Newton UK Equity, Franklin UK Equity Income and Jupiter Income trust are among some of the equity funds to have best-protected investors on the downside since Black Monday 30 years ago, according to data from FE Analytics.
The official anniversary of the 1987 global market crash – one of the biggest crashes in living memory – falls on 19 October.
According to Schroder’s David Brett, Black Monday toppled a five-year bull market within a matter of hours. While the exact causes are unknown, suggested catalysts include concerns surrounding rising inflation, interest rate rise rumours and heightened political tension between the US and Iran.
Performance of index since Black Monday
Source: FE Analytics
“Losses were exacerbated by new computerised trading floors that were ill-equipped, at the time, to prevent the collapse from spreading,” he said.
“It came after a period of sustained gains. Most stock markets in developed countries had been growing at more than 30 per cent a year in the five years up to Black Monday – gains that have not been repeated since. It took valuations to record highs.
“As stock markets plunged and investors panicked, central bankers took action: interest rates were cut and the Federal Reserve ‘encouraged’ banks to continue lending to ensure the flow of money wouldn’t dry up.
“Those policies worked. In the five years following the crash, stock markets made a strong recovery.”
Brett added that, while high valuations can contribute to a market crash, they are not necessarily the catalyst.
The investment writer’s research shows that valuations in the US, the UK and Europe are far higher than they were in 1987 but stock markets have continued to rise.
Not only this, he said investors in 1987 were able to shelter from the storm in government bonds which, as has been well-documented, are now far more volatile and are closely-correlated with equities.
“[In 1987] the yields on 10-year government bond yields in developed countries such as Japan, Germany and the US were as much as 9.9 per cent,” Brett explained.
“In the UK, the figure was 10.1 per cent. Today, the highest yield, among those countries, is 2.9 per cent for US bonds. In the UK it is 1.28 per cent, while Germany and Japan are closer to zero.
“The path to protecting your money now is not so obvious.”
With this in mind, the team at FE Trustnet looked at the equity funds with long-enough track records to have existed through Black Monday which have most successfully protected investors’ capital to the downside since.
Using the MSCI World index as an approximate benchmark, a total of four out of 27 equity funds have achieved a lower annualised volatility, a higher Sharpe ratio (which measures risk-adjusted returns), a lower maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) and a lower downside risk ratio (predicts susceptibility to losing money during falling markets) over the time frame in question.
All of them invest in UK equities which is unsurprising, given the FTSE All Share has achieved stronger risk metrics than the global index over the last 30 years. As shown below though, the four funds also achieved stronger risk metrics than the UK index.
Source: FE Analytics
Of these, the fund to have achieved the highest total return since Black Monday is the five FE Crown-rated Jupiter Income Trust, which aims to provide a high income which at least increases in line with inflation. Its current manager – Ben Whitmore – has been at its helm since the start of 2013.
Over the last 30 years, the £2.4bn fund has returned 1,692.79 per cent compared to its average peer and FTSE All Share benchmark’s respective returns of 822.87 and 830.4 per cent. It has done so with a maximum drawdown of 41.61 per cent and an annualised volatility of 13.3 per cent compared to its FTSE All Share benchmark’s drawdown and volatility of 42.92 and 14.21 per cent.
Had an investor placed £10,000 into the fund 30 years ago, they would have received £38,279.93 in income alone.
The fund has a concentrated portfolio of 40 stocks, 75 per cent of which are large caps. Examples of its largest individual holdings include BP, HSBC, Aviva and GlaxoSmithKline.
Next up for its total return of 1,542.69 per cent is Newton UK Equity, which has an AUM of £944m and has also been awarded five FE Crowns. While current manager Simon Nichols has only been at its helm since April last year, the manager has worked as a researcher at Newton since 2001.
The fund adopts a bottom-up stock selection process which, as with all Newton funds, is combined with a broader thematic overlay. Market themes that Nichols focuses on include demographic shifts, the impact of debt on growth and rapid technological change. Its largest holdings are Royal Dutch Shell, Diageo and British American Tobacco.
In terms of its risk metrics since Black Monday, Newton UK Equity has the lowest maximum drawdown and annualised volatility on the list at 34.69 per cent and 12.92 per cent respectively.
The third and final fund on the list to have outperformed the MSCI World index as well as achieve better risk metrics is Franklin UK Equity Income.
The four crown-rated fund has been headed up by Colin Morton since 1995, who was later joined at its helm by Mark Hall and FE Alpha Manager Ben Russon in 2013. The managers adopt a bottom-up approach to stock selection and run a concentrated portfolio of 49 stocks, which are deemed to be of high quality but undervalued by the broader market. Examples of its largest holdings include Royal Dutch Shell, HSBC and BP.
Over the last 30 years, the £420m fund has beaten its average peer and benchmark by 320.43 and 312.9 percentage points respectively with a total return of 1,143.3 per cent.
Performance of fund vs sector and benchmark over 30yrs
Source: FE Analytics
Over the same time frame, it has a maximum drawdown of 36.21 per cent and an annualised volatility of 13.43 per cent. Had an investor placed £10,000 into the fund 30 years ago, they would have received £23,826.44 in income alone.
The fourth and final fund on the list is Fidelity Moneybuilder Dividend, which has been managed by Michael Clark since 2008.
The three crown-rated fund has underperformed its average peer and benchmark by 197.44 and 204.97 percentage points respectively over the last 30 years with a total return of 625.43 per cent.
While it may not have shot the lights out on a relative basis over the last 30 years, the fund has a maximum drawdown of 37.87 per cent and an annualised volatility of 13.36 per cent, both of which are comfortably lower than the FTSE All Share and the MSCI World’s risk metrics.
Clark aims to find high-quality companies which can generate steady and growing dividends as well as provide some growth. Traits he looks for include high levels of dividend cover, robust balance sheets and a strong track record of dividend delivery, with examples of some of its largest holdings including HSBC, GlaxoSmithKline and AstraZeneca.
Had an investor placed £10,000 into the fund 30 years ago, they would have by now received £16,046.02 in income alone.