What are Rated Funds and how are they chosen?

rated-funds-stamp-with-logo

HOW ARE RATED FUNDS PRESENTED?

Money Observer Rated Funds are presented in 16 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.

Similarly, we think sector titles such as mixed investment 40-85% shares or its lower-risk cousin, mixed investment 0-35% shares, are a bit of a mouthful.

Our Rated Funds that are members of those official industry sectors are more simply presented in the mixed-asset - higher-risk and mixed-asset - lower-risk asset groups.

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 Invesco Perpetual Income and M&G Global Dividend, which appear respectively in our UK equity income and global equity income asset groups, are not members of the equivalent IA sectors.

The IA specialist sector, with nearly 200 funds, is a rich source of excellent funds that can get missed. Several Rated Funds are included in what we believe to be more appropriate Rated Fund asset groups.

Examples include Schroder Small Cap Discovery, which appears in our emerging markets asset group, and Jupiter India in our Asian equities group.

WHO CHOSE THE RATED FUNDS FOR 2017?

The 2017 choices were selected by a four-member investment committee chaired by Rated Funds editor Andrew Pitts (previously editor of Money Observer for 17 years).

The other members are Faith Glasgow (Money Observer's current editor), Kyle Caldwell (deputy editor) and consultant Helen Pridham (a fund industry expert and regular Money Observer contributor).

HOW WERE THE 2017 RATED FUNDS SELECTED?

The committee assessed the entire universe of UK-authorised funds and trusts to produce a long-list for each Rated Funds asset group.

In most cases the final constituents were selected because they have delivered consistently superior returns over at least three years compared with their relevant peer group.

Both short- and longer-term periods were analysed, in tandem with the three discrete annual performances.

Other factors taken into consideration included manager track record and 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 they are relevant for current markets.

WHY ARE INVESTMENT TRUSTS INCLUDED?

In the past most fund recommendation lists did not include investment trusts. But investment trusts are often just as good choices for private investors as open-ended funds. This is particularly true in difficult markets, where volatility can hit open-ended fund performance.

The closed-ended structure of investment trusts can result in short-term volatility, but can also be more rewarding over time for investors seeking income from equities. It also provides a route into specialist or less liquid asset classes such as private equity.

The superior medium to longer-term performance of trusts versus open-ended funds in a variety of sectors also generally 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.

A beginner's guide to investment trusts

WHICH RATED FUNDS MIGHT SUIT YOU?

Within each asset group, where appropriate, the committee has selected constituents to suit a range of individual investor preferences. Rated Funds that focus on income and smaller companies are highlighted separately.

Three of our asset groups have a large range of funds and trusts, reflecting the larger number of potential members for the groups and strategies they adopt.

To help investors choose a Rated Fund that suits their preferences and risk tolerances, we have assigned 'core' and 'adventurous' badges to Rated Funds in the UK growth (18 funds), UK equity income (18 funds) and global growth (22 funds) groups. Mixed-asset funds are split into lower-risk and higher-risk categories.

Most of our Rated Funds groups also include a constituent that takes a socially responsible or ethical investment approach, not simply because of their SRI credentials but because their performance compares favourably against other funds considered for that asset group.

WHY ARE POOR PERFORMERS INCLUDED?

Poor performance of a fund in isolation does not necessarily make it a bad choice if the asset class has been out of favour. For example, the majority of funds and trusts that focus on emerging markets and commodities have lost investors money over the medium term because these asset classes have been out of favour.

If and when these asset groups return to favour, we expect the funds we have rated to make the most of the opportunities that arise.

While most of our Rated Funds have performed respectably against their peers, we have made a few 'contrarian' choices where the investment style pursued by the manager has not been in favour, but where we believe past performance and/or the current investing environment suggest a change in fortunes is due.

WILL THE 2017 RATED FUNDS LIST CHANGE?

Although the performance of Rated Funds will be monitored throughout the year, the committee is unlikely to make any changes to the range before 2018, unless there are exceptional circumstances.

In the event of some Rated Funds running into short-term difficulties, our committee prefers to give them time to overcome the problems rather than ejecting them.

However, a Rated Fund will be suspended in the following circumstances:

  • lack of capacity (leading to new investments being discouraged)
  • a persistently high share price premium to net asset value (NAV) on investment trusts
  • a significant change in fund manager
  • significantly poor performance compared with an index benchmark or peer group

WHAT DOES THE RATED FUNDS DATA SHOW?

In our annual Your Fund Choices magazine (available to buy here), each asset group includes a table or tables showing the official industry sector that each constituent (fund or trust) belongs to; its size and current yield; the three- and five-year performance; discrete annual performance over each of the past three years; and the quartile rank in its industry sector for each of those periods.

We also quote the FE Risk Score produced by our data provider Financial Express, which shows how risky an investment is relative to the FTSE 100 index.

Many constituents of the FTSE 100 are regarded as comparatively defensive, but it also includes a large dollop of more risky energy and mining-related companies.

Funds and trusts more volatile than the FTSE 100 have a score above 100, and vice versa, giving a reliable indication of a fund's relative risk. It is not a measure of absolute risk.

The financial data was sourced from FE Analytics as at 1 January 2017.

ARE RATED FUNDS AVAILABLE AS PORTFOLIOS?

Yes. Almost every fund or trust that features in the 12 Money Observer Model Portfolios (where gains range up to 102 per cent after five years to 1 January 2017) is a Rated Fund.

The portfolios (six income and six growth) aim to provide private investors with pre-selected groups of funds and trusts for various levels of risk and different timescales. They are assessed and updated every three months.

They are tradable as portfolios on Money Observer's sister website Interactive Investor at a much lower charge than if the constituent funds were bought individually.

WHERE CAN I FIND CURRENT INFORMATION?

The Rated Funds section includes explanatory information on each Rated Fund group. Bespoke factsheets for each of the funds and trusts are updated daily.

They contain current performance and valuation metrics, as well as key statistics to help investors make their own judgements. Investors can also view the leading and lagging Rated Funds, both overall and within the 16 asset groups.


Subscribe to Money Observer magazine

 

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.
By submitting this form, you accept the Mollom privacy policy.