While some commentators and managers did predict a bumpier ride this year, most investors have been taken by surprise by the sudden evaporation of confidence in equities, which has seen the FTSE All Share lose 2.11 per cent so far.
Performance of indices in 2014
Source: FE Analytics
Investors could be forgiven for thinking about taking some risk off the table, even if – or perhaps because – the direction from here isn’t yet obvious.
Some high-profile managers such as Alastair Mundy say the market is still overvalued and that investors should sit on the sidelines until things fall further.
Whether or not markets shuffle sideways, plummet further or rise again, the following funds have the best track records in their sector of protecting on the downside, giving investors more peace of mind.
One way of looking at how funds shield investors' cash is to examine how they did the last time markets experienced a sustained fall.
The All Share lost 18.17 per cent between 7 July 2011 and 4 October 2011, according to FE Analytics data, and ended the year down.
Performance of index in 2011
Source: FE Analytics
Our data shows that the five crown-rated Trojan Income fund, run by FE Alpha Manager Francis Brooke with Hugo Ure, protected investors best during this period, losing just 6.85 per cent.
The fund, which is now £1.45bn in size, has been a sluggish performer of late because the managers have refused to increase the risk in their funds during a rising market.
Brooke told FE Trustnet in a recent interview that he believes the market will fall even further later in the year, and he is keeping his powder dry until that point.
FE Alpha Manager Neil Woodford’s Invesco Perpetual High Income fund did almost as well during this period, losing 7.27 per cent. Invesco Perpetual Income lost 7.37 per cent.
Fidelity Enhanced Income, run by Michael Clark and David Jehan, lost just 7.33 per cent while Fidelity Moneybuilder Dividend, also Clark’s, fell 7.47 per cent.
Enhanced Income has the highest yield of those mentioned so far, at 4.96 per cent, while Moneybuilder Dividend pays out 4.1 per cent. Trojan Income yields 3.85 per cent and the Invesco funds 3.32 and 3.24 per cent respectively.
Source: FE Analytics
It is noticeable that the funds at the top of the list have a strong large cap bias, which is to be expected. Large cap companies are expected to be less volatile and hold up better when markets fall.
However, a different pattern emerges when looking at the funds that held up best in the market downturn of 2013.
Last spring then Federal Reserve chairman Ben Bernanke started to talk about tapering bond purchases, thereby bringing to an end the quantitative easing programme that had been supporting markets since the financial crash.
The result was a general sell-off in both equities and bonds, with emerging market stocks hurt the most.
The latter have continued to struggle as funds have been withdrawn from the developing world in favour of the “safer” markets in the West.
The FTSE lost 10.17 per cent in a month, according to our data, but it was the small and mid cap funds that held up the best.
The £519m Unicorn UK Income fund, which has five FE Crowns, lost just 1.67 per cent while CF Miton UK Multi Cap Income lost 2.57 per cent. Elite Webb Capital Smaller Companies Income & Growth lost 2.82 per cent.
A number of other multi or small cap funds also did well, according to our data.
Source: FE Analytics
The FTSE 100 as a whole did considerably worse than the small cap end of the market, with sectors such as the miners and the banks, strongly represented at the top of the index, doing particularly poorly.
The different results highlight that the causes of a market sell-off are relevant to deciding which funds are likely to perform well or badly.
The sell-off last year, driven by the tapering of QE and the poor performance of emerging markets, was relatively kind to funds that invested more in the domestic economy instead of those geared to global growth.
The financial sector was also a bad place to be thanks to the expected effects of tapering on money supply and the profitability of many companies in this area.
We can use ratios to try to judge how the funds in the sector perform overall in all market conditions, but they are no substitute for understanding the reasons behind a correction.
Our data shows that looking at downside risk – the volatility in down markets – Trojan comes top with a score of just 10.72 per cent. PFS Chelverton UK Equity Income scores 11.48 per cent and Unicorn UK Income scores 11.82 per cent.
The latter fund does not look too smart in terms of maximum drawdown, however: it is third quartile, with a maximum loss of 16.61 per cent if you had bought and sold at the worst possible moments.
Chelverton is also top quartile, while the best result is from Trojan Income. This does not change the fact that the latter fund was second quartile in the sell-off last year, losing 8.26 per cent, almost seven percentage points more than the Unicorn fund.
The Unicorn fund yields just 2.92 per cent while Chelverton UK Equity income yields 3.99 per cent.
FE Trustnet compared the merits of the two funds in a recent article.
