New survey reveals fund consistency is greater in riskier rather than safest sector

The percentage of funds delivering above median returns fell from 9.9% in the last quarter to just 8.6%, one of the lowest recordings ever in many years, according to the latest FundWatch survey from multi manager specialist Thames River Multi-Capital (TRMC).

The number of funds achieving top quartile ranking over the last three consecutive years was only 16 and the report also reveals the impact of the highly volatile first quarter of 2011 on the mutual funds industry.

The quarter took place against the backdrop of violent political and social unrest across the Middle East and North Africa, a major natural disaster in Japan, the ongoing sovereign debt crisis in Europe and spiraling oil prices.

The TRMC consistency ratio, which measures the proportion of funds that perform consistently above average in each of the last three 12 month periods, in addition to those which are consistently top quartile over the same period, reveals that during the quarter no funds achieved the ‘Holy Grail' of achieving both top of the sector three year returns and bottom of the sector three year volatility. Only one fund managed to achieve this accolade during the last quarter of 2010.

The survey reveals that the sectors with the most consistent performance were Global Emerging Markets, Japan and Europe, excluding the UK. This is the second quarter in a row where both Global Emerging Markets and Japan equity funds were most consistent under the less demanding consistency hurdle, the latter being all the more surprising given recent events.

‘Despite the fact that some funds within the Japanese sector returned reasonable performance figures, there was a natural step back from Japanese equity related sectors in quarter one. A rebound post the initial shock reaction reduced the losses somewhat, but still resulted in a 6.7% loss from the main Japanese sector,’ said Gary Potter, co-head of TRMC.

‘Elsewhere, the Europe, excluding the UK, sector benefited from currency strength in the Euro along with a general feeling that previous growth fears in the region may have been overdone,’ he added.

The Japan equity sector also triumphed in the survey when the team researched how the 26 funds launched in the fourth quarter of 2010 fared during the first quarter of 2011, with the Alliance Trust Japan Equity Fund achieving highest peer group ranking despite losing 3.7% of its capital value. The best absolute return for a newcomer during quarter one went to the Neptune US Income Fund which gained 2.2%.

FundWatch identified that three IMA sectors, £ Corporate Bond, £ Strategic Bonds and Asia excluding Japan, produced no funds with consistent above average performance over the last two quarters. Given that both £ Strategic Bond and £ Corporate Bond regularly appear at the top of the IMA best selling net retail sectors, this supports the view of the TRMC team that ‘rear view mirror investing, the habit some investors have of basing their future investments on what sectors have performed best in the past, is not always the most effective strategy.

'The results from the latest FundWatch survey demonstrates that the market volatility we have seen during the last three years has resulted in a further fall in the consistency ratios to the lower end of the historic range,’ said Rob Burdett, co-head TRMC.

‘The trend of recent times to witness more consistency in fund performance in what are arguably more volatile sectors such as Asia excluding Japan and Emerging Markets, with less consistency in safer sectors such as Global Bonds, £ Corporate Bonds and North America is an interesting one,’ he added.

‘This shows that while you may think you have a safer asset class, the fund you select may not actually deliver the consistency we all strive for over the long term,’ he explained.