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The sectors where every fund has been less volatile than the FTSE 100

27 July 2018

With volatility back in investors’ minds, we review which peer groups have the highest and lowest concentrations of funds with FE Risk Scores below 100.

By Gary Jackson,

Editor, FE Trustnet

Ten Investment Association sectors do not have a single fund that has been riskier than the FTSE 100 in recent years, according to the FE Risk Scores metric, although eight peer groups do not have a fund that has been less risky than the index.

FE Risk Scores measure funds volatility relative to the UK’s 100 largest companies over the past three years to offer investors a reliable indication of relative risk. Most funds have an FE Risk Score between one and 150, where a score of 100 means it has displayed the same volatility as the FTSE 100 while zero would be the equivalent to pure cash.

Given that the opening half of 2018 has put volatility back at the forefront of investors’ minds, FE Trustnet has reviewed all the funds within the Investment Association universe using the metric to see which sectors have the lowest and highest levels of relative risk.

 

Source: FE Analytics

In this research, we reviewed 3,586 funds from 34 sectors (excluding several such as IA Money Market). Of these, 2,459 – or 69.1 per cent – had an FE Risk Score that was lower than 100 while 1,062 – or 29.8 per cent – were higher than 100; the remaining 38 (1.1 per cent of the total) have a risk score of exactly 100.

Six funds had a risk score of zero while another four scored just one. However, these are cash funds that reside in the IA Unclassified sector rather than the IA Money Market and IA Short Term Money Market peer groups. Funds such as SJP Money MarketSmith & Williamson Cash and Threadneedle Sterling are among the names with the lowest scores.

The table above shows how things look on a sector level, with three multi-asset sectors, some bond peer groups and an equity sector all boasting that not one of their members has an FE Risk Score of 100 or higher.


Of these 10 sectors with a clean sheet, it’s the IA Sterling Strategic Bond that has the lowest average FE Risk Score – which stands at just 26. The lowest risk scores within this peer group are BlackRock Fixed Income Global Opportunities and Royal London Short Duration Credit; both scored 10.

BlackRock Fixed Income Global Opportunities is run by Scott Thiel, Bob Miller, Rick Rieder and Andreas Doerrenhaus. The £123m fund aims to generate returns that are uncorrelated with the broad bond market and has a risk-focused approach that spreads risk across lots of smaller positions across regions, sectors and issuers.

Paola Binns’ £492m Royal London Short Duration Credit fund, on the other hand, is a pure short duration fund. While Binns and her team focus on market inefficiencies, the portfolio is carefully risk-managed and bonds tend to be held until maturity, meaning the managers take a longer-term view than many of their peers.

While sectors such as IA Mixed Investment 0-35% Shares and IA UK Gilts would be expected to be on the above table given their generally cautious nature, the inclusion of peer groups that are perceived to be of higher risk – IA Sterling High Yield and IA UK Smaller Companies – might be more of a surprise.

FE Risk Score of funds over 3yrs

 

Source: FE Analytics

The funds in the IA Sterling High Yield sector have an average FE Risk Score of 29, which means they have been less risky than peer groups such as IA Sterling Corporate Bond, IA Mixed Investment 0-35% Shares and IA Targeted Absolute Return.

Royal London Short Duration Global High Yield Bond has a score of just nine, which is the lowest in the peer group; this fund, which is managed by Azhar Hussain and Stephen Tapley, was designed to offer a low-volatility approach to high yield bonds. Eaton Vance Int (Ire) US High Yield Bond, on the other hand, has the sector’s highest risk score at 78 (which is well above than the fund with the second highest, which stands at 40).

When it comes to the IA UK Smaller Companies sector – an area that is seen as being riskier than the FTSE 100 – the average FE Risk Score is higher than those mentioned so far at 81. Old Mutual UK Smaller Companies Focus has the highest score at 96, but this is to be expected from the portfolio’s more concentrated approach.

Liontrust UK Micro Cap – which many would assume to be one of the sector’s riskiest offerings – has the lowest FE Risk Score at 60. Overseen by the FE Alpha Manager duo of Anthony Cross and Julian Fosh alongside Matthew Tonge and Victoria Stevens, the fund prefers stocks with defensive characteristics such as intellectual property or infrastructure advantages; this helped it after the Brexit referendum, for example, when it fell less than the typical smaller companies fund.


There are six sectors, however, where every single fund has an FE Risk Score of above 100: IA Asia Pacific Including Japan, IA China/Greater China, IA Japan, IA Japanese Smaller Companies, IA North American Smaller Companies and IA Technology & Telecommunications.

Of these, IA China/Greater China has the highest average score – it stands at 161. The lowest risk product in the peer group has been Aberdeen Global Chinese Equity (at 125), reflecting the group’s generally defensive approach to Asian and emerging market investing.

The product with the highest FE Risk Score, however, is Matthews Asia China fund at 197. Managed by Andrew Mattock with Henry Zhang and Winnie Chwang, the fund is overweight Chinese mid- and small-caps, which helps to explain its higher volatility.

FE Risk Score of funds over 3yrs

 

Source: FE Analytics

IA Japanese Smaller Companies has the next highest average FE Risk Score at 143 (with Invesco Perpetual Japanese Smaller Companies being the highest at 174) followed by IA Technology & Telecommunications at 139 (where AXA Framlington Global Technology scored 159).

On an individual fund level, portfolio that focus on commodities have the highest FE Risk Scores.

HC Charteris Gold & Precious Metals tops the table after racking up a risk score of 277, followed by MFM Junior Gold (275), MFM Junior Oils Trust (269) and Investec Global Gold (238).

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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.