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Zero to hero: 10 top turnaround funds in 2017

Investment editor Shunil Roy-Chaudhuri looks at which funds have turned around their fortunes in 2017. All data used in this article runs up to 23 November.

First State Japan Focus

Launched in October 2015, this fund just about makes the cut for eligibility into this gallery. The 2016 ranking of 123 (out of 127 funds) was a baptism of fire for the fund. By contrast, its performace in 2017 must have been a blessing for conviction-based, bottom-up managers Sophia Li and Martin Lau.

That conviction paid off with stock pick Harmonic Drive Systems, which, according to the September fund commentary, ‘continued to benefit from the secular growth of global robotic demand’. Domestic-focused Recruit Holdings also rose on double-digit profit growth and had the fund managers praising its defensive qualities.

Meanwhile, Casio Computer (remember them?) was divested ‘around its slowing business’ and Hoshizaki Electric was sold ‘on valuation concerns’.

The managers have recently taken a position in Komatsu, which makes construction and mining machinery. ‘We believe a cyclical global recovery is underway, which should improve profits,’ said September’s manager commentary. 

On a further positive note, Li and Lau believe the recent election victory of prime minister Shinzo Abe, a keen reformer of corporate governance, should support the Japanese equity market.

First State Japan Focus

Launched in October 2015, this fund just about makes the cut for eligibility into this gallery. The 2016 ranking of 123 (out of 127 funds) was a baptism of fire for the fund. By contrast, its performace in 2017 must have been a blessing for conviction-based, bottom-up managers Sophia Li and Martin Lau.

That conviction paid off with stock pick Harmonic Drive Systems, which, according to the September fund commentary, ‘continued to benefit from the secular growth of global robotic demand’. Domestic-focused Recruit Holdings also rose on double-digit profit growth and had the fund managers praising its defensive qualities.

Meanwhile, Casio Computer (remember them?) was divested ‘around its slowing business’ and Hoshizaki Electric was sold ‘on valuation concerns’.

The managers have recently taken a position in Komatsu, which makes construction and mining machinery. ‘We believe a cyclical global recovery is underway, which should improve profits,’ said September’s manager commentary. 

On a further positive note, Li and Lau believe the recent election victory of prime minister Shinzo Abe, a keen reformer of corporate governance, should support the Japanese equity market.

Ashmore Frontier Equity

Ashmore’s frontier markets fund comfortably outpaced its benchmark in the year to date. More noteworthy, though, was its rise up the rankings from number 12, out of 13 funds, to number 2.

Key to this outperformance was the fund’s investment in Argentina, which in October was the biggest single country exposure, at 17.9%. This was up from a 13.5% exposure to that country in October 2016.

Andrew Brudenell, head of frontier markets at Ashmore, pointed out many frontier markets funds had exposure to Argentina in 2015 and 2016. But, at beginning of 2017, there was uncertainty about whether positive structural changes in the country were all priced in.

Brudenell added that, at the start of this year, investors were being asked to pay a higher price for Argentinian equities than in mid 2016. He said: ‘But we thought valuations did not look that aggressive, given the growth prospects of Argentina, the sustainability of the returns and the compounding ability of the growth. So we had more exposure to Argentina than most, which helped the fund’s relative and absolute performance.’

Amundi Funds Equity India Infrastructure

As an infrastructure fund, it is little surprise Amundi Equity India, managed by AA rated Sidharth Mahapatra and Vihal Jhaveri is significantly overweight its benchmark in industrials, utilities and real estate. Equally unsurprisingly, it is significantly underweight in financials, IT and consumer staples.

This positioning helped the fund beat our S&P BSE 500 benchmark, particularly given weak IT performance in August. Unfortunately, though, it meant it missed out on strong results from Indian financials in July and August.

This mixed performance means the fund’s 33.9% return in the year to date is not markedly different from our benchmark’s mouthwatering 30% return. Indeed, over three years, the performance of the fund and our benchmark are almost identical, at 57.7% and 57.3%, respectively. The strong recent market performance was driven in part by a market bounceback after last November’s demonetisation programme, when 1,000 and 500 rupee notes were declared invalid in an effort to curtail the shadow economy. 

More notable, however, is the fund’s rise up Citywire’s rankings. Last year, it was stuck at the bottom of the performance tables, at number 40. Today, it has risen to number three, based on total returns in the year to date.

JP Morgan US Small Cap Growth

The factsheet blurb for this small cap fund says investors ‘should be comfortable with its potential to be more volatile than core, large-cap biased equity sub-funds’. Given that, in 2016, it ranked 44 (out of 53 funds), while this year it holds the top spot, this was advice worth taking.

Fund managers Eytan Shapiro and Timothy Parton adopt a growth at reasonable price (Garp) approach. Shapiro said:  ‘Outperformance can be achieved by investing in quality companies with leading competitive positions, run by talented management with the capacity to achieve sustainable growth over many years.’

And indeed, the fund’s performance is down to Shapiro’s team’s company selection. ‘We are at heart bottom-up stock pickers,’ said Shapiro, ‘and it is gratifying to have our abilities rewarded so strongly.’

The fund also focuses on growth, which has clearly been of benefit in an investment environment that has favoured growth over value. ‘And we have found some of the best growth opportunities in the technology space,’ he added. Indeed the fund is 4.1% overweight technology against benchmark. 

One of the strongest performers for the fund this year is Kite Pharma, which focuses on the development of immunotherapy drugs. The shares rallied around 300% this year, with most of the gain due to its acquisition by Gilead Sciences.

Baring Asia Growth

Total returns of 46.3% in the year to date drove the growth fund’s meteoric rise up the Equity Asia Pacific ex Japan sector rankings. It trounced the MSCI AC Far East ex Japan benchmark’s 33.2% return, helping the fund move up from number 163 in the sector rankings in 2016 to number two today.

Longer term growth has also been impressive, with the fund posting returns of 84.7% over three years and 112.8% over five. This compares very favourably with the benchmark’s 64.2% and 88.8% rise over the same respective periods.

This admirable track record is testament to fund manager Hyung Jin Lee's growth at reasonable price (Garp) approach. A September report from Baring said this strategy ‘favours companies with well-established or improving business franchises, profitability focused management and strong balance sheets’.

According to the October factsheet, the fund also considers ‘changing and emerging consumption patterns in Asia, beneficiaries of the next secular growth areas in technology, and the rise of Asian brands in a global landscape’.

Strong recent performances from Taiwanese motor manufacturer Sunonwealth Electric Machine, Taiwanese pneumatic equipment manufacturer Airtac International and Chinese insurer Ping An helped drive the fund’s success.

Elite Webb Smaller Companies Income and Growth

February 2017 was a key month for the Elite Webb fund. Citywire + rated manager Peter Webb said: ‘That month marked a change in top-down emphasis from the UK to overseas. The fund is now the best it has ever been.’

In that month the fund bought companies that, to quote the factsheet, are ‘world class businesses with proprietary technology and/or [intellectual property] and scope for significant long term growth’. These include CML Microsystems and Oxford Instruments. The fund manager’s commentary added: ‘These companies are beneficiaries of sterling weakness but just as importantly significant operators in global markets with attractions to even larger corporates. These companies all pay dividends.’

The approach has certainly paid dividends for investors. In the year to date, it has returned 38.7% against the FTSE All-Share benchmark total returns of 9%. And the fund has moved up from a ranking of 101 in 2016 to number 1 in the year to date. 

This robust performance allowed Webb to blow his own trumpet in his commentary last month. ‘Your Manager’s decision to reduce exposure to cyclical sectors of the UK economy earlier in the year and increase exposure to international earners has proved a wise one,’ he wrote.

Aubrey Global Emerging Markets Opportunities

Analysing the steps a country goes through as its economy matures is key to the ‘wealth cycle’ investment philosophy of this fund.

Manager Andrew Dalrymple has certainly got his analysis right so far this year, registering total returns of 43% and significantly outpacing the MSCI Emerging Markets benchmark returns of 27%. This helped the fund rise 249 places, to number 2, in the Equity Emerging Markets Global sector rankings today.

That impressive performance was in part driven by the hotelier China Lodging holding, which rose 13% after positive October holiday travel numbers. Meanwhile, technology holdings Alibaba, Tencent and 58.com all made single digit gains in the month.

Moreover, the fund manager’s commentary for October stressed China president Xi Jinping’s recent outlining of his vision for the country. ‘Most notable to us,’ ran the fund commentary, ‘was the de-emphasis of hard economic growth targets, but instead more on softer “quality of life” goals, most obviously in the term “beautiful” China. This suggests the natural rebalancing of the economy towards consumption driven growth will only be encouraged further, to the general benefit of our investments.’

MainFirst Global Equities

Benchmark? What benchmark! Given the fund has an active share of 98.3% against MainFirst’s chosen MSCI World Index, investors should hardly be surprised if the fund’s performance deviates significantly from it.

And indeed, in the year to date, the fund has returned 49.5%, against the MSCI World’s 11.3% in sterling terms. This contrasts strikingly with a 2.8% underperformance in the 12 months to 31 October 2016, reported in the fund’s October 2016 factsheet. Perhaps more notable, though, is the fund’s rise in the rankings from number 659 in the Equity Global sector in 2016 to number one today.

According to commentary from the fund’s managers, AAA-rated Frank Schwarz, AAA-rated Patrick Vogel and Jan-Christoph Herbst the main contribution to performance in 2017 is theme-driven stock selection. ‘We invest in stocks based on a multi-year time horizon within long-lasting structural trends,’ they said.

Such themes include ‘the takeover of robots and automation in industrial production’. So the fund bought Japanese robot producer Fanuc in the second half of the year and it went on to grow by more than 30%.

In a similar vein, the fund invested in tech giants Facebook, Adobe, Alibaba, Tencent and Samsung. ‘Clients wonder if a technology bubble is evolving. But, contrary to 2001, the portion the IT-sector contributes to the S&P 500 is covered by its earnings,’ said the managers.

Morgan Stanley US Growth

‘The long term investment horizon and conviction weighted investment approach embraced by the team since 1998 can result in periods of performance deviation from the benchmark and peers.’ So said the fund’s quarterly commentary from 30 September. And we could add, to quote the late Radio 1 DJ Alan Freeman, ‘Not arf!’

For while today, pop-pickers, the fund is number one in the Equity US sector, last year it was number 228. Even the Birdie Song did better than that.

And, indeed, performance has even been mixed in the current year. Yes, the fund has returned more than three times our benchmark so far in 2017. But it underperformed Morgan Stanley’s chosen Russell 1000 Growth benchmark in the third quarter of this year.

‘Stock selection in Health Care and Consumer Discretionary accounted for the majority of the Fund’s underperformance this quarter,’ said the quarterly commentary. In particular, Dexcom, which makes monitoring devices for diabetics, slumped after a rival device was approved by the US Food and Drug Administration. 

Even so, technology was the top contributor in the fund in the third quarter, with holdings Facebook, ServiceNow, Workday and Salesforce.com all performing strongly. The fund management team will no doubt be hoping these stocks will, to quote another of Freeman’s catchphrases, ‘Stay bright!’

SW Mitchell Capital UK

‘One lesson from 2016 is that it is very difficult to second-guess political developments and their likely impact on equity prices.’ So said Brian Cullen, manager of the SW Mitchell Capital UK (SWMC UK) fund, in his January 2017 newsletter.

He continued: ‘We feel it much more effective to focus on finding the greatest pockets of value out there and picking stocks that should – over time – deliver good returns to the fund regardless of the external environment.’

Indeed, the fund benefited recently from holding flooring manufacturer Victoria. Its shares rose on news of the acquisition of Italian ceramic flooring company Ceramiche Serra.

But SWMC UK is unusual in this gallery, in that it can go long and short. And the dangers of this flexibility were highlighted in the September factsheet, which reported the fund’s short book suffered from share price rises in two UK non-food retailers. ‘This reflected a sector-wide rally, as short-term trading for these businesses does not appear to be as bad as some had feared.’ 

Finance theory suggests funds that can go both long and short can have lower risk-adjusted returns as they have a wider investable universe. Unfortunately, while they can benefit disproportionately if they get their long and shorts right, they can also get doubly hit if they get them both wrong. This may perhaps go some way to explaining the fund’s seesaw ride, from a ranking of 254 in 2016 to number one today.

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