Concerns over valuations, the nervousness over inevitable interest rate rises, and geopolitical risks in Ukraine, Iraq and beyond have made investors increasingly nervous.
Whilst past performance is by no means a guide to the future, there are tried-and-tested ways to protect against the downside, and a number of managers have a proven ability of weathering the storm much better than their rivals.
Here, with the help of research from Bestinvest, we look at fund managers with a proven track record of beating their peers in months when their benchmarks fall – starting with the UK Equity Income and UK All Companies sectors.
All of the funds in the top-10 have a focus on dividend paying companies, which tend to hold up better during times of stress.
However, not all sit in the IMA UK Equity Income sector.
At the top of the pile is FE Alpha Manager Mark Barnett, who runs the Invesco Perpetual Income, High Income and UK Strategic Income funds.
Barnett has outperformed in more than three quarters of months when markets have fallen over the last 10 years.
Source: Bestinvest (June 2004 to June 2014)
Barnett only recently took over the Income and High Income funds from the departing Neil Woodford, meaning that his defensive credentials stem from the manager’s UK Strategic Income fund, which he has run since 2006.
His fund has long had a bias towards mega caps, particularly value companies that have a reliable track record of paying out dividends.
Income helps to stabilise falling share prices, and the characteristics of the companies he likes – strong balance sheets, visible earnings and good cash flows – further helps to protect against the downside.
The five crown-rated Invesco Perpetual Strategic Income fund has returned 72.14 per cent over the past seven years; a period that that includes two severe market downturns.
By comparison the IMA UK All Companies sector average has returned 32.17 per cent, while the FTSE All Share has made 34.36 per cent.
Performance of fund, sector and index over 7yrs
Source: FE Analytics
Barnett has held his own in rising markets, but it’s been during falling and flat markets that he’s come into his own.
In 2008, for example, the Strategic fund lost 19.91 per cent, compared to more than 31 per cent from the All Share. In 2011 the manager made 3.28 per cent, while the index lost more than 7 per cent.
Barnett has long played second fiddle to former head of UK equities at Invesco Woodford (pictured), though he only made it to seventh on the list. Bestinvest’s research shows that he has outperformed in 71.6 per cent of down months for the FTSE over the past decade.Like Barnett, Woodford focuses on large caps paying out a high and sustainable level of dividends.
For a closer look at the manager’s newly launched CF Woodford Equity Income fund, click here.
The list of 10 includes six FE Alpha Managers, including Woodford and Barnett, which you might expect given that downside protection is key to the rating.
John Wood, who heads up the JOHCM UK Opportunities fund, is unsurprisingly high up on the list, coming second only to Barnett.
Again, this is a value manager who tends to favour large caps, and prioritises capital protection above all else.
Performance of fund, sector and index over 7yrs
Source: FE Analytics
Wood builds up cash when he believes there are a lack of value opportunities, which has helped him to protect against tumbling markets – as was the case in 2008 and 2011.
He currently has 19.38 per cent in cash, reflecting his cautious outlook for equities.
Though the £1.4bn UK Opps fund sits in the IMA UK All Companies sector, it has a competitive yield, currently at 2.85 per cent.
Elsewhere, there are some less familiar faces in the top-10.
The third best performer over the past decade with 74.7 per cent is Colin Morton, who manages the £146m Franklin UK Equity Income fund.
Whitechurch’s Gavin Haynes recently told FE Trustnet that Morton stands out as a manager who has a long term track record managing cautious, UK blue-chip stocks, which is very much supported by Bestinvest’s analysis.
Again, the fund significantly outperformed in the down years of 2008 and 2011, and is amongst the least volatile funds in IMA UK Equity Income.
However, it has outperformed its peers every year the FTSE has risen since 2004. Morton has been lead manager of Franklin UK Equity Income since 1995 but has been assisted by two FE Alpha Managers – Mark Hall and Ben Russon – since September last year.
The three also run the £22m Franklin Blue Chip, £93m Franklin UK Opportunities and £56m Franklin UK Managers’ Focus funds.
Bestinvest’s Jason Hollands says when markets are going down there are a number of reasons why managers might generate relative outperformance compared to their peers.
A focus on higher yielding companies is one of the primary drivers and is shared by most of the managers who have made the top 10 list.
“The ability of a company to generate a decent dividend is often a sign that the business is in rude financial health, with good cash flow. In tougher times higher yielding shares are seen as particularly attractive as the income provides some compensation for share price declines,” he said.
Value investing is also a key strategy to stay ahead of peers, Hollands says.
“A number of the managers identified have a strong emphasis on investing in companies they believe are undervalued and avoiding high growth businesses that they believe are expensive compared to current earnings levels. When markets go through bearish phases, it is often more speculative growth companies that are hit hardest.”
The big exception to the rule here is FE Alpha Manager Mark Slater, who tends to target mid-cap growth companies in his MFM Slater Growth portfolio.
However, while the manager tends to perform best during fast rising markets, he has managed to outperform in 68.3 per cent on down months over the past decade.
A willingness to allocate into cash might also prove to help during period of market weakness, Hollands says, with Wood the standout candidate.
“Some managers may be more adept at raising cash weightings in their funds when markets are going through down periods than others,” he said.
“These means they perform relatively better than fund managers who are fully invested.”
Carl Stick, who heads up the Rathbone Income fund, made the list despite having a disappointing 2008 by his own standards.
He says that having too much in cyclicals contributed to losses of over 34 per cent, but insists that he’s learnt his lesson and pays much more attention to the downside these days.
