Active 8: The fund groups with the highest share of successful funds

We identify the eight most consistent fund management groups.

One outcome cannot be guaranteed when investors hand over their cash to an active fund: future outperformance over a comparable stock market index. Most funds fail to consistently deliver value on this front, and this has been one of the drivers behind a huge surge in the popularity of passive funds in the past decade.

The beauty of passive funds lies in their low costs (which have come down significantly over the past decade) and simplicity. The latter means investors have more measured expectations regarding fund performance, as they have accepted simply ‘buying the market’ and that they will therefore see their returns mirror the performance of an index, minus fees.

- Why funds fail, and how they can turn from zero to hero
- Did active funds provide protection for UK investors in the market’s recent turmoil?

Eight we rate

Investors in active funds hope for outperformance, and various funds have indeed earned their stripes delivering that to investors over a range of timeframes. The trouble is that there are far more dud funds than there are gems, so investors need to have their wits about them to find superior options.

One potential tactic for sifting through the thousands of funds available to investors is to take a view on fund management groups in terms of their reputation and prowess – and on this front Money Observer is here to help. In this new, annually reviewed feature, we aim to identify the Active Eight – the eight most consistent fund management groups.

We have done so by looking at the 10 main equity Investment Association (IA) sectors and awarding points for funds that sit in the top decile (three points) or top quartile (one point) of their IA sector over the three years to the end of January 2020. Then, to strike an appropriate balance, we have deducted points from funds in the bottom decile (-3 points) or quartile (-1 point). The IA sectors we examined are: UK all companies, UK equity income, UK smaller companies, global, global equity income, Europe ex UK, North America, Asia-Pacific ex Japan, emerging markets and Japan.

Not all fund groups have a presence in each of the 10 sectors; given that the aim of the exercise is to find consistency across a broad range of funds, we have therefore only included in the universe groups with funds in at least five of the 10 sectors. This rules out boutique fund firms, but (as we explain) a number of these firms continue to impress. In total, 24 fund management groups were examined, with the vast majority running tens of billions of pounds of assets.

Top of the pops

Overall, a key observation from trawling through the sectors is that when it comes to individual fund management groups, the performance of an entire fund range tends to be chaotic, with some funds performing well, some doing indifferently and others going through a rough patch, whether temporary or permanent. This is something fund management sales teams are acutely aware of, and it explains why certain funds are heavily promoted to investors and others less so.

While individual fund performance in each group is erratic on the whole, some businesses stand out from the crowd, and none more so than Baillie Gifford, which comfortably tops our league table. Out of a total of 15 funds in the 10 sectors under review, the firm has nine in the top decile, five in the top quartile and just one in the bottom decile, with the blot on its copybook being the Baillie Gifford British Smaller Companies fund.

Across nine of the 10 sectors in which the firm has at least one fund (the exception being UK equity income), it boasts an impressive array of strong performers. The nine top-decile funds over the three-year period are: Baillie Gifford American, Baillie Gifford Emerging Markets Leading Companies, Baillie Gifford Emerging Markets Growth, Baillie Gifford European, Baillie Gifford Global Discovery, Baillie Gifford Global Stewardship, Baillie Gifford Pacific, Baillie Gifford Positive Change and Baillie Gifford UK Equity Alpha.

Taking the silver medal in our Active Eight table is Liontrust. The firm has a notably higher number of funds (26 in total) than Baillie Gifford, due in part to its recent acquisition of Neptune Investment Management. Therefore, in many of the 10 sectors, it has two or three funds that are essentially competing against each other. In a number of cases, using our scoring system, a strongly performing Liontrust fund would be cancelled out by a weak performer in the same sector.

For example, in the IA UK all companies sector, Liontrust has two funds in the top decile (Liontrust UK Ethical and Liontrust Sustainable Future Growth), one in the top quartile (Liontrust Special Situations), one in the bottom quartile (Liontrust Macro UK Growth) and one in the bottom decile (Liontrust UK Mid Cap). Nonetheless, with six funds in the top decile and five in the top quartile, Liontrust demonstrates that it has an array of strong performers which ultimately outweigh the laggards.

Active Eight: the fund management firms topping our leaderboard

Notes: Calculations carried out by Money Observer. Top decile: three points. Top quartile: one point. Bottom quartile: -1 point. Bottom decile -3 points. Source: FE Analytics, as at end January 2020.

Standout sector

It is a similar story for Fidelity, in fifth place. The firm is one of the biggest fund houses in the UK and has an enormous fund range. It has more than 40 funds in the 10 sectors we looked at. Therefore, it is not uncommon to find Fidelity funds in both the top and the bottom quartiles of the same sector. However, despite some funds going through a rough patch, there are plenty of strong performers. Asia ex Japan is the standout sector, with two funds in the top decile (Fidelity Asia-Pacific Opportunities and Fidelity Asia Focus) and three in the top quartile (Fidelity Asia, Fidelity Emerging Asia and Fidelity Asian Dividend).

In contrast, three other big firms that make our top eight have narrower fund ranges, with Threadneedle, Royal London and JPMorgan all running around 20 funds across the 10 sectors.

Threadneedle’s consistency is bettered only by Baillie Gifford. The former has one fund in the top decile, 10 in the top quartile and just two in the bottom quartile. It takes third place overall, with a strong showing globally (via top-decile performer Threadneedle Global Select) and in Europe (through top-quartile performers Threadneedle European Select and Threadneedle European).

Royal London has no bad apples across its range, with the vast majority of funds either second- or third-quartile performers. It has its UK funds to thank for making the Active Eight, with Royal London Sustainable Leaders Trust and Royal London UK Mid-Cap Growth both top-decile performers.

Smaller fish show strength

Elsewhere, JPMorgan has five funds in the bottom quartile, but this is negated by a strong showing in the Asia and emerging market sectors, through JPM Asia Growth and JPM Emerging Markets.

The two other fund management firms in the top eight, BMO and Investec, are smaller fish in terms of assets under management. The star performers are BMO Responsible UK Income and Investec Asia Pacific Franchise. Both groups benefit from not having enormous fund ranges and from a notable absence of poor performers. BMO does not having a single fund in the bottom quartile or decile and Investec has just one outlier in Investec Global Situations.

A number of behemoth firms with enormous fund ranges fall short, but may well be knocking on the door when we revisit this exercise in a year’s time. Groups in mid-table positions include BlackRock, Janus Henderson and Aberdeen Standard Investments. Smaller firms, in terms of funds under management, that are similarly ranked include AXA, Artemis, Aviva Investors, Marlborough and Merian.

The two firms that score notably poorly overall are Invesco and Schroders. Both firms have several funds in the bottom quartile and decile of various sectors. Invesco’s performance woes have led investors to the exit. Figures from Morningstar show that £9.3 billion was pulled out of the fund group’s various UK-domiciled funds in 2019.

Invesco is by no means alone in seeing assets decline in the face of the continued rise in popularity of passive funds, though. Figures from the Investment Association show that a net £3.2 billion was withdrawn from active funds in 2019. In stark contrast, it was a record-breaking year for the passive fund sector, where a net £18.1 billion was invested.

Stronger together

Against this backdrop – one that has hit active fund sales – fund firms have been fighting back by joining forces. In doing so, scale and market share is increased, which can help the business achieve economies of scale and increase profits.

A flurry of mergers and acquisitions over the past couple of years has included Liontrust snapping up Neptune, Premier and Miton joining forces, and the mega-merger of Aberdeen Standard Life. In the first quarter of 2020 two deals were announced within days of each other: Jupiter’s proposed acquisition of Merian Global Investors and Franklin Templeton’s planned purchase of Legg Mason.

According to Kamal Warraich, a fund analyst at Cannacord Genuity, the fund management space is going through a period of profound change. He predicts that in a decade’s time there will be two types of fund firm: the large players and the boutiques.

He says: “The pressure active fund manager fees are facing from passive fees is becoming unbearable, and this is behind the increase in mergers and acquisitions.

“Over the next decade I expect the middle ground to start to disappear as various firms join forces and become more scalable. I do think, though, that there will always be room for boutique fund firms, as they will attract fund management talent that does not want to deal with the corporate bureaucracy that can stifle creativity.”

Strong correlation between sales and performance makes top-selling fund management groups compelling options

Fund marketing literature comes with the caveat that ‘past performance is no guide to the future’, but the reality is that when funds perform well, investors take note.

A recent example of this was investor buying behaviour at the start of 2020, when technology funds were back in vogue after a stellar 2019. At interactive investor, Money Observer’s parent company, funds that entered the top 10 most-bought for the month of January included L&G Global Tech Index Trust, Fidelity Global Technology and AXA Framlington Global Technology.

At a management group level, there is also a strong correlation between performance and sales. Five of our Active Eight were in the top 10 for retail sales in 2019, as measured by The Pridham Report. The two accompanying tables, which show the top 10 fund firms for gross and net retail sales, feature Baillie Gifford, Liontrust, Fidelity, Royal London and JPMorgan.

BlackRock, Legal & General and HSBC Global Asset Management were among the 2019 winners for net sales, primarily due to a surge in passive business. HSBC, for example, saw its net sales increase by more than 90% last year thanks to passive flows.

Top 10 fund managers by gross sales in 2019 

Top 10 fund managers by net retail sales in 2019 

Source: The Pridham Report

Under-the-radar fund firms punching above their weight 

The marketing machines of big fund management companies help elevate their stature, but it would be a mistake to discount less familiar names. A number of boutique fund management firms more than hold their own, despite having smaller teams and less lavish resources.

In the IA UK all companies sector, several boutique firms have produced top-decile performance over the past three years, with the top three being MI Chelverton UK Equity Growth, Slater Recovery and CFP SDL UK Buffettology. Boutique funds in other sectors that did well over the period include: Guinness Global Equity Income, Matthews Asia ex Japan Dividend, TB Amati UK Smaller Companies and TM Cavendish AIM.

One reason to back a boutique is that the fund manager’s interests are more aligned with those of investors, because they have a bigger stake in the business. Another is that boutique fund managers have greater freedom to invest as they see fit, rather than toeing a corporate line.

On the downside, there is often less oversight – the big fund managers have risk committees. What’s more, fund charges tend to be higher, as boutiques don’t benefit from economies of scale.

Top decile boutique funds in UK All Companies sector 

Notes: Three-year returns to the end of January 2020. Source: FE Trustnet

Passive power: how tracker funds have cleaned up

In 2007, before the financial crisis struck, the amount held in tracker funds was a mere £29 billion, which at the time represented 6.3% of the total. Fast-forward to 13 years later (to the end of 2019) and passive funds’ market share has leaped to £230 billion. Overall, passive funds now account for almost 18% of funds under management.