Choosing an investment fund should not be based on strong past performance in isolation.
About Money Observer Rated Funds
Choosing an investment fund should not be based on strong past performance in isolation. It’s also crucial to identify funds or investment trusts that suit your own investment aims, which is what we expect of Money Observer Rated Funds, explains Andrew Pitts.
Rated Funds: in a nutshell
- Rated Funds for 2019 are comprised of 201 actively managed unit trusts, open-ended investment companies, investment trusts and investment companies. A further 66 ‘passive’ index-tracking funds are comprised of open-ended funds, exchange traded funds and exchange traded commodities.
- Rated Funds are presented in 15 easy-to-understand asset groups that avoid industry jargon.
- Most of the 15 asset groups include funds and trusts with a range of styles and aims.This helps investors to identify funds that suit their own preferences, such as investing for income, a focus on smaller companies, or cautious and adventurous choices.
- The majority of Rated Funds have made consistently superior returns against a relevant peer group over at least three years. A Rated Fund may also be selected for other reasons: for example, it is a ‘specialist’ where peer group comparisons are less easily made; or it offers a compelling investment theme or style where past performance may have little bearing on the potential for future gains.
Money Observer Rated Funds are presented in 15 asset class groups. They have titles that can be easier to interpret than the official industry sector names.
For example, ‘UK all companies’, is an official sector name for funds and trusts that target growth from UK-listed shares. But we believe ‘UK Growth’, the title for our asset group, is more intuitive.
Some funds appear in a more appropriate Rated Funds asset group than their official sector. The most common examples are equity income funds, many of which do not comply with the strict sector income requirements laid down by the Investment Association (IA). Thus, Rated Funds such as Franklin Rising Dividends and Montanaro UK Income, which appear in the UK Equity Income asset group, are not members of the equivalent IA sector.
The IA specialist sector, with around 200 constituent members, is a rich source of excellent funds that can get lost in the crowd. Several Rated Funds are included in what we believe to be more appropriate Rated Fund asset groups. An example is Stewart Investors Indian Subcontinent, which is included in our Asian Equities group.
As for mixed asset funds, we group these into three categories based on their indicative equity content. In contrast, four IA mixed asset sectors exist, while some mixed asset investment trusts are not in appropriate Association of Investment Companies (AIC) sectors for our purposes. An example is Shires Income, which is in the AIC UK equity income sector, but we feel the Mixed Asset 61-100% Equity category is more appropriate.
Who chose the Rated Funds for 2019?
The 2019 choices were selected by a committee chaired by Rated Funds editor Andrew Pitts (previously editor of Money Observer). The other members are Faith Glasgow (Money Observer’s current editor), Kyle Caldwell (deputy editor) and interactive investor investment analyst Dzmitry Lipski.
The choices were presented to and ratified by the investment sub-committee of interactive investor, which is Money Observer's parent company.
The committee assessed the universe of UK-authorised funds and trusts to produce a long-list for each Rated Funds asset group. Exchange traded products quoted on the London Stock Exchange with a sterling share class, plus index-tracking open-ended funds, were considered for the passive options.
We strove to limit the number of places to be filled in each asset group, but aimed to include funds that focus on specific strategies such as smaller companies, income and sustainable/ethical investment.
The previous year’s Rated Funds, as well as Money Observer award-winning funds from earlier in 2018, were assessed for inclusion before other potential constituents were considered.
In most cases the final constituents were selected because they have delivered consistently superior returns over at least three years compared with a relevant peer group. Short and longer-term periods were analysed, in tandem with three discrete annual periods. Investment statistics such as the Sharpe and information ratios (which are both useful measures of risk-adjusted performance) were also considered.
Other factors taken into consideration included manager track record and income yields (where relevant), plus dealing spreads and share price discount or premium to underlying asset value for investment trusts.
Funds and trusts may also have been picked for Rated Fund status if the committee felt they were relevant for current market conditions, with less emphasis placed on past performance.
Why are investment trusts included?
The majority of fund recommendation lists do not include investment trusts. But investment trusts are, in many instances, just as good a choice for private investors as open-ended funds, which are more widely promoted. This is particularly true in difficult markets where volatility can hit open-ended fund performance, such as in the property or smaller company sectors.
The closed-ended structure of investment trusts can result in short-term volatility. But it can also be more rewarding over time for investors seeking, for example, an income from equities. It also provides a route into specialist or less liquid asset classes such as private equity.
Generally speaking, the superior medium to longer-term performance of trusts versus open-ended funds in a variety of sectors also supports their inclusion. So, where appropriate for each Rated Funds asset group, the committee has endeavoured to ensure that both funds and trusts are well-represented.
Which Rated Funds might suit you?
Within each asset group, and where appropriate, the committee has endeavoured to select constituents to suit a range of individual investor preferences. For example, Rated Funds in the Asian Equities asset group are presented within a ‘pan-Asian’ sub-group and then by the ‘emerging Asia’ sub-group, and then by single country funds. In other asset groups, Rated Funds that focus on income or smaller companies are often highlighted separately.
Three of our asset groups have a large range of funds and trusts, reflecting not only the larger number of potential members for the groups, but also the variety of strategies they adopt. To further assist investors in choosing a Rated Fund that suits their own preferences and risk tolerances, we have assigned ‘Core’ and ‘Adventurous’ badges to Rated Funds in the following groups: UK Growth (20 choices), UK Equity Income (20 choices) and Global Growth (21 choices).
Mixed asset funds are split into categories that broadly reflect their equity content.
Most of our Rated Funds groups also include a constituent that takes a socially responsible or ethical investment approach. However, these have been accorded Rated Fund status not simply because of their SRI credentials, but also because their performance compares favourably against other funds considered for that asset group.
Why are comparatively poor performers included?
Poor performance of an individual fund in isolation does not necessarily make it a bad choice, if the asset class or the fund’s strategy has been out of favour, or less successful than others.
For example, funds that focus on defensive areas of the markets or have a mandate to protect investors’ wealth will not perform comparatively well in a strong bull market. But they would be expected to show up comparatively better when markets are weak.
Also, while the majority of our Rated Funds have performed respectably against their peers, we have also made a few ‘contrarian’ and 'wildcard' choices where the management's investment style has not been in favour, but where we believe past performance of a fund manager and/or the current investing environment suggest that inclusion is warranted.
Will the 2019 Rated Funds list change?
We will monitor our Rated Funds list consistently for major changes. Examples of such changes include fund manager moves, soft-closures (where a fund has indicated it has reached capacity), a significant divergence in tracking errors for passive funds, a persistently high share price premium to net asset value (NAV) on investment trusts, or a major re-rating from external or internal sources. Funds which have experienced a major change are likely to be suspended initially, pending formal review.
The investment committee formally meets quarterly to review the list and monitor performance. All active investments are included in this assessment. Inevitably, funds have periods of out- and under- performance, but this approach allows us to highlight investments that are struggling over an extended period, or funds which are failing to meet their stated strategy and which may warrant an in-depth review.
Any recommendation for change is then discussed, agreed and ratified by the investment committee.
In no way is the selection of funds for Rated status influenced by commercial considerations.
Are Rated Funds available as portfolios?
Yes. Every fund or trust that features in the 12 Money Observer Model Portfolios (where gains range up to 124% after seven years to 1 January 2019) is a Rated Fund. The portfolios (six income and six growth) aim to provide private investors with a pre-selected group of funds and trusts for various levels of risk, timescales or income requirements These portfolios are assessed and updated every three months.
Each is profiled on www.moneyobserver.com/model-portfolios, where you can find details of current constituents and portfolio weightings.
Variants of these portfolios are also available on interactive investor: ii.co.uk/model-portfolios.
In each of the fund profiles, we have included ratings from third-party fund analysts FE and Morningstar. A brief explanation of each is as follows:
FE Alpha Manager
FE Alpha Manager ratings rate the performance of fund managers over their career, including all funds they have managed and places worked. They are designed to distinguish fund managers who have consistently performed well in both rising and falling markets over the long term.
FE Crown fund
FE Crown fund ratings are quantitative ratings ranging from one to five, designed to help investors identify funds that have displayed superior performance in terms of stock-picking, consistency and risk control. The top 10% of funds under the system are awarded five FE Crowns, the next 15% receive four Crowns and each of the remaining three quartiles get three, two and one Crown(s) respectively. We show funds with three or more Crown ratings.
Morningstar Analyst rating
Morningstar Analyst ratings are designed to be forward-looking. If a fund receives a positive rating of Gold, Silver or Bronze it means Morningstar analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years.
Morningstar Sustainability rating
Morningstar Sustainability ratings are a new way for investors to evaluate how well the companies in a fund’s portfolio are managing the environmental, social, and governance (ESG) investing factors relevant to their industries. It makes it possible to find sustainable funds even if they aren’t marketing themselves specifically as products that support a socially responsible investment approach. We show funds that have a high (full green globe) or above-average (half green globe) sustainability rating.