IA UK Equity Income funds have a better track record of minimising their losses relative to the FTSE All Share than those in the IA UK All Companies sector, research by FE Trustnet suggests. 
Recent years have seen relatively calm markets despite numerous potential headwinds such as the UK’s decision to leave the EU and rising inflation. FE Analytics shows the FTSE All Share’s volatility was just 7.79 per cent in 2017 while its maximum drawdown – or the most an investor would have lost if they bought and sold at the worst times – was only 2.47 per cent.
Indeed, the VIX index, which is often called Wall Street’s fear gauge, sat at historic lows for much of last year. However, many commentators have warned that investors should not get used to such benign market conditions and predicted that volatility could soon start to rise.
The first Bank of America Merrill Lynch Fund Manager Survey of 2018 noted that allocations to equities have jumped to a two-year high while the balance of investors with insurance against a near-term correction is at its lowest since 2013. BofA ML chief investment strategist Michael Hartnett said this makes market turbulence likely: “By the end of Q1, we expect peak positioning to combine with peak profits and policy to create a spike in volatility.”
Quarterly maximum drawdown of FTSE All Share and UK equity sectors over 15yrs
Source: FE Analytics
With this in mind, we looked at the IA UK All Companies and IA UK Equity Income sector to examine their members’ track records in avoiding the maximum drawdowns of the FTSE All Share. To do this, we compared maximum drawdowns of the index, sector average and the individual funds in the 60 quarterly periods of the past 15 years.
The chart above shows all those drawdowns. Although it’s difficult to determine from the chart, the average fund in the IA UK Equity Income sector has beaten the IA UK All Companies peer group by a decent margin.
Our data shows that the IA UK Equity Income sector has been hit with a lower maximum drawdown than the FTSE All Share in 73.3 per cent of the 60 quarters examined, while the IA UK All Companies sector has done this just 63.3 per cent of the time.
The largest quarterly drawdown encountered by the FTSE All Share in the overall period was 13.5 per cent. While the average IA UK Equity Income fund’s worst quarterly maximum drawdown was better at 12.85 per cent, IA UK All Companies underperformed the index with a 15.63 per cent average drawdown.
However, the performance of the average fund does not reflect how all individual funds fared and within the IA UK All Companies sector there are a number of funds that have consistently reported lower quarterly maximum drawdowns than the index.
In order to make sure that the losses of the global financial crisis are included in the research, we only considered funds with a track record going back 10 or more years.
In the IA UK All Companies sector, we found that only four of the 204 funds posted a lower drawdown than the index in 75 per cent or more of the quarters. However, 181 had better maximum drawdowns than the FTSE All Share for more than half of the quarters in their track record.
Topping the table after outperforming in 77.1 per cent of its 48 quarters of track record is the five FE Crown-rated Liontrust Special Situations fund, which is headed up the FE Alpha Manager duo of Anthony Cross and Julian Fosh. Over the entire period, the fund’s worst quarterly drawdown has been 15.6 per cent.
The £3.4bn fund – which invests in companies with a clear competitive edge – is a consistently strong performer, posting top-quartile total returns over one-, three-, five- and 10-year periods. Square Mile Investment Consulting & Research, which gives the fund an ‘AA’ rating, said: “This is a very well-considered and defined investment process that steers the managers towards relatively steady businesses that are gradually growing and generating high levels of cash.”
Source: FE Analytics
Newton UK Opportunities, which appears in second place, also holds five FE Crowns and has outperformed its average IA UK All Companies peer and the FTSE All Share over three, five and 10 years. The fund makes uses of Newton’s global thematic overlay, which examines themes such as financial repression, demographic challenges and the rise of China, as well as bottom-up stockpicking from lead manager Chris Metcalfe.
The only fund on the above table that appears on the FE Invest Approved List is Mark Barnett’s Invesco Perpetual UK Strategic Income. Funds that hold five FE Crowns, aside from the Liontrust and Newton offerings already mentioned, include Jupiter UK Special Situations, Franklin UK Rising Dividends, Aviva Investors UK Equity MoM 1 and Aviva Investors UK Equity 2.
At the bottom of the ranking is Dimensional UK Value, which has only had a lower maximum drawdown than the FTSE All Share in 34.5 per cent of its 55 quarters of track record.
Turning to the IA UK Equity Income, our research shows that four of its 57 members with a track record going back to the financial crisis have posted a better maximum drawdown than the FTSE All Share in more than 75 per cent of quarters.
What’s more, all but one of the sector’s members with a track record stretching back 40 quarters or more have posted a lower maximum drawdown than the index in more than half of the examined periods.
The fund at the top of the list is a relatively off-the-radar offering. Paul Hookway’s £84.8m HC Kleinwort Hambros Equity Income fund has suffered a lower drawdown in 79.2 per cent of its 48 quarters of track record; that said, it has also posted bottom-quartile total returns over three, five and 10 years.
It is a fund of funds portfolio produce an above average and increasing income return coupled with long-term capital growth. Top holdings include Liontrust Macro Equity Income, Artemis Income and Schroder UK Alpha Income.
Source: FE Analytics
More familiar names can be found further down the list. Four of those 25 funds have a place on the FE Invest Approved List: Franklin UK Equity Income, Threadneedle UK Equity Income, Trojan Income and Royal London UK Equity Income.
Only two funds on the table hold the maximum of five FE Crowns: AXA Framlington Monthly Income, which is in second place after posting a lower drawdown than the index 76.7 per cent of the time, and Trojan Income.
The only fund that has suffered a higher maximum drawdown than the FTSE All Share in more than half of the quarters in its track record is Halifax UK Equity Income. The fund’s history covers all 60 quarters looked at in this research and its drawdown was higher in 53.3 per cent of them.