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The UK funds that have balanced reward with risk since the financial crisis

08 April 2019

FE Trustnet examines the two main UK equity sectors to discover which funds have made the highest returns with the lowest volatility.

By Gary Jackson,

Editor, FE Trustnet

Liontrust Special Situations and MI Chelverton UK Equity Income are among the UK equity funds have made some of the market’s highest returns while giving investors are relatively smooth ride since 2008, FE Trustnet research shows.

While the financial crisis of 2008 saw funds hit with hefty drawdowns, this was followed by a decade-long bull market: FE Analytics shows the FTSE All Share has posted an 82.73 per cent total return since the start of 2008 (a period which includes the crash), with annualised volatility of 17.67 per cent.

The average fund in the Investment Association’s UK All Companies and UK Equity Income sectors have made returns in line with this benchmark: IA UK All Companies is up 81.7 per cent with volatility of 15.48 per cent while IA UK Equity Income made 80.05 per cent with 13.98 per cent volatility.

However, individual UK funds have achieved better results than these over the past market cycle – generating much higher returns with lower volatility than their peers. Here, we highlight a number of funds combining some of their sector’s best returns and volatility since 2008.

Scatter chart of IA UK All Companies funds’ risk/return since the start of 2008

 

Source: FE Analytics

Starting with the IA UK All Companies sector – which is the largest in the Investment Association universe – and the fund with the highest total return is Slater Growth, which is up 305.18 per cent; however, its annualised volatility has been higher than its average peer (but lower than the FTSE All Share) at 15.98 per cent.

However, the £4.5bn Liontrust Special Situations fund appears to have made the best balance between the two metrics. Since the start of 2008, the fund – which is headed up by Anthony Cross and Julian Fosh, who both hold FE Alpha Manager status – has made a 284.35 per cent with annualised volatility of 12.89 per cent.

Its total return is in the first percentile of the peer group while its volatility is in the third; the average of these percentile rankings – 2 – is the best in the sector. As a point of comparison, Slater Growth’s average percentile is 14.5: first for returns but 28th percentile for volatility.


Liontrust Special Situations is managed using Cross and Fosh’s Economic Advantage process, which looks for companies with intangible assets such as desirable intellectual property, strong distribution channels and significant recurring business.

Square Mile Investment Consulting & Research, which gives the fund an ‘AA’ rating, said: “This is a very well-considered and defined investment process which steers the managers towards relatively steady businesses that are gradually growing and generating high levels of cash. Essentially, the team is looking for companies operating with a clear and unique competitive edge.”

In second place with an average percentile of 2.5 for the two metrics is Unicorn Outstanding British Companies (fourth percentile for total returns and first for volatility), followed by Unicorn UK Growth with 4.5 (seventh percentile for total returns and second for volatility).

LF Lindsell Train UK Equity, one of the most closely watched members of the IA UK All Companies sector, is in the second percentile for total returns and eighth for volatility, giving it an average of 5 and a third place ranking in this research; rounding out the top five is EdenTree UK Equity Growth at 7.5, after being eighth percentile for total returns and seventh for volatility.

At the very bottom of the rankings is Dimensional UK Value. It is in the peer group’s 98th decile for total returns and 99th for volatility, resulting in an average of 98.5.

Scatter chart of IA UK Equity Income funds’ risk/return since the start of 2008

 

Source: FE Analytics

Turning to the IA UK Equity Income sector, MI Chelverton UK Equity Income comes in first place when we look at the balance between the relative percentile rankings for returns and return. It is in the second percentile for returns and the fourth for volatility, giving an average of 3.

The £656.5m fund focuses on opportunities outside of the large-cap space with a bias to stocks outside of the FTSE 100. Its average holding’s market  cap is £700m and this is an equity income fund with a heavy bias towards UK small-caps, especially those with a value tilt.


MI Chelverton UK Equity Income has performed strongly since the financial crisis but Unicorn UK Income, which comes in second place, has arguably been stronger.

It has an average percentile score of 3.5 for returns and volatility but its total return of 238.36 per cent is significantly higher than Chelverton’s 169.69 per cent while coming with broadly the same volatility (12.49 per cent vs 12.11 per cent).

The FE Invest team, while has Unicorn UK Income on its Approved List, said: “Unicorn’s investment philosophy combines valuation and growth disciplines in looking for under-valued, profitable, well-managed companies that are lesser known or understood. Large caps are not excluded but as smaller caps are less researched, and thus more susceptible to market inefficiencies, they align well with the managers’ philosophy.”

Trojan Income comes in third place, with its capital preservation philosophy leading to it having the lowest volatility of the sector with 10th percentile returns (giving an average of 5.5).

Square Mile’s analysts said: “This fund is suitable for investors seeking a lower risk UK equity income strategy, in which income should grow over time; something that has been achieved every year since launch.

“Whilst there is a clear focus on providing a premium yield over the market, the managers will not unnecessarily place capital at risk by chasing higher yielding yet perhaps more risky and less income reliable stocks.”

There’s quite a jump in average percentiles after this. In fourth place is Artemis Income with a score of 18.5, based on a 16th percentile total return and 21st placed volatility while Barclays UK Equity Income scored 24 after a 34th percentile return and 14th percentile volatility.

Sitting at the very bottom of the table is Halifax UK Equity Income, with an average percentile of 91. The £2.3bn fund is in the 95 percentile for total returns and the 87th for volatility.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.