Finally: a pattern. So far in this FE Trustnet series looking into the best funds for risk-adjusted returns over the last decade there has been no real strong correlation backing up the adage that the higher the risk the bigger the reward.
It has not been for a want of trying. We have looked at the three UK sectors, as well as the IA Global sector. The same was even the case in the investment trust universe.
In each case it appeared there was a peak of volatility before returns started to fall back down again – if indeed there was any pattern at all.
However, when looking at the three mixed-asset sectors, the trend moves from bottom left – representing lower volatility and returns – to top right – higher risk/returns.
Risk-adjusted performance of funds and sectors over 10yrs
Source: FE Analytics
The three equity-weighted sectors – IA Mixed Investment 0-35% Shares, IA Mixed Investment 20-60% Shares and IA Mixed Investment 40-85% Shares – all follow the rule.
Below, we look in more detail at each sector and pick out some of the funds that have been the best for investors on a risk-adjusted basis.
IA Mixed Investment 0-35% Shares
Starting with the least equity-heavy sector, the fund with the highest Sharpe ratio – a common measure for risk-adjusted returns – is Fidelity Multi Asset Income.
Run by Eugene Philalithis and deputy Chris Forgan, the £775m fund aims to achieve an income yield of between 4 and 6 per cent a year, although this is not guaranteed. Currently it has a yield of 3.25 per cent.
The portfolio has 24.3 per cent invested in equities with the bulk of the portfolio held in bonds, although there are some property and infrastructure assets also.
It has been the top performer in the IA Mixed Investment 0-35% Shares sector over the last decade, returning 91.89 per cent.
Despite sitting in the fourth quintile for volatility (5.99 per cent), the strong returns mean it has the highest Sharpe ratio at 0.54.
Second for Sharpe ratio (0.52) is the five FE Crown-rated LF Prudential Dynamic Focused 0-30 Portfolio, which is also the second-best performer (81.81 per cent).
The fund-of-funds has been run by Philip Butler since 2016 and is two-thirds invested in bonds, 20 per cent in equities and 7 per cent in property.
At the other end of the spectrum, four funds – JPM Global Macro Balanced, FP New Horizon Cautious, VT Greystone Conservative Managed and FP New Horizon Income have a Sharpe ration of exactly 0.
All four have made less than 40 per cent over the past decade, although VT Greystone Conservative Managed is the only fund to not have done so on top quintile volatility.
Still, it goes to show that just because a fund has had low volatility it does not mean it scores well on risk-adjusted metrics if the returns have been sub-par.
IA Mixed Investment 20-60% Shares
Next up the risk scale is the IA Mixed Investment 20-60% Shares sector where the best performer has been the five FE Crown-rated Invesco European High Income fund.
It invests primarily in European bonds, which is headed up by Paul Causer and Paul Read, and equities – overseen by Stephanie Butcher – and has a yield of 3.36 per cent.
The income fund has returned 141.9 per cent over the last decade, but with the highest volatility in the sector it actually sits outside the top quintile for Sharpe ratio (0.48).
Instead, on a risk-adjusted basis the top performer has been the £3bn Quilter Investors Cirilium Balanced Portfolio fund headed up by FE Alpha Manager Paul Craig.
The third-best performer in the sector (having returned 129.61 per cent) has achieved this with top quintile volatility of 6.7 per cent, giving it an overall Sharpe ratio of 0.77.
The fund-of-funds is 43.11 per cent weighted to equities currently, with 43.96 per cent held in bonds and cash and 12.95 per cent in alternatives.
Risk-adjusted performance of funds and sector over 10yrs
Source: FE Analytics
Kames Ethical Cautious Managed and AXA Global Distribution were joint second with a Sharpe ratio of 0.59.
At the other end, Aberdeen Multi-Manager Diversity has the lowest Sharpe ratio of 0.17, having made the smallest returns (55.72 per cent) over the last decade. This is despite the fourth-lowest volatility.
Second with a score of 0.19 is Elite Income, which despite being more volatile (7.68) has also made slightly higher returns (62.19 per cent).
IA Mixed Investment 40-85% Shares
In the most equity-heavy sector the pattern disbands rather, as the below chart shows, although there is still somewhat of a tendency from bottom left to top right.
The best fund in the sector for risk-adjusted returns is another from the Quilter Investors Cirilium range - Moderate Portfolio.
The £2.8bn strategy has returned 177.77 per cent – the second-most in the sector, while experiencing volatility of 8.79 per cent, giving it a Sharpe ratio of 0.83.
Risk-adjusted performance of funds and sector over 10yrs
Source: FE Analytics
The top performing five FE Crown-rated Baillie Gifford Managed fund is second. Despite returning 200.79 per cent to investors it has been a little more volatile (11.15 per cent places it in the bottom quintile). Overall it has a Sharpe ratio of 0.73.
Managed by Iain McCombie and Steven Hay, the £3.4bn fund, which follows Baillie Gifford’s growth bias, is around 19 per cent weighted to bonds with the remained in equities.
MFM Hathaway is third for performance having returned 157.68 per cent over the past decade. However, the five FE Crown-rated portfolio has a Sharpe ratio of 0.59 – joint seventh in the sector – as it has higher than average volatility.
FE Alpha Manager Robin Hepworth and co-managers David Katimbo Mugwanya and Thomas Fitzgerald’s EdenTree Higher Income is the third-best fund for risk-adjusted returns just behind Baillie Gifford at 0.72.
Sitting at the bottom of the top quintile for returns (140.02 per cent), it has been among the least volatile in the sector (7.88 per cent).
At the other end, FP New Horizon Growth is at the bottom with a Sharpe ratio of 0.15 as it has been the lowest returner in the sector 63.64) with third quintile volatility (10.4 per cent).
Despite top quintile volatility, HC Kleinwort Hambros Multi Asset Balanced also finds itself in the bottom three (0.25) having returned 69.43 per cent to investors.