As always, it’s very difficult to predict what way the markets will turn next, but given the valuations on offer, finding funds that have a proven record of protecting against the downside – whilst also delivering competitive returns on the way up – is a big priority for many investors.
Here, we highlight two funds that possibly tick these boxes in the popular IMA UK All Companies sector:
JOHCM UK Opportunities
Ben Willis, head of research at Whitechurch, says there are surprisingly few UK growth funds that excel in both rising and falling markets given the size of the sector. At last count, IMA UK All Companies has 273 constituents.
He says that most funds are defined as either aggressive or defensive, but says that one has characteristics that help it perform well in various market conditions.
“John Wood who heads up JOHCM UK Opportunities springs to mind,” said Willis. “He is very active with his cash which serves him well in the bad times, and he also has a big focus on quality. He invests in themes and has a very long-term outlook with a low turnover.”
“He’s a value manager, though ultimately it’s about buying quality names at good prices. He has a lot of conviction investing in only 30 or 40 names.”
“He tends to hold up very well when the market falls but his stock picking has been so good that he participates in a rising market as well. It’s a good structure.”
“He invests in large caps but also mid-caps, which helps in the good times,” he added.
Willis says the fact Wood has had plenty of cash during market sell-offs has enabled him to snap up cheap stocks very easily, helping the fund to catch the rebound. This was the case in both 2008 and 2011.
Year-on-year performance of fund, sector and index
Source: FE Analytics
FE data shows that JOHCM UK Opps was a top quartile in both down years, losing more than 10 percentages less than its FTSE All Share benchmark in 2008. The fund has also outperformed in the up years of 2006, 2007 and 2013.
While Wood failed to keep up with the market in 2009, 2010 and 2012, he made double digit returns on all occasions.
Unsurprisingly, the fund’s strong numbers have seen it outperform both its sector average and benchmark since its launch in November 2005, with returns of 112.1 per cent.
Performance of fund, sector and index since launch
Source: FE Analytics
Wood currently has 19.37 per cent in cash, reflecting what he perceives to be a severe lack of value opportunities in the UK market. His top-10 is dominated by established large cap names such as Shell, Glaxo and BAT, though he does have significant exposure to smaller companies like Sage and Smiths Group.
His mid-cap exposure has come down significantly over the past year or so, again reflecting where the manager sees value.
Unicorn Outstanding British Companies
Unicorn is best known for John McClure’s very popular UK Income fund, which is consistently a top-quartile performer in its IMA UK Equity Income sector.
There is, however, another top-performing portfolio run by the firm in the shape of Unicorn Outstanding British Companies. Co-managed by FE Alpha Managers McClure and Chris Hutchinson, the fund is consistently one of the least volatile funds in its entire sector, and also a top-performer. FE data shows that the fund has outperformed its sector and benchmark in each of the last six calendar years, which includes a whole host of different market conditions. Standout years include 2008 when the fund lost even less than JOHCM UK Opps, and 2010 when it made more than 38 per cent.
Hutchinson and McClure (pictured) are head and shoulders ahead of their peers since the fund’s launch in December 2006, with returns of 125.34 per cent.
Performance of fund, sector and index since launch
Source: FE Analytics
Like Wood, the managers have a strong emphasis on quality, investing only in market leaders with high barriers to entry. Such companies are expected to underperform during fast rising markets, but McClure and Hutchinson’s expertise in small and mid-caps allowed it to thrive in years such as 2009 and 2012.
Unicorn Outstanding British Companies is very much a multi-cap fund. Top-10 positions include FTSE 100 giant Rolls Royce, FTSE 250 funeral home specialist Dignity, and FTSE AIM-listed patent experts Murgitroyd Group.
It currently has just £25m under management.