Crown Ratings – New Funds

The second run of Money Management’s quantitative Crown Ratings, powered by FE, found that several of the funds that were rated for the first time managed to deliver a strong performance and were rewarded with either four or five crown rating which meant these funds were in the top 10 per cent or 15 per cent funds across their respective sub-asset classes.

The research also proved that overall 37.5 per cent of funds that had never been rated before, as they previously did not to meet a three-year history requirement, managed to attract one of the highest ratings. On the other hand, 27.5 per cent of funds that were classified as new entrants were rated as one crown, meaning they were in the bottom quartile for their respective sub-asset class.

As far as the asset classes and sectors were concerned, the small and mid-cap sector saw the UBS Microcap Fund, which entered the space for the first time, earn a five-crown rating. The fund, which seeks to identify “businesses of tomorrow” that are in a rapid growth phase and operate in the “underappreciated and very large segment of the market”, said it applied the same investment process as the firm’s flagship UBS Small Companies fund. “It’s very pleasing to achieve such a high rating,” Joel Fleming, fund’s portfolio manager, said.

According to him, the combination of an attractive investable universe and robust investment process that helped focus on long term value of a company was the basis for the long-term risk adjusted return of the fund.

“We apply the same process to those smaller listed ASX companies (a market capitalization below $250m at initial investment) to identify those companies with the ingredients to deliver long term capital growth to the funds investors,” he said.

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The fund which is run by Smarter Money Investments and managed by Coolabah Capital, the Smarter Money Higher Income Assisted Investors, was also one of the few funds that operated in the sector of fixed income Australian bonds and managed to receive a five-star rating after meeting for the first time the three-year history criteria.

Coolabah’s co-chief investment officer, Christopher Joye, explained that his fund was a floating rate fund which meant that in the rising interest rates climate it tended to generate higher returns. “One of the benefits of this floating-rate fund is that it does not carry any interest rates risk and so in a rising interest rate climate we can significantly outperform fixed-rate products,” he said.

“In late 2016, there was a big increase in long-term interest rate, which was bad for fixed-rate funds in the sector with duration risk, but good for our floating-rate strategy.”

He went on to say that the fund was also generating those high returns not through high risk, and not through looking for credit or liquidity risks but looking for the assets that were mispriced and that were likely to appreciate in value, when the market figures out that they are cheap.

Another fund that has been rated by FE for the first time was Invesco’s Senior Secured Loans which delivered cumulative returns of 18.78 per cent over the last three years.

According to Invesco Australia’s head of investment, Ashley O’Connor, the fund’s five crown rating could be attributed to five key reasons which included the fund’s depth of resources (of more than US$44 billion in senior secured loan assets under management), its market presence and scale, proven credit process along with the proprietary tools, privileged access to company information and strong track record.

“One additional factor of note would be the increased appetite in the market for senior secured loans over the last few years,” O’Connor stressed.

However, the fund also witnessed some turbulence in 2016. “Since the repositioning of the strategy in August 2014 the largest drawdown was in early 2016. While the streak of negative monthly results from November 2015 through to end of February 2016 was long, the overall decline during this period was relatively benign,” O’Connor explained.

However, negative sentiment continued to pressure the loan market, primarily driven by concerns about economic growth both domestically and abroad (China), continued volatility in the commodity sectors, and a weaker technical backdrop, he added.

“This negative sentiment was a common theme across the broader capital markets and not unique to loans,” he said.