europe ex UK index fell -4.4 per cent. The EMIX Smaller European Companies ex UK index fared a little better, down 3.6 per cent. 

Just one fund, Man GLG Continental European Growth, made a positive return in the first quarter. Its 1.2 per cent gain further cements its status as one of the best-performing funds in the region over longer periods. Marlborough European Multi-Cap was the next best performer with a loss of 1.9 per cent. 

The standout loser in the group was the small company-oriented TR European Growth trust. It fell by 12.6 per cent over the quarter, but this was compounded by a 7 percentage point move in its discount to net asset value. That is now -6.8 per cent compared with a 1 per cent premium when the year started. 

Another Janus Henderson managed trust was also among the back-markers. Henderson European Focus lost 6.8 per cent, although that loss was almost entirely due to a move from a premium of 2 per cent to a discount to net asset value on its shares of -4.3 per cent.

No funds or trusts under review 

Emerging markets

There has been some rotation in fund flows from developed markets, chiefly away from the US, and into developing markets over the quarter. That is reflected in index returns from the asset class. 

Latin America was the best performing emerging market region over the quarter. The FTSE Latin America index gained 3.8 per cent, followed by MSCI Frontier Markets with a 1.4 per cent uplift. The broader MSCI Emerging Markets index was down 2.2 per cent.

Index performance is broadly reflected among the Rated Funds. BlackRock Frontiers trust (up 2.9 per cent) and its sister trust BlackRock Emerging Europe (-0.8) led the pack over the period, closely followed by Aberdeen Latin America Equity, which lost 1.6 per cent.

The worst return was from Invesco Perpetual Global Emerging Markets, down 5.2 per cent. 

However, Templeton Emerging Markets (-4.7 per cent) is the trust we are placing under review, following the sudden departure of lead manager Carlos Hardenberg, who had transformed performance since taking over from Mark Mobius in October 2015. His deputy Chetan Sehgal has taken over but is something of an unknown quantity at this stage. 

Trust under review: Templeton Emerging Markets 

Global bonds

The broad Bloomberg Barclays Global Aggregate Bond index gained 1.4 per cent as investors sought refuge from risk assets such as equities. 

Only the debt specialist trust Twentyfour Select Monthly Income managed to keep pace with that index reading, gaining 1.5 per cent over the quarter, bolstered by demand for its 6.5 per cent income yield. However, the trust’s premium to net asset value has also risen a little and now stands at 4.8 per cent.

Marlborough Global Bond was the worst performer with a 3 per cent loss over the quarter, but investors will be comforted by its 3.9 per cent yield.

No funds or trusts under review

Global equity income

Equity income strategies have largely been out of favour with investors in the first quarter, and indeed for the past six months, and that is reflected in the index returns. The MSCI World High Dividend Yield index lost 6.6 per cent in the first three months, compared with a 4.8 per cent drop for the MSCI World index.

All Rated Funds in the group beat the first-mentioned index return over the period, led by Guinness Global Equity Income, which fell by just 3 per cent, closely followed by Schroder Global Equity Income(-3.9 per cent). The latter fund is being placed under review because manager Ian Kelly left the firm at the end of March. New managers (but old hands) Nick Kirrage and Simon Adler have taken over.

The worst performer was Sarasin Global Higher Dividend (-6.2 per cent), followed by investment trusts Henderson International Income (-5.9 per cent) and JPMorgan Global Growth & Income (-5.8 per cent).

Despite this short-term weakness, demand for shares in income-paying investment trusts remains strong. Shares in Murray International and JPMorgan Global Growth & Income continue to trade on premiums to net asset value of more than 4 per cent. We would become concerned if they exceed 5 per cent for new purchases. 

Fund under review: Schroder Global Equity Income 

Premium watch: Murray International and JP Morgan Global Growth & Income 

Global growth

Sterling’s continued strength against the dollar in particular over the first three months compounded losses for investors in overseas markets by around 2.5 per cent.  The MSCI World index dropped 4.8 per cent in sterling terms over the quarter, while the FTSE World ex-UK index (a useful barometer for global funds that largely exclude the UK) fared little better with a fall of 4.2 per cent. 

However, four funds in our adventurous global growth group bucked the losing trend, led by a 1.8 per vent gain from Standard Life Global Smaller Companies and Ardevora Global Equity, a fund that has the ability to ‘short’ shares of companies that it feels are overvalued. The best performance among our ‘core’ choices was from Rathbone Global Opportunities, down a shade under 1 per cent.

All adventurous selections beat the Investment Association’s Global sector average loss of 5 per cent, as did all of the core choices, except for the normally solidly reliable Artemis Global Growth fund, which had an uncharacteristically poor quarter, losing 6.1 per cent.

The worst return came from Scottish Investment Trust, which lost a disappointing 7.8 per cent over the quarter. Although its discount to net asset value is largely unchanged at a shade under 8 per cent, the shares have traded on a small premium over the past year, so that fall in its rating has contributed to a poor overall performance over the past year. However, Scottish’s 1.8 per cent return compares with a sector average of 13.1 per cent from 22 other trusts in the past year. Its net asset value returns are also the second-weakest in the sector over a year, leading us to place the trust under review. 

Trust under review: Scottish Investment Trust 

Japanese equities

Japan’s benchmark Topix index was one of the stronger global equity markets in sterling terms, losing 2.6 per cent. 

Three Rated Funds with strong long-term records made meaningful gains in the first quarter and were the top three Rated Funds overall over the quarter. Legg Mason IF Japan Equity returned 10.7 per cent, the best performance among all actively managed Rated Funds over the quarter. 

Lindsell Train Japanese Equity also returned a very healthy 6.6 per cent.

The small-company oriented Baillie Gifford Shin Nippon trust continued its very strong run, returning 5.8 per cent. However, as we have previously cautioned, the trust continues to be quoted on a very high premium to net asset value (currently 11.8 per cent), despite the regular issuance of new shares to satisfy demand. We will continue to rate the trust, but highlight this high premium as potentially unsustainable should sentiment against the trust or Japanese equities change for the worse.

As with other asset groups, equity income strategies were not popular. Our income choice for this group, LF Morant Wright Nippon Yield fund, fell 6.1 per cent. Our open-ended smaller company choice, M&G Japan Smaller Companies, also had a comparatively bad quarter, down 5.9 per cent.

The strong team approach fostered by Baillie Gifford’s Japanese equities desk leads us to keep faith with Baillie Gifford Japan trust and Baillie Gifford Japanese following the anticipated and planned retirement of manager Sarah Whitley in April. The high premium on the trust may persuade investors to focus instead on the open-ended Baillie Gifford Japanese.

Premium watch: Baillie Gifford Shin Nippon and Baillie Gifford Japan 

Mixed asset funds

The FTSE UK Private Investor Conservative index returned -2.4% over the quarter. In the 0-40% mixed asset group there were no major deviations from this. The best performer was TM Fulcrum Diversified Core Absolute Return (0.1 per cent) and the worst was Artemis Monthly Distribution (-3.7 per cent).

In the 41-60% mixed asset group the representative FTSE UK Private Investor Balanced index returned -3.8%. All three funds beat that return, marginally.

In the 61-100% mixed asset group the representative FTSE UK Private Investor Growth index returned -4.6 per cent. Funds that are heavily exposed to equity income strategies performed worse than this, notably Shires Income (-7.5 per cent) and TB Wise Multi-Asset Income (-7.3 per vemt). We feel this is a result of the asset class being out of favour rather than anything to be concerned about with regards the management of these funds.  

However, Newton Multi-Asset Growth is being placed on review following the retirement of Christopher Metcalfe, although the management group stresses its team-based approach for the fund.

The top performer with a loss of -3 per cent was Unicorn Mastertrust, which is a fund of investment trusts. 

Fund under review: Newton Multi-Asset Growth


The FTSE EPRA/NAREIT Global index, which tracks the performance of real estate securities, was particularly weak, falling 7 per cent over the quarter. In contrast the IPD UK All Property index, which tracks the total return from ‘bricks and mortar’ commercial property, rose by 1.4 per cent.

In the latter group, F&C Commercial Property was the stand-out performer with a gain of 5.2 per cent, which was boosted by a near 3 per cent improvement in its rating – moving from a small discount to NAV to a small premium.

The worst performer, Fidelity Global Property, marginally outperformed the benchmark index with a loss of 6.5 per cent.

No funds or trusts under review 


Performance against official sectors benchmarks have not been measured in this review. 

Worldwide Healthcare IT has not been placed under review following the abrupt departure of co-manager Sam Isaly from management group Orbimed. Sven Borho, founding partner at the group, has assumed full responsibility for the portfolio he co-managed with Isaly since 1995. 

Indeed, this trust has outperformed the more biotech-oriented International Biotechnology trust, which was among the worst performers overall this quarter, having lost 10.4 per cent and its premium rating too, as investor enthusiasm for US biotechnology shares waned.

However, Polar Capital Biotechnology fund managed to buck that trend, returning a respectable gain of 2.6 per cent over the quarter. 

Guinness Global Energy was another notable loser among specialist funds, it dropped 8.1 per cent, yet marginally outperformed its benchmark MSCI World Energy index. 

The clear winner among specialist selections was Allianz Technology, which gained 3.5 per cent, with its shares also moving to a small premium to net asset value. The open-ended Fidelity Global Technology fund also put in a relatively strong show, losing just 1.5 per cent.

No funds or trusts under review

Sterling bonds

Representative government and corporate bond indices suffered minor falls of up to -1.2 per cent over the quarter. 

That performance is broadly reflected among the Rated Funds in the group, although funds pursuing high yield strategies tended to perform marginally better than others, notably Schroder High Yield Opportunities, which has a portfolio yield of 6 per cent. 

Regular income-payers Axa Framlington Managed Income (yield 5 per cent) and Artemis High Income(yield 5.3 per cent) also held up well on a total return (income reinvested) basis.

No funds or trusts under review

UK equity income

Investors in UK equities generally suffered a torrid quarter, with UK-listed shares among the worst performers on a global basis. The benchmark FTSE 100 index fell 7.2 per cent over the quarter, while the wider FTSE All-Share fared little better with a 6.9 per cent fall, as did the FTSE UK Dividend+ index.

While not making gains over the quarter, the vast majority of funds in the adventurous UK equity income group did far better than the indices. Notable outperformers were the small-company oriented Diverse Income trust, which fell by 0.7 per cent and fellow investment trust Lowland, down just 3 per cent. The value-oriented Schroder Income, a new entrant Rated Fund for 2018, fell by just 1.3 per cent.

However, fellow new entrant Premier Optimum Income had a very inauspicious start, falling 8.5 per cent. This suggests its options-writing strategy (which is designed to boost its yield, currently 7.6 per cent) has not worked well in the first quarter. That is particularly true when measured against the fund it replaced: Schroder Income Maximiser fell by just 1.2 per cent. Such a disappointing comparison leads us to place the fund under review.

Among the core UK equity income selections, TB Evenlode Income is being placed under review after the managers announced it will ‘soft-close’ the fund by applying a mandatory 5 per cent charge to new investments from May. That is a shame, as it is the best performing core fund in the group, having lost 3.4 per cent over the quarter.

Other funds in the core group marginally outperformed the benchmark indices over the quarter.

Funds under review: TB Evenlode Income and Premier Optimum Income

UK Growth

Our growth-oriented choices mostly did well against the benchmark indices: the FTSE All-Share fell by 6.8 per cent and the FTSE 250 index of medium sized companies fell by 5.7 per cent.  

Among the adventurous selections the best protection against market falls came from investment trust Fidelity Special Values, which was the only member of the group to post a positive return, of 2 per cent. However, that gain arose from the trust moving from a 4 per cent discount to net asset value to a premium of 1.9 per cent. The trust’s net asset value actually fell by a still-respectable 4.1 per cent.

Two other adventurous choices registered decent performance: the small-company oriented MI Chelverton UK Equity Growth fund lost just 0.6 per cent and Ardevora UK Equity fell by 1.7 per cent.

It was a similar story among core choices: CFP SDL UK Buffettology shed only 0.9 per cent and four other core choices significantly outperformed the market. 

The outlier in performance among adventurous choices was Unicorn UK Growth, with the fund slipping 7.7 per cent over the quarter, while core choice Slater UK Growth slipped by 6.2 per cent, which was still ahead of the All-Share.

Old Mutual UK Dynamic Equity has been placed under review. A Rated Fund since 2016, its very strong performance has drawn too much interest from investors and the fund is now effectively closed to new investments. 

Fund under review: Old Mutual UK Dynamic Equity

UK Smaller Companies

The Alternative Investment Market, which has been a rich hunting ground for small company funds in recent years, bucked the trend in UK markets. The FTSE AIM All-Share index fell by 3.1 per cent over the quarter, less than half the fall in the FTSE Small Cap index (-6.5 per cent), which in turn performed marginally better than the All-Share (-6.8 per cent).

Indeed, it is somewhat odd to see small company funds performing better than their larger brethren in a period of market stress. The percentage fall among most Rated Funds in the group was in the low single digits, with the best performer being BlackRock Throgmorton.

However, we are placing the trust on performance review due to a manager change. The trust has two distinct portfolios: a ‘long-only’ portfolio which was previously managed by Mike Prentis to very good effect; coupled with a portfolio of contracts for difference (allowing ‘shorting’ of stocks) that is run by Dan Whitestone, who joined the trust in 2015. 

Whitestone will now manage both the long and short stock positions, while Prentis will continue to give him unofficial support. However, given Whitestone’s relative inexperience, we will watch to see how the trust performs over the coming month’s before reconfirming its Rated status.

The worst performing member was Strategic Equity Capital trust, which fell by 5.9 per cent over the quarter. The trust has a concentrated portfolio which is run in a private equity style to extract value from its holdings. However, it is taking some time for performance to shine again – its three-year returns are not compelling, so we may place the trust under review should returns not improve. 

Trust under review: BlackRock Throgmorton

US Equities

US shares mainly ended the quarter in negative territory despite posting sharp gains towards the end of March. The S&P 500 finished down 1.2 per cent but the tech-heavy Nasdaq Composite bucked the trend by gaining 2.3 per cent. In sterling terms, however, the currency’s strength turned those numbers into losses: -4.8 per cent for the S&P 500 and -2.4 per cent for the Nasdaq Composite. Smaller companies were in between: the Russell 2000 index lost 3.7 per cent over the quarter. The best performer was Brown Advisory US Smaller Companies, a new addition for 2018, which lost just 0.3 per cent. 

Our two investment trust constituents were the worst performers: the heaviest fall from our only income-oriented choice in the group, North American Income, which has suffered more than most other Rated Funds with an equity income mandate. The only positive aspect to take from its 10.1% loss is that it has boosted the yield on the shares from 2.8 per cent to 3.2 per cent.

JPMorgan US Smaller Companies also performed poorly, down 9.8 per cent. It has been a Rated Fund since 2014 so we, and investors, are hoping that this quarter’s performance is a short-term blip. However, the trust has traded on a discount of up to 15 per cent in the recent past, so the current 3.8 per cent discount to net asset value shows there is scope for the discount to fall further from here should sentiment continue to be poor.

One other fund is currently giving us cause for some concern: Fidelity American Special Situations, a Rated Fund since 2015, has extended a poor recent performance record with a quarterly loss of 7.46 per cent. We will monitor the fund closely over the next three months before considering whether to formally put in under review. 

No funds or trusts under review 

View a full list of our Rated Funds 2018 here and a full list of of our Rated Funds sectors here.

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