Despite the growing demand for equities that has followed rising stockmarket indices, investors are still keen for the diversification benefits on offer from mixed-asset funds.
One of the key selling points of these funds is their ability to protect against falling markets through allocating assets to bonds, taking away from the investor the responsibility for calling the market.
This makes it particularly relevant to look at how the funds perform in poor markets; and, after a year of steadily rising equity markets, it may be time to start thinking about how to protect your gains in the inevitable correction.
One way of gauging the risk on an investment is through volatility, which is a measure of the standard deviation of the returns.
However, this does not take into account whether the returns were positive or negative: a fund that has a tendency to make big gains in rising markets and small losses in falling ones could have a high volatility on this score and be classed as risky.
Downside risk allows us to isolate "downward" volatility and find those funds that tend to move less in negative periods than their peers.
The Sortino measure allows us to quantify the risk-adjusted returns achieved in down-periods, and is calculated in the same way as the Sharpe ratio.
Last week, FE Trustnet looked at UK Equity funds, which have leapt to the top of the sales charts once again, and found some interesting discrepancies between the ratios.
Funds in the IMA Mixed Investment 20%-60% Shares sector are in general less volatile than those in equity sectors as they hold less volatile assets, largely bonds and cash.
Our data shows there is less divergence between downside risk and volatility than in equity-only sectors, but there are some interesting disparities.
CF Ruffer Total Return is the best-performing fund according to both the Sortino and Sharpe ratios, although our data shows the fund actually does better in falling markets.
The £2.9bn portfolio, which is run by FE Alpha Managers David Ballance and Steve Russell, has a Sortino score of 1.1 over the past five years compared with a Sharpe ratio of 1.08.
It is in terms of downside risk that it has performed better, with a 7.49 per cent score compared with a volatility of 7.67 per cent.
The portfolio has made 70.89 per cent over the past five years while its custom benchmark – which consists of 50 per cent in the FTSE All Share and 50 per cent in the FTSE British Government All Stocks index – has made 39.54 per cent.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Performance has been strong in recent months thanks to the fund’s large position in Japan, which was built up prior to the recent rally.
This fund’s reputation was built on strong performance in 2008, when it made 20.86 per cent while investors in UK equities, measured by the FTSE All Share, lost 29.93 per cent.
Another fund to do particularly well in 2008 was the £42.4m CF Cautela portfolio, which made 2.23 per cent, making it one of only four funds to produce positive returns in that time.
The fund was launched by Whitefoord in 2006 to be "extremely cautious" and our figures show it has been just that.
It is run by a four-man investment strategy committee, tracking the balanced private client portfolios they run.
The fund has the second-highest Sortino ratio in the sector, of 0.62, and the third-highest Sharpe, also at 0.62.
The fund aims to beat the Bank of England base rate plus 2 per cent, and our data shows it has done that comfortably, returning 47.72 per cent over the past five years.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Unfortunately, it is available on few platforms, which may be why it has failed to grow to a large size.
In general it has been harder to score higher on Sortino in the sector than Sharpe, with the average Sortino of the top-10 funds being 0.534 and the average Sharpe ratio 0.592.
There is also less disparity between the ranking of funds according to each ratio than there is in the UK equity funds we looked at last week.
Sortino and Sharpe ratios over 5yrs: IMA Mixed Investment 20%-60% Shares
| Name | Sharpe | Rank | Sortino | Rank |
|---|---|---|---|---|
| CF Ruffer Total Return | 1.08 | 1 | 1.1 | 1 |
| CF Cautela | 0.62 | 3 | 0.62 | 2 |
| Scot Wid Managed Income Portfolio | 0.64 | 2 | 0.56 | 3 |
| Newton Managed Income | 0.56 | 4 | 0.49 | 4 |
| Jupiter Merlin Income | 0.53 | 6 | 0.48 | 5 |
| Invesco Perp Distribution | 0.55 | 5 | 0.44 | 6 |
| Investec Cautious Managed | 0.47 | 10 | 0.43 | 7 |
| Scot Wid Momentum Income Portfolio | 0.5 | 7 | 0.42 | 8 |
| Kames Ethical Cautious Managed | 0.48 | 9 | 0.4 | 9 |
| Aviva Inv Distribution | 0.49 | 8 | 0.4 | 10 |
Source: FE Analytics
One fund stands out as being particularly good in risk-adjusted terms on the downside: Alastair Mundy’s Investec Cautious Managed.
The £2.6bn fund is ranked 10th in terms of Sharpe, but seventh in terms of Sortino, showing that Mundy’s decisions have been more successful on the downside.
The fund has the third-best returns over five years in the sector, having made 51.32 per cent while its custom benchmark – which is equally split between the FTSE All Share and the Merril Lynch GBP Broad Market Index – has made 40.21 per cent.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
When it comes to downside risk, some of the best-known funds in the sector stand out as protecting better against the downside.
The £4.7bn Jupiter Merlin Income fund is 34th in terms of downside risk, but just 52nd in terms of volatility, suggesting that the volatility score does not do justice to its low-risk style.
Trevor Greetham’s £718m Fidelity Multi Asset Strategic fund is another to do noticeably better on the downside. The fund is 31st in terms of downside risk but just 43rd in terms of volatility.
The £1bn Threadneedle Equity & Bond fund, run by Alex Lyle and Mark Burgess, is just 59th in terms of volatility, putting it in the lower half of the sector, but is 39th in terms of downside risk, in the upper half.
In the next article in the series, FE Trustnet will be looking at the volatile IMA UK Smaller Companies sector, where funds that protect against the downside have a strong record of outperformance.
