Best regional funds: Fund Awards 2016

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BEST NORTH AMERICA FUND

Fidelity American Special Situations

1-year return: 4%; 3-year return: 56%

Our winner and highly commended fund in this category were pretty much level pegging in terms of performance, but thanks to a higher Sharpe ratio Fidelity American Special Situations wins the best North America fund award, as it has delivered a better risk-adjusted return.

The fund, which has been managed since December 2012 by Angel Agudo, was highly commended last time around.

Agudo describes his investment philosophy as 'a high-conviction, contrarian value approach'.

He targets companies suffering from a specific problem that he believes will be resolved, by analysing the trends and structure of the sector in which the company operates, the prevailing competitive environment and the likelihood of future merger and acquisition activity.

The first stage of the investment process is Fidelity's quantitative screen of around 3,000 stocks, reducing Agudo's list of potential investments to around 200.

Browse Money Observer's 2016 Fund Awards winners
Best UK equity funds
Best global equity funds
Best regional funds
Best mixed asset funds
Best absolute return funds
Best bond funds
Best property funds
Methodology

He runs a concentrated portfolio of around 35 to 50 stocks. The two top holdings are drug company Pfizer and software company Oracle.

Also in the top 10 is Warren Buffett's Berkshire Hathaway. The top three sectors are information technology (28 per cent), healthcare (16 per cent) and industrials (15 per cent).

On the US presidential election, Agudo says it is difficult to assess which sectors and companies are going to benefit from each candidate's policies, but that he will look to take advantage of any market weakness ahead of the vote.

Nevertheless, he expects short-term volatility in the run-up to the election. This, he notes, can create buying opportunities.

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HIGHLY COMMENDED NORTH AMERICA FUND

Old Mutual North American Equity

1-year return: 2%; 3-year return: 58%

Old Mutual North American Equity, winner of our best North American fund awards in 2013 and 2014, is highly commended in this category.

Over the three years to the end of the March, the fund has returned 57 per cent, which is 20 percentage points higher than rivals and slightly ahead of the winner of this category, Fidelity American Special Situations.

But the latter's higher risk-adjusted returns knocked Old Mutual North American into second place.

Run by Ian Heslop, Amadeo Alentorn and Mike Servent, the fund is well-diversified, with nearly 200 shares.

The managers don't follow any particular investment style but they do have a well-defined investment process: they 'follow the money'.

They find out what type of stocks other investors are buying and then buy the best ones in those categories. This involves assessing companies against a range of financial criteria and characteristics.

BEST EUROPE FUND

MAN GLG Continental European Growth

1-year return: 20%; 3-year return: 68%

Even though its economy may have its ups and downs, Europe is home to many successful companies. Investing in these companies has won Man GLG Continental European Growth fund our best Europe fund award.

Rory Powe, who took the helm in October 2014, looks to build long-term positions in Europe's strongest companies. He divides them into two categories.

The bedrock of the portfolio must always consist of 'established leaders' that enjoy a strong market position based upon sustainable competitive advantages.

But it may also contain 'emerging winners', where the company already enjoys competitive advantages but is in the vanguard of an immature market or is successfully disrupting a more mature marketplace.

Powe says he is looking for companies that can flourish without the assistance of a tailwind from the performance of the wider economy, since his long-term view is that Europe is unlikely to see dynamic economic expansion.

He explains: 'We look for companies where the drivers of top-line growth and pricing power are highly specific to them, and preferably uniquely so.'

Powe aims to achieve a balance between concentration and diversification, holding a portfolio of between 30 and 40 stocks. He lists Pandora, Ryanair and Christian Hansen as important contributors to performance over the past three years.

'Our approach can be summarised as trying to find those names where the expansion of the underlying business is the driver of returns,' Powe says.

He maintains that the strong performance of the fund has relied not only on the winners, but also on avoidance of losers.

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HIGHLY COMMENDED EUROPE FUND

Lazard European Smaller Companies

1-year return: 13%; 3-year return: 60%

Smaller companies can be more volatile than their larger counterparts, so for Lazard European Smaller Companies to win highly commended status in our broad European fund category is a considerable achievement.

Its investment universe is the smallest 10 per cent of European-listed companies, measured by market capitalisation. It has been managed since January 2013 by Edward Rosenfeld, supported by Patricia Biggers, Alan Clifford and Steven Fockens.

Rosenfeld's investment approach is based on Lazard's philosophy of relative value investing, which looks at the trade-off between valuation and financial productivity.

In other words, he looks for attractively priced quality companies with high or improving returns on capital and high barriers to entry.

He believes this helps to protect capital when markets go down, but also enables the fund to participate in the rallies.

Rosenfeld and his team focus on choosing the right companies, so although they take general economic issues into account, these do not dictate where they invest.

BEST JAPAN FUND

Fidelity Japan Smaller Companies

1-year return: 3%; 3-year return: 35%

The proactive approach of Japanese prime minister Shinzo Abe to revitalising the Japanese economy has led many investors to start buying Japanese funds again.

Those who selected our award winner Fidelity Japan Smaller Companies, managed since 2006 by Jun Tano, can congratulate themselves on a good choice.

However, for Tano, making the right company selections is more important than predicting economic outcomes.

Tano focuses on company fundamentals. He explains: 'The prospects for and valuation of individual companies can be predicted with a greater degree of accuracy than macroeconomic themes and factors and, consequently, stock selection provides the best opportunity to capture added value.'

Nevertheless, he admits that global perspectives are important when picking stocks in Japan; besides his own research and extensive company visits, he also benefits from Fidelity's inhouse team of analysts covering Asian, European and US equities.

In constructing his portfolio, he focuses on well-run mid-to-smaller companies with solid balance sheets.

He says: 'I favour companies that are capable of delivering strong sales and earnings growth, and where there is evidence that this could continue for several years.'

Over the past three years, he says, selected holdings in the pharmaceuticals and electric appliances sectors in particular have made material contributions to the fund's returns.

'At the stock level, drug company Ono Pharmaceutical, precision motor manufacturer Nidec and automaker Fuji Heavy Industries have been major contributors to the performance of the fund over the past three years,' he adds.

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HIGHLY COMMENDED JAPAN FUND

Baillie Gifford Japanese Smaller Companies

1-year return: 20%; 3-year return: 70%

Baillie Gifford has a strong Japanese equity team and has regularly won Money Observer awards in the past for both its funds and its trusts.

Praveen Kumar has only been lead manager of the Japanese Smaller Companies fund since December 2015, when he also took over responsibility for Baillie Gifford Shin Nippon investment trust.

However the company operates on a team-based approach and Kumar has been a member of the team since 2011, so we are happy to commend this fund. The fund was previously managed by the highly respected John MacDougall.

Kumar is following much the same approach as his predecessor. He has free rein to invest in any economic sector in Japan. He looks for attractively valued smaller companies that he believes offer good growth opportunities.

Among the companies he particularly likes are those creating new business models using the internet and those that are disrupting existing industries by removing inefficiencies.

Besides seeing many companies at Baillie Gifford's offices, Kumar and the rest of the team also make regular visits to Japan.

BEST ASIA PACIFIC EX JAPAN FUND

Hermes Asia ex Japan Equity

1-year return: 1%; 3-year return: 49%

Asia Pacific funds have slipped down the popularity stakes in recent years, as the slowdown in the global economy has made investment in the region more challenging.

Against this background, our winner this year deserves special praise. Hermes Asia ex Japan Equity has been managed by Jonathan Pines since its inception in 2012. He attributes its success to a contrarian approach.

He explains: 'We are neither growth nor value investors. We seek the best price-to-value propositions, which are often found in those parts of the market which are less popular. We do not seek quality companies. We seek quality deals.

'The most important characteristic we look for is asymmetry. We want to make a lot if we are right about the future, but don't want to lose a lot if we turn out to be wrong.'

The fund has a concentrated portfolio. Pines says: 'We are not afraid of having large sector and country over- and underweights, but we remain aware of resulting risks and sometimes choose to mitigate these.'

Fortunately most of Pines's large bets have worked. He points out: 'More than 80 per cent of our outperformance has resulted from stock selection rather than country allocation.'

Stocks that have done well for the fund over the past three years include Baidu, the Google of China, and Kepco, Korea's monopoly electricity generator.

Both went on to beat the market's pessimistic earnings expectations. This resulted in the fund gaining both from the improvement in earnings and from the market's re-rating.

Pines cautions: 'We believe that long-term outperformance for risky assets requires the acceptance of periods of short-term underperformance.'

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HIGHLY COMMENDED ASIA PACIFIC EX JAPAN FUND

Veritas Asian

1-year return: 2%; 3-year return: 27%

Highly commended in this category is last year's winner, Veritas Asian. The fund's objective is to generate capital growth over and above the MSCI Asia Pacific ex Japan index, but with lower volatility.

Despite being a strong performer over the years, it is smaller than some rival funds, holding £352 million in assets.

The fund, which launched in 2004 and is managed by a team led by Ezra Sun, aims to provide steady returns over the longer term (defined as three to five years). The managers use a thematic approach to help drive company selection.

Then, looking at individual companies, they focus on the business model, the quality of management and the sustainability of the business. They pay particular attention to free cash flows.

The companies they invest in can be of any size, but a minimum of 75 per cent of the portfolio is normally held in larger, more liquid companies, split between core holdings that are expected to deliver sustainable growth or income, and short-term 'trading' positions, which are held for up to six months.


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