Liontrust Special Situations, Majedie UK Equity and Jupiter UK Special Situations are some of the funds to have exhibited the least volatility during down markets over the last decade while also harnessing upside from positive market conditions, data from FE Analytics shows.
This comes following comments from Psigma’s Tom Becket last week, in which he warned that market volatility is far from dead despite unusually calm movements of the VIX (which measures the market’s volatility expectations) over recent years.
“What would concern us is if our ‘upside capture’ of equity returns – or increased correlation to equity volatility – over the last two years was replicated to the downside when conditions in equity markets deteriorate, which is why we have progressively de-risked our strategies over the last year,” he said.
“If you want to be unnecessarily simple when thinking about volatility, what you want to do is have a high volatility relative to equity markets in bull markets and low volatility in bear markets, although clearly this is a difficult task to manage in practice.”
As such, we decided to focus our attention on the UK growth funds that have indeed experienced lower volatility than the broader market during down periods while harnessing volatility during market upswings.
To do so, we first focused on the annualised volatility of funds in the IA UK All Companies sector during 2008, 2011 and 2014 - the only three full years over the last decade to the end of last month in which 10 to 15-year UK gilts outperformed the FTSE All Share index (thereby signifying a down market for equities).
After sifting through to find the funds that have achieved a lower annualised volatility than the index over these time frames, we then selected the funds to have done so with higher Sortino ratios over the last decade.
The Sortino ratio measures risk-adjusted returns but, because it uses downside risk as its denominator, it differentiates between the fund’s use of ‘good’ volatility and ‘bad’ volatility.
The final screen we applied was that the funds were in the top quartile for their 10-year alpha generation (which measures the over or underperformance of a fund in comparison to the index) relative to its average peer.
From an initial list of 195 funds with long-enough track records, we were left with the seven funds shown in the below table.
Source: FE Analytics
Of these, the fund with the highest alpha generation at 7.6 – which means that, if the FTSE All Share were to return nothing over the last decade it would have seen gains of 7.6 per cent – is FE Alpha Manager duo Anthony Cross and Julian Fosh’s Liontrust Special Situations.
The five crown-rated fund, which is £3bn in size, also has the highest Sortino ratio on the list at 0.64 compared to the FTSE All Share’s Sortino of 0.13.
Cross and Fosh select stocks through their Economic Advantage process, which focuses on companies with unrepeatable competitive advantages relative to their peers such as intellectual property, strong distribution channels or significant recurring business.
Over the last decade, it has outperformed its average peer and benchmark by 155.93 and 157.79 percentage points with a total return of 238.38 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
It has done so with a top-quartile annualised volatility of 13.09 per cent and a top-quartile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) of 35.26 per cent.
In second place for its alpha generation of 4.14 is Majedie UK Equity, which is co-managed by James de Uphaugh, Chris Field, Matthew Smith and Richard Staveley.
The £4.2bn fund is the firm’s flagship vehicle and, as well as being able to invest up to 20 per cent of its holdings outside of the UK, incorporates a dedicated investment in smaller companies.
In terms of its current asset allocation, it has a 60 per cent weighting to FTSE 100 stocks, 16 per cent in UK mid-caps, 10.2 per cent in internationally-listed equities and smaller weightings in AIM and FTSE Small Cap stocks. Overall, it has a diversified portfolio of 168 holdings.
Over 10 years, the fund has returned 130.58 per cent compared to its average peer and benchmark’s respective returns of 82.35 and 80.49 per cent. It has done so with a top-quartile annualised volatility of 13.44 per cent and a top-quartile maximum drawdown of 29.24 per cent.
In third place for its alpha generation of 3.91 is the five crown-rated Jupiter UK Special Situations fund, which has been headed up by Ben Whitmore since 2006.
As the fund’s name suggests, Whitmore invests in companies which he deems to be undervalued by the broader market. He also has a markedly concentrated portfolio of 36 holdings, with its largest individual holding – BP – accounting for 6.4 per cent of the overall funds.
Its other largest individual constituents include Anglo American, Standard Chartered and Pearson, which all count for more than 4 per cent of the portfolio each.
Over 10 years, the fund has a Sortino ratio of 0.39, an annualised volatility of 12.94 per cent and a maximum drawdown of 31.25 per cent. It has seen gains of 138.21 per cent over this time frame.
In terms of the funds on the list exhibiting the lowest levels of annualised volatility over the last decade, FE Alpha Manager Mark Barnett’s Invesco Perpetual Income fund takes the top spot at 11.22 per cent compared to the FTSE All Share’s volatility of 14.12 per cent.
Headed up by star manager Neil Woodford until his departure in 2014, the £5.3bn fund aims to provide a ‘reasonable’ level of income alongside capital growth. It does so through a diversified portfolio of 124 stocks, although Barnett is unafraid to demonstrate high conviction in certain holdings and currently has a 6.07 per cent exposure to British American Tobacco.
The fund has returned 91.16 per cent over 10 years compared to its average peer and the FTSE All Share (which it is not benchmarked against) index’s respective gains of 82.35 and 80.49 per cent.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Over the same time frame, it has a Sortino ratio of 0.27, a maximum drawdown of 31.71 per cent and an alpha generation of 2.82.
Other funds to have made it onto the list include Invesco Perpetual High Income, Newton UK Opportunities and Invesco Perpetual UK Strategic Income.