These high risk strategies have proven to offer the best returns over the past five years but will they do so again and are they worth the risk?
Patrick Connolly of Chase de Vere says that investors should avoid these outlier top performing funds as they are likely to see outlier underperformance.
“We actually look at really strong performance in fund as a warning sign more than indication to buy,” he said.
“It’s important to look at performance but it’s also important to look at consistency of performance over time and the level of risk the fund has taken to get where it is.”
He says funds that tend to be stand out performers can also often be standout worst performers.
“This is because they tend to be those with the highest degrees of volatility.”
“They might produce outperformance and have stellar periods but if the best go wrong you can end up near the bottom of the tables.”
“They tend to be those either in specialist areas or where the fund manager has taken the highest degree of risk and either it’s worked and they’re at the top of the tables or it hasn’t worked and they’re at the bottom of the tables.”
Here we look at those funds to have beaten their sector rivals over five years but at the cost of much more volatility.
Invesco Perpetual European Opportunities
The £107.9m fund, managed by Adrian Bignell, has returned 235.17 over five years, more than double the performance of its sector and benchmark. The IMA Europe ex UK returned just 96.26 per cent and the MSCI Europe ex UK rose 86.02 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
However, the fund also has the highest recorded annualised volatility over the same period, according to our data making it more risky.
Over three years the fund’s performance is a respectable but less noteworthy 36.09 per cent.
However, this period encompasses the 2011 Eurozone crisis where equity markets where severely all funds during which the fund lost 16.87 per cent and dropped to the third quartile for the year’s performance.
Connolly says the fund has a highly risky strategy and is too concentrated
He prefers more diversified funds such JPM UK Dynamic and Henderson European Growth.
Legg Mason Japan Equity
This £247m fund, managed by Hideo Shiozumi, has also seen massive outperformance over five years. It has returned 182.8 per cent compared to a sector average of 41.05 per cent and a rise in the Topix of 37.82 per cent over the same period.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
However, the fund also has recorded the highest annualised volatility of any fund in the sector and almost twice that of the IMA Japan sector average and Topix average over the same period.
“If you’re going back over time this fund tends to be at the top or the bottom of the tables,” Connolly said.
“So, you take your chances and you might get some stellar performance or some bad performance. We’re looking for funds that are more consistent.”
MFM Techinvest Technology
This £47.3m specialist tech fund has returned 289.47 per cent over five years, the top performance in its sector alongside the highest annualised volatility, over the same period.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Connolly says he avoids specialist funds altogether as they often carry the risk of the sector going out of favour.
The risk is that either the specialist area of the market the fund is or the bets taken by the fund manager don’t come off, Connolly says.
“Funds where there is allot of outperformance in specialist areas of the market or the fund manager has taken bets and at any given time that might be the approach that works to put you into the bottom or the top.”
“We prefer to get technology exposure through broad based funds that can absorb some of the volatility risk.”
Baring ASEAN Frontiers
The $515.5m fund is the second best performing fund over five years behind Aberdeen Global Asian Smaller Companies.
Performance of fund vs sector and benchmark over five years
Source: FE Analytics
The Baring ASEAN Frontiers fund’s volatility has meant it tend to underperform when markets fall, shown by its three year performance where it failed to beat its index.
It is also investing in a specific region which had a strong run in recent years and became overvalued in many managers’ eyes, meaning it will be hard for it to repeat this success.
Connolly says he avoids frontier market funds for Asian exposure, preferring broad based funds whereby the manager might have some limited exposure.
Standard Life UK Equity Income Unconstrained
This £463.4m fund has been the third best per former in its sector over five years returning 179.38 per cent, compared to a sector average of 116.79 per cent, over the same period.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
However, it also recorded the highest annualised volatility over the same period.
Connolly says this fund is the exception to his rule which he does recommend to investors with established and diversified portfolio but days he doesn’t think it works well as a core fund due high volatility.
