Fund Watch - Q4 2019

Fund Watch uses our team’s process to highlight the past quarter’s developments in the fund world.

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Fund Watch uses our team’s process to highlight the past quarter’s developments in the fund world. It is fact-based and uses performance analysis techniques which form part of our investment process. All data is from Lipper for Investment Association (IA) sectors and is calculated in total return terms in sterling for periods ending 31 December 2019.

This quarter’s report includes the following analysis:

  • The BMO MM Consistency Ratio – highlighting the surprisingly limited number of funds beating their peers on a regular basis
  • Tops and Bottoms – the ultimate winners and losers over the quarter
  • Sector Skews – the best and worst of the 37 IA sector averages
  • Risky Business – a look at the leading funds for combining first class longer-term returns with the lowest levels of volatility

The BMO MM Consistency Ratio

Here we conduct a review of the 12 major market sectors, filtering out only those funds that are consistently above average in each of the last three 12-month periods, and those consistently top quartile. In the 12 main sectors researched, there are currently 1,090 funds with a 3-year track record.

  • The BMO MM Consistency Ratio for top quartile returns over three years (to the end of Q4 2019) rose to 2.2% (1.7% last time) with 24 of the 1,090 funds achieving this feat. This ratio was within the usual historic range of c.2-4%.
  • The IA North American sector was the most consistent for top quartile returns with and unusually high 9.1% of funds making the cut. It was followed by the IA Global Equity and IA Japan sectors, which had 2.8% and 2.3% of funds making the grade respectively. The IA Asia ex Japan and IA £ Strategic Bond sectors failed to deliver any funds that achieved this level consistency.
  •  Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw 139 of the 1,090 funds delivering above median returns consistently. This means this less demanding ratio rose to 12.8% from 12.7%.
  • All 12 main IA sectors contained funds that met the less demanding above median consistency hurdle. The most consistent sector on this measure was the IA North American sector with an impressive 23.9% of funds performing above median for 3 consecutive years. The IA Europe ex UK and IA Japan sectors were the next best with 16% and 14% respectively achieving the target, with the IA Global Bond sector the least consistent with 5.5% of funds achieving above median consistency hurdle.

BMO MM comment

  • The final quarter of the year proved to be yet another gripping instalment of the soap opera that markets seem to have become. The “will they won’t they” conclusions of trade wars and the UK election / Brexit continued to dominate sentiment in the quarter, with the finale of December a fittingly dramatic end to a decade that few could have predicted.
  • With recent quarters having been dominated by either passive and/or quality growth offerings it was refreshing to see a more balanced mix of funds in the consistency tables. In the fixed income world the same was true of the lack of dominance of long duration strategies, having been shaken out by Q4 when there was a significant shift in yield curves.

A look back over the last 10 years – as it seems to be all the rage to reflect (I have thus far yet to succumb to  this on FB but I’m sure it’s only a matter of time), we thought it might be interesting to mull over the trends of the statistics of the last 10 years quarterly musings.

  • Looking first at the most challenging consistency ratio of top quartile returns over 3 consecutive 12 month periods, the range has been remarkably muted. The best number achieved was 4.6% in Q3 2014 when we saw a surge in mid cap fund in the UK flattering the stats. The low of 0.5% was seen in Q4 2018 as the vicious rotation in December left managers wanting. Those that held their nerve (or bought the dip) were handsomely rewarded as markets bounced back shortly after a change of rhetoric from the Federal Reserve.
  • Widening the goalposts to achieving above average returns over 3 consecutive 12 month periods yielded stronger results as would be expected: the range this time seeing a 18.6% figure again in Q3 2014, however the low of 8.6% was seen in Q1 2011.
  • Over the 40 data point period the average sits at 2.4% for top quartile consistency and 13.2% above average consistency, remarkably close to the numbers reported for this fourth quarter of 2019.
  • Reading through these historic musings the key stand-out is that there is always something to worry about – but also opportunity if you are prepared to look for it. It has been a fascinating decade, but also a perplexing one in investment terms. We know the things that have driven markets for the last decade are unlikely to persist in the same form for the next 10 years. Investors’ behaviour does however remain as emotional as ever. The potential for a black swan event is increasingly viable, and those assets that are priced for perfection look more vulnerable than ever.

Tops and bottoms

Identifying the best and worst performers of all funds in the quarter across all 37 IA sectors.

  • The £1.7bn ASI (AAM) UK Smaller Companies fund’ run by industry veteran Harry Nimmo’ topped the performance tables of the IA universe this quarter. A relatively focused offering of c.50 holdings with a preference for quality growth companies’ the fund has around half its holdings in UK mid cap companies which fared well in the final quarter of the year.
  • With the last two quarters (Q2 & Q3) having a gold fund as the best performer it is unsurprising to see the fortunes of funds in this volatile area turn. The LF Ruffer Gold (the best performing fund in Q2 19) took this quarter’s wooden spoon as the worst fund in the IA universe falling 12.1% as the thirst for the yellow metal abated.

Sector skews

Identifying the best and worst performers in the quarter across all 37 IA sectors.

  • The fourth quarter of 2019 saw a continuation of the positive run for most IA sectors.
  • The change in fortunes for certain sectors was stark, as the risk-off trade of Q3 very much spun on its head. Yes, that trade deal is actually happening (allegedly)! And hard Brexit has been avoided (for now)! More Japanese QE – yes please! And it’s off to the races we go….
  • The IA UK Smaller Companies sector was the best performer gaining a staggering 14% with the IA UK Equity Income sector next best rising 7.2%. The IA UK All Companies sector was only marginally behind gaining 7%.
  • On the flipside the IA UK Index Linked sector was the laggard falling 9.4% with the IA UK Gilt sector the next worst losing 4.5%.
  • Of the other Sterling Bond sectors, the IA £ High Yield sector led the pack, gaining a respectable 2.2%, with the IA £ Strategic sector also in positive territory gaining 0.7%. The IA £ Corporate Bond sector lost 0.1% in comparison. The IA Global Bond sector lost 2.4% in comparison.
  • The fortunes of fixed income investing continued to surprise right up to the final quarter of the year, with the vicious rotation away from long duration assets sweeping away the outsized gains from the quarter before. A sense of calm around credit, and the ability for companies to honour their debts, resulted in steady gains in corporate bond world. Inflation remains the dog that hasn’t barked in 2019. With much talk of global fiscal stimulus in 2020 this remains an ever-present threat that most definitely is not accounted for in the price of assets.
  • The IA Targeted Absolute Return sector gained 1% in the quarter. Over the 12-month to the end of Q4 the sector has gained 4.6%. Perhaps this sector has finally worked out its role, though it is yet to be truly tested in a prolonged negative period.
  • Looking at the Mixed Asset IA offerings, the IA Mixed 40-85% Shares sector was the strongest performer gaining 2.5%. The IA Mixed Investment 20-60% Shares returned 1.8% ahead of the 0.5% gain of the IA Mixed Investment 0-35% Shares.
  • The IA Global Equity sector rose 2.1% against a rise 1.2% for the IA Global Equity Income sector.


This was Sterling’s quarter. As we now know, this was short lived, but the conclusive outcome of the UK election bought with it relief, and probably a healthy dose of short-covering to buoy the currency. The path from here remains less clear as the detail of any deal and its long-term implications for the UK economy are assessed. One thing that is likely is that Sterling will continue to be the vessel of choice for anyone wanting to position themselves against any extreme outcome.

Risky business

Can you have your cake and eat it? Here we search for funds with good risk characteristics and establish which funds offer the holy grail of low risk and high returns. For this purpose, a longer time period is required, so we look back over three years to the end of the quarter.

  • Measured to the end of Q4 2019, yet again no fund achieved the perfect mix of top of the sector 3-year returns with bottom of the sector 3-year volatility. This mix seems to be becoming ever more elusive. The TB Evenload Income fund achieved 100th percentile risk, but only 9th percentile return. There were no funds with top decile returns and bottom quartile risk over the three years to the end of the quarter. A simplistic observation could be that you have been able to make good returns in these years, but you may have had to weather more volatile performance to achieve it. The middle ground is becoming a crowded place – to achieve long term excellence patience is a necessity.

Looking Ahead – As we stare into the abyss that is Q1 2020 it is worth reflecting on where we have come from and what may focus the minds of markets and investor in the coming months.

  • Brexit and the outcome of any deal or discussions will undoubtedly have a huge influence on all UK assets in the near term. As believers in active management we see this as an exciting opportunity for our underlying managers.
  • Fiscal policies of the world’s politicians could come into greater focus early on in the new year. The central banks of the world have grown exhausted at the reliance on them to solve the woes of an otherwise anaemic global economy. Depending on how this is shaped, the potential for the purse of the real man on the street (rather than the holders of already bloated balance sheet rich assets) to benefit and the implications of this have yet to be considered.
  • Could this finally be the quarter/year/decade where the realisation that investing clients’ assets without looking under the bonnet (who did lend their money to Pizza Express/ Thomas Cook/WeWorks/Debenhams/Patisserie Valerie to name but a few anyway?) and just investing on the basis of the representation of a name in an index comes home to roost.


In summary, we believe the performance numbers are – as always – well worth crunching to find trends, provide ideas, layer knowledge on how each fund performs and to generally provoke thought.

Of course, the analysis must be taken in context, and the qualitative work must be done to allow for fully informed judgments. We hope you found this review interesting. If you have any questions, contact us.

BMO Multi-Manager Team


Risk Disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.

Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

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