More winners than losers in IC Top 100 Funds

During the year we have lost one fund. The ISIS Property Trust Limited was acquired by IRP Property Investments Limited on 11 April 2013 and is no longer available for new investment. The merged trust has been renamed F&C UK Real Estate Investments Limited. Continuing investors will find information about the trust and their investment under this name. But for the purposes of reviewing performance we have excluded the new merged trust from the list.

We looked at performance over the calendar year to 30 June 2013 (in the case of investment trusts this was the share price rather than the net asset value). Total return performance of the remaining funds in the list taken all together has been in line with the market, averaging 16.56 per cent, compared with 17.93 per cent from the FTSE All-Share index and 19.27 from the MSCI World US $ index.

This is what you would expect if you collated such a broad list of funds with wide diversification. We don’t expect any of our readers to hold all 100 at the same time. If you remove the three cash funds, which we expect readers to use to get out of the market while they are waiting to buy, performance is slightly better.

It is interesting to drill down and see which funds have been the winners and losers over the past year. This may let help investors identify where the opportunities lie - and which funds to sell after a good run. In the case of investment trusts we looked at the share price total return.

Just 9 out of the 99 funds had negative performance.

Top 100 Funds with negative performance

Source: Morningstar

As you can see, the commodity funds fared badly this year. All 7 commodity funds in the Top 100 Funds selection bar Sarasin Agrisar posted poor performance. Sarasin Agrisar invests thematically in the longer-term trends within the global food and agricultural industry. Sarasin, however, posted a 15 per cent positive return, showing that diversification is important within asset classes. The other funds are all in the mining and resources sector of commodities.

Many of these funds have big exposure to gold or gold miners. Personal Assets is a global growth trust that has 12.2 per cent of its portfolio invested in gold bullion. First State Global Resources which has a defensive bent with limited exposure to small companies lost least out of the other funds.

The bigger losses will be very damaging to portfolios. The biggest loss - from BlackRock Gold and General - 41 per cent down over the year to 30 June 2013 - will take a 69 per cent gain to allow investors to recoup their loss.

This represents an important lesson to investors that commodities are volatile and can lose you a lot of money even if you invest via funds. For those invested in the three open-ended funds with big exposure to gold miners - Smith & Williamson Global Gold & Resources, Investec Global Gold and BlackRock Gold and General - you could consider switching to City Natural Resources which also has a focus on gold miners and is currently trading at a 20 per cent discount to its net asset value. So if there is a bounce back in gold miners then this could have a better chance of recouping your losses over the long term.

Nevertheless, the underperformance from gold miners has exposed a weakness in our list. We have tried to make the list as diversified as possible with exposure to a range of asset classes to give investors the tools to build diversified portfolios. However, we may consider dropping a couple of funds that have exposure to gold miners for next year and try to get some other types of commodity exposure into the list.

Looking to the Money Market funds that we recommend investors use if they want to come out of the market - these have done their job in posting very small positive returns.

Top 100 Funds: Money Market Funds

Source: Morningstar

Strip out the 6 mining and resources focused funds and the 3 cash funds, the performance of our Top 100 Funds would be 20.35 per cent.

Forty of the Top 100 funds posted returns of 20 per cent or more, with 43 beating the FTSE All-Share over the period.

But let’s take a look at the really blinding performance - the 20 funds in the selection that posted returns of 30 per cent or more. These are mostly a mixture of smaller companies fund, country specific funds and funds that invest thematically in specific sectors.

Top 100 Funds: Top 20 performers

Source: Morningstar

Acorn Income Fund has made investors very happy with an astounding return of 82.06 per cent over the year. It is still a relatively small investment trust with gross assets around £50m. However, earlier this year it completed a £10m share issue, a mixture of ordinary and zero dividend preference shares. Its board and managers are keen to grow it further in order to maintain liquidity for buyers and to limit the premium to net asset value (NAV), which is currently only small at 0.59 per cent.

The company invests in two portfolios:

• Smaller Companies portfolio: between 70 to 80 per cent of the assets will be invested predominantly in UK equities with a market capitalisation of under £1 billion. The focus will be on companies with experienced and well motivated management products or services supplying growth markets, sound operational and management controls, good cash generation and a progressive dividend.

• Income portfolio: between 20 to 30 per cent of the assets will include sterling denominated fixed interest securities including corporate bonds, preference and permanent interest bearing shares, convertibles, reverse convertible bonds, debentures and other similar securities. The Income portfolio may also contain higher yielding shares of other investment companies including property investment companies, not exceeding 15 per cent of the overall portfolio.

Fund manager John McClure (who also manages another IC Top 100 Fund with outstanding performance - the Unicorn UK Income fund) says his strategy for Acorn Income remains unchanged with a focus on overseas earnings, especially industrial earnings. He remains negative on the UK high street, especially as the internet develops further and says "we do not understand some of the recent private equity deals".

That three Japan funds feature in the Top 20 comes as no surprise. Following the moves by Prime Minister Abe to stimulate economic growth the Japanese equity market has performed very strongly over the last six months or so, albeit with a significant sell off in May. However, while Baillie Gifford Japan is trading at a small premium of 2.57 per cent the discount on Schroder Japan Growth remains wide at 11.71 per cent.

Schroder Japan Growth remains the core Japan recommendation for analysts at Winterflood Investment Trusts. It strongly outperformed the Topix in sterling terms during the rally as a result of both gearing and stock selection. Winterflood concludes that although it is unlikely that gains over the last six months will be replicated in the short-term, with the fund likely to begin paying a dividend shortly and shares trading on a substantial discount "it offers some value".

Impax Environmental Markets is a bit of a surprise in our Top 20 list. It has massively underperformed the FTSE World index over the past five years. However, over the past year performance has rallied. The fund’s objective is to enable investors to benefit from growth in the markets for cleaner or more efficient delivery of basic services of energy, water and waste and it is included in the Ethical and Environmental funds section of our Top 100 Funds.

The Top 100 Funds list includes a mixture of open-ended funds (such as unit trusts and oeics) and closed-ended funds (such as investment trusts and investment companies).

The performance of the closed-ended funds was much better. The average performance of the 50 investment trusts included in the selection was 22.32 per cent, compared with 16.56 per cent average performance when you include the open-ended funds.

There have been many studies to show that investment trusts continue to have the edge over open-ended funds in terms of performance and the experience of our Top 100 funds backs this up.

However, the investment trusts that have made it into our Top 100 may sometimes trade on a hefty premium to their underlying net asset value. If this is the case it may be best to keep them on your watch list and delay your purchase until they are selling at a discount.

Bear in mind, too, that it's very rare for a fund manager to beat a benchmark consistently across the investment cycle. Some funds will race ahead when times are good but fall sharply when markets take a tumble. Others will preserve value in tough times, but lag benchmarks in stock market booms. Funds are long-term investments and you should really be prepared to invest for five years or more to get the true benefit.

Top 100 Funds: Investment trusts

Source: Morningstar