While the average UK equity fund generated poorer risk-adjusted returns than many of its global and specialist peers in the decade since the global financial crisis, several portfolios have broken this trend and posted high 10-year Sharpe ratios.
A recent FE Trustnet article revealed the sectors have, on average, made the highest risk-adjusted returns (as indicated by the Sharpe ratio) in the 10 years since the first signs of the global financial crisis started to emerge.
Over this past decade, the highest average Sharpe ratios were found in the IA Technology & Telecommunications, IA Global Bonds, IA UK Index Linked Gilts, IA North American Smaller Companies and IA North America sectors.
Source: FE Analytics
However, when it comes to the UK, the average fund is much further down the rankings.
The average IA UK Smaller Companies fund actually performed relatively well after posting a 10-year Sharpe ratio of 0.32; this ranks it in eighth place, out of 38 Investment Association sectors. Over the same period, the average fund has made a 129.83 per cent total return with annualised volatility of 15.77 per cent.
But the more popular IA UK Equity Income and IA UK All Companies peer groups haven’t fared as well.
FE Analytics shows that the IA UK Equity Income ranked 22nd with an average Sharpe ratio of 0.17, a 76.64 per cent total return and annualised volatility of 13.17 per cent. IA UK All Companies comes in 25th place with a 0.16 Sharpe ratio, 78.68 per cent total return and 14.65 per cent annualised volatility.
Over the following pages, however, we highlight some of the funds from the three UK equity sectors that have managed to make some of the industry’s best risk-adjusted returns since the global financial crisis first broke 10 years ago.
IA UK Smaller Companies
First up is the sector with the highest 10-year Sharpe ratio, where four funds have generated risk-adjusted returns higher than the 0.58 made by the best performing sector (IA Technology & Telecommunications).
Source: FE Analytics
Topping the table is the £742.7m Liontrust UK Smaller Companies fund, which is headed up by the FE Alpha Manager duo of Anthony Cross and Julian Fosh along with Victoria Stevens and Matthew Tonge. The five FE Crown-rated fund is managed using Liontrust’s Economic Advantage process, which looks for companies with tangible strengths that rivals struggle to replicate.
The fund has a strong record of outperformance – it has beaten its FTSE Small Cap (ex IT) benchmark in seven of the past 10 full calendar years and is significantly ahead of it over the year-to-date. It also tends to perform strongly in down markets; in 2007 it lost 5.81 per cent against the benchmark’s 17.92 per cent while in 2008 it was down 27.48 per cent compared with the index’s 48.32 per cent slump.
Performance of fund vs sector and index since the start of the financial crisis
Source: FE Analytics
While the fund has the sector’s highest Sharpe ratio, Old Mutual UK Smaller Companies Focus – the fund in second place – has made the highest total return over the 10 years in question, although it has been one of the more volatile members of the peer group.
The £272.2 fund is a member of the FE Invest Approved List, with the analysts behind it saying: “The fund is aggressively structured, so investors should be prepared for significant price swings. Overall this is a high-risk way to access smaller companies, so could suit those with a long time horizon who want to maximise their ability to make money.”
IA UK Equity Income
None of the funds in the IA UK Equity Income sector, which is one of the largest in the Investment Association universe, have posted a higher Sharpe ratio than the average IA Technology & Telecommunications fund over the past 10 years. However, some have come close.
Source: FE Analytics
The two at the top of the table stand out the most. Unicorn UK Income is run by FE Alpha Manager Fraser Mackersie and Simon Moon; it has also made the highest return of the IA UK Equity Income sector in the decade since the financial crisis’ start.
Unlike the typical equity income fund, the £625.7m portfolio focuses on smaller companies. This is reflected in the fact that its annualised volatility of 15.39 per cent is amongst the highest of the peer group, although its maximum gain is also the highest.
Performance of funds vs sector and index since the start of the financial crisis
Source: FE Analytics
FE Alpha Manager Francis Brooke’s £3.4bn Trojan Income fund, meanwhile, has made the sector’s third highest 10-year return with the lowest annualised volatility (at 10.22 per cent). The portfolio is mainly built around defensive blue-chip names, while – like all funds run by Troy Asset Management – it has a generally cautious approach.
Square Mile Investment Consulting & Research, which gives the fund an ‘AA’ rating, said: “The managers view risk as the potential for permanent capital loss and rightly take pride in this strategy's capacity to provide protection in more volatile periods. In the same vein it does therefore have the propensity to lag the market in more aggressive upswings. However, the consistency of returns and protection in down markets should compound into a rewarding investment for investors over time.”
IA UK All Companies
In this sector, which is the largest in the Investment Association universe but produced the lowest Sharpe ratio of those mentioned this article, three portfolios have produced better risk-adjusted returns than the IA Technology & Telecommunications sector.
Source: FE Analytics
Slater Growth, which is run by FE Alpha Manager Mark Slater, is in first place with a Sharpe ratio of 0.66. Over the 10 years we examined, its 237.29 per cent total return is the highest in the IA UK All Companies sector, while its annualised volatility is in the third quartile.
The £456.3m fund is run with a bottom-up approach that focuses on companies that Slater considers to have superior and sustainable growth potential that has not yet been recognised by the market. He looks for stocks with strong competitive positions, solid balance sheets, good free cash flow generation and a high rate of conversion of profits into cash; since a mandate change in 2009, most of this has come from the small- and mid-cap part of the market.
Performance of fund vs sector and index since the start of the financial crisis
Source: FE Analytics
While Slater Growth is at the top of the table, CF Lindsell Train UK Equity and Liontrust Special Situations are very close behind with Sharpe ratios of 0.65.
FE Alpha Manager Nick Train’s CF Lindsell Train UK Equity fund is built around a concentrated portfolio of quality-growth stocks that that manager thinks will perform well over the long term, while Liontrust Special Situations is another portfolio using Liontrust’s Economic Advantage process.