by Jake Moeller.
Usually designed to a high specification, fund group foyers often have on tasteful display the crystal fund awards the fund managers have collected over their years of operation. In addition to their sparkling aesthetic, these quiet sentinels stand as evidence of a fund group’s ability to add value to investors.
Fund awards recognise consistent outperformance
A considerable number of media organisations and data providers (including Thomson Reuters Lipper) host an annual fund awards event, and there are plenty of opportunities for a fund house to pick up these sought-after gongs. Categories and methodology behind the various awards differ, but past performance is usually a major consideration; a fund with a period of relative outperformance of its peers will often find itself as a contender.
What do awards mean to end investors?
It’s worth considering how important these awards are to the investors of winning funds and what they tell us, if anything, about the potential fortunes of the fund in the future. Certainly, fund awards are meaningful to fund groups themselves. Many individual fund managers proudly collect their trophy on the night, and groups subsequently promote their victory in marketing materials. Whether fund awards generically are of any use in assessing the enduring quality of an investment is more open to speculation.
Award winners and pedigree
In addition to other layers of due diligence, fund awards certainly offer an insight into the ability of a fund manager to add value to an investor. In the U.K., there are a number of generators of excellence over the years who are regularly picking up awards; Prusik Asian Equity Income, Henderson Preference & Bond, Russell Investments UK Long Dated Gilt, and Techinvest Special Situations are funds that spring readily to mind.
A considerable number of fund groups such as Fidelity, Kames, Columbia Threadneedle, and Schroders have consistently had the same fund appear as a candidate or winner over multiple discrete years.
Is there evidence of persistency?
It is evidence of this persistency of performance that is the value of a fund award. Nearly 70% of U.K. Lipper Fund Awards winners over three years for 2014 remained in the first or second quartile of their categories for the same period at the end of 2016.
Similarly, of the 2013 winners of the popular Investment Week Fund Manager of the Year Awards, which has a qualitative overlay (the Lipper Awards are based solely on a quantitative process), 71% of them were in the first or second quartile of their categories for three-year performance at the end of 2016.
Fund awards advantageous in a competitive market
It is unlikely any serious fund gatekeeper would confess to using a fund award as a metric for selection processes, but I maintain there are worse ways of assessing a potential investment in isolation. Past performance is an important component of fund assessment and is effectively encapsulated in a fund award. To otherwise uninformed investors, a fund award can be a proxy for at least some rudimentary performance analysis.
The worth of fund awards for active funds is further being inflated by the growth and sustained popularity of Exchange Traded Funds and other passive investments. For 2016, 24% of estimated net flows into pan-European-based mutual funds were into passive vehicles. For 2015, this was 32%. Compare this for example to 2004 when passive investments only constituted 7% of total net flows.
In a highly competitive fund market experiencing unprecedented consolidation, those glittering, silent sentinels standing proudly on display in fund group foyers may become increasingly valuable indeed.
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This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.