With the tapering of quantitative easing and a likely rate rise by central banks around the corner, and the outcome of the Scottish referendum and general election anyone’s guess, it’s more difficult than ever to predict what way the UK market will go from here.
Geopolitical events also continue to be a theme knocking sentiment back, with crises in Iraq, Syria and the Ukraine pushing up oil and energy prices. Throw in an all-time high for the S&P and a close to all-time high for the FTSE, and it is of little surprise that investors are getting nervous.
The possibility of a market correction has been on fund managers' minds in recent weeks and months, including bears such as Troy’s Sebastian Lyon and Ruffer’s Steve Russell (pictured), and more recently Russell Investments’ multi-asset team insisting that a sizeable pull-back is a matter of when – not if. With this in mind, FE Trustnet is kicking off a series looking at which fund groups are the strongest at meeting certain objectives by highlighting those that are best at protecting investors’ capital.
Ben Willis, head of research at Whitechurch Securities, identifies Ruffer as a firm that is defined by its emphasis on downside protection.
“It is part of their ethos, especially as they run a lot of charity and family money where capital preservation is key,” he said.
“Their primary objective is to protect capital and then make incremental growth over time.”
FE analysis supports Willis’s view. According to FE Analytics, all but one of Ruffer’s seven funds are top-quartile performers among their respective peer groups for standard measures of downside protection over the market cycle – in this case, a seven-year period. This timeframe includes the 2007-8 market crash and the 2011 eurozone sell-off.
As well as maximum drawdown, which measures how much you would have lost if you bought and sold at the worst possible times, we also looked at annualised volatility and downside risk.
CF Ruffer Equity & General, CF Ruffer European, CF Ruffer Total Return and CF Ruffer Absolute Return all had top-quartile scores for the three metrics in their respective sectors.
The two other Ruffer funds – CF Ruffer Baker Steel Gold and CF Ruffer Pacific – are both in IMA Specialist and therefore sector comparisons aren’t really fair. However, the Pacific fund has easily beaten the MSCI Pacific including Japan index for the three metrics over seven years, as well as the average IMA Asia Pacific including Japan portfolio.
Source: FE Analytics
Investors looking for funds that protect their capital tend to look at the Mixed Investment and Absolute Return sectors – areas where Ruffer particularly excels. The group's stellar track record earned it an "Outstanding" rating in alternative investments in the latest rebalancing of FE's Group Awards.
CF Ruffer Total Return, for example, managed to deliver positive returns of almost 21 per cent in the disaster year of 2008, while the average fund in the IMA Mixed Investment 20-60% sector lost 15.84 per cent.
Manager Steve Russell’s emphasis on the downside has meant the fund underperformed in fast rising years such as 2009 and 2013, but his ability to make money when others around him are making big losses has seen him significantly outperform over the market cycle.
Performance of fund, sector and benchmark over 7yrs
Source: FE Analytics
Total Return uses a composite benchmark, split 50/50 between the FTSE All Share and FTSE British Government All Stocks indices.
While Ruffer has great strength in depth, certain groups stand out in more specific areas. Here is a selection of those that have excelled when it comes to protecting your cash.
UK equities
Across the IMA UK All Companies and UK Equity Income sectors, five Invesco Perpetual funds have outperformed across the three capital protection metrics over seven years – more than any other group.
FE Alpha Manager Mark Barnett’s Invesco Perpetual Income, High Income and UK Strategic Income funds, as well as Martin Walker’s Invesco Perpetual Childrens fund, are top quartile for max drawdown, volatility and downside risk over seven years. Invesco Perpetual UK Aggressive is second quartile across the measures.
Invesco has built its reputation and track record on investing in quality companies with strong and sustainable dividends. Even those in the UK All Companies sector have a quality bias, which has helped them protect against the downside in market sell-offs.
Once again, it was 2008 that proved very positive for the group on a relative basis. Invesco Perpetual Income, High Income and UK Strategic Income lost less than 20 per cent, while the sector average lost 28.54 per cent.
In 2011, all of these made money, with High Income leading the way with 8.99 per cent. IMA UK Equity Income lost 2.9 per cent over the same period.
Dividend growth is at the forefront of Barnett’s process, as it helps to deliver strong total return from both a capital and an income point of view. Being able to consistently raise dividends is a sign of health, and a rising share price tends to be a natural result of it.
Invesco funds tend to lag their peers in sharply rising markets as quality companies tend to be left behind, but over the longer-term they boast very strong absolute and relative returns.
Performance of funds and sector over 7 years
Source: FE Analytics
Commenting on the Invesco Perpetual Income fund, FE Research analyst Charles Younes said: “The key word for this fund is consistency. The fund’s success gives the manager sufficient confidence to maintain his strategy and investors should stick with it even during short periods of underwhelming performance.”
Invesco Perpetual was the only firm that was awarded an “Outstanding” rating in UK equities in the latest FE Group Awards.
It is worth pointing out that the man who established Invesco’s process – Neil Woodford – left the firm in March of this year, recently launching the CF Woodford Equity Income fund as a direct competitor to Invesco Perpetual High Income & co.
Barnett worked with Woodford for almost 20 years, however, and is rated as one of the best investors in the UK stockmarket. Time will tell whether he is able to replicate Woodford’s success, though a number of experts have recently rallied around the under-pressure manager.
Emerging markets
First State has shown a similar level of consistency to Invesco in the capital protection stakes in the IMA Global Emerging Markets and Asia Pacific ex Japan sectors.
According to FE data, First State Global Emerging Markets and Global Emerging Markets Leaders have the two lowest max drawdowns – 37.76 and 35.36 per cent – of any funds in the IMA Global Emerging Market sector. The sector average has a drawdown of 49.01 per cent.
The same is also true of volatility and downside risk, making the team of Jonathan Asante and Tom Prew the undisputed winners. The funds are also among the three best performers in the sector over the seven-year period.
Performance of funds and sector over 7yrs
Source: FE Analytics
First State Global Emerging Market Leaders doesn’t yet have a seven year track record, but since its launch in 2009 is top-quartile across the three capital protection measures, and is also vastly outperforming from a total return point of view. It has returned 125.17 per cent, compared to the sector’s 66.66 per cent.
Unfortunately the success of these funds has led all three to close to new money, but investors can still get access to FE Alpha Manager Angus Tulloch’s First State Asia Pacific Leaders portfolio.
Along with the now soft-closed First State Asia Pacific and First State Asia Pacific Sustainability funds, it boasts top quartile returns for max drawdown, volatility and downside risk over seven years, and are also top quartile performers from a total return perspective.
Like Invesco, First State target quality companies with a strong competitive advantage over their peers, and strong balance sheets to match.
Speaking in reference to the Asia Pacific Leaders, Younes said:
“Idea production is central, but Tulloch have adopted a cautious approach, which differentiates them from their peers who see the Asian market as the next Eldorado. They remain flexible, however, and will be able to adapt should conditions change.”
First State is the only group rated as “Outstanding” in emerging markets by FE.
