We dig into the archives to reveal which funds have kept their Rated stamp every year since our shortlist began in 2013.
With more than 3,000 active funds to choose from, investors face an uphill task to identify the cream of the crop – and risk paying a premium for mediocre performance.
To help readers focus their sights on the superior options, Money Observer created a shortlist of Rated Funds six years ago. Over the years, the number of fund sectors covered has evolved, while the number of funds achieving Rated Fund status in 2019 now stands at 201, almost double the 106 in the March 2013 issue. Additionally, passive index-tracking funds were introduced in 2018, with 66 in total for 2019.
The list of Rated Funds is reviewed in depth annually and also quarterly, with Money Observer’s investment committee keeping an eye out for certain red flags (see below).
Overall, only a small number of funds, 22 of the original 106, have kept their Rated Fund status year in, year out since 2013. One of the main reasons for this is the short-term nature of fund management, which leads firms to chop and change managers frequently if performance is not deemed to be up to scratch. According to research by adviser Tilney Bestinvest for Money Observer last year, the median total career tenure for fund managers, taking into account job changes, is a mere seven years.
The 22 Rated Funds that have stood the test of time are spread mainly across the two main asset classes, equities and bonds. In total, 14 invest mostly in listed equities and five ply their trade in bonds, while Threadneedle Monthly Extra Income and Royal London Sustainable World can mix and match, and Pantheon International is a private equity trust.
In terms of sectors, five global funds have kept their stamp, as have three UK funds. There is just one fund in each of the US, Europe and Japan sectors.
In addition, three specialist funds have retained their Rated Fund status: Impax Environmental Markets IT, Pantheon International IT and Worldwide Healthcare IT. It is no coincidence that all three are investment trusts and experts in their respective niches, rather than attempting to be a jack-of-all-trades across various asset classes and sectors.
Our table ranks annualised fund performance from the end of January 2013 to the end of January 2019. Bearing in mind the limitations of comparing funds with differing strategies and asset types, the five bond funds have produced the lowest annualised returns over the period, ranging from 3.8% to 7.8%.
Conversely, at the top end of the table the more adventurous strategies have prevailed, with Legg Mason IF Japan Equity, Scottish Mortgage IT and Worldwide Healthcare IT producing annualised returns of more than 20%.
Red flags used by our investment committee
Manager change: Some funds are managed using a team approach, whereas others have a lead manager at the helm. When a Rated Fund manager departs, we put the fund under review.
Fund too big : Some fund management firms ‘soft-close’ a fund when it hits a certain size, often by imposing an initial charge to deter new investors from investing. When Rated Funds are soft-closed, we place them under review.
Performance down: On a quarterly basis we keep tabs on how all our active funds are performing versus both peers and their benchmarks. Where we have concerns over performance, we will place a fund under review.
High premium: High investment trust premiums are another red flag that investors should keep an eye out for. We may put Rated trusts under ‘premium watch’ if we deem the price premium to net asset value to be excessive for new investors.