That being said, it is still important to analyse and highlight the times when managers do fall further than the market so that the underlying investor fully understands the type of outperforming fund they are buying.
In this article, we look at a selection of five funds across the various IMA sectors that have comfortably outperformed over a full market cycle – in this case seven years to incorporate the crises of 2007 and 2008 – but have done so with a very high maximum drawdown; a ratio which measures how much an investor would lose if they bought and sold at the worst possible time.
PFS Chelverton UK Equity Income
One of the top-performing, but highly volatile, funds in the IMA UK Equity Income sector is the £336m PFS Chelverton UK Equity Income fund which is co-managed by David Taylor and David Horner.
The five crown-rated fund is a multi-cap income portfolio and its bias towards smaller companies goes a long way to explain its return profile.
According to FE Analytics, it has returned 61.31 per cent over seven years, beating its FTSE All Share benchmark by 13 percentage points.
However, its maximum drawdown over that time has been -56.96 per cent.
Performance of fund vs sector and index over 7yrs
Source: FE Analytics
The fund has been hit hard during falling markets, losing 17.22 per cent in 2007, 43.68 per cent in 2008 and 7.04 per cent in 2011.
However, it has made the most of rising markets as our data shows it returned at least 29 per cent in 2009, 2010, 2012 and 2013.
Over five years, and therefore removing the downturn from the figures, it has been the sector’s second best performing portfolio with returns of 157.95 per cent.
PFS Chelverton UK Equity Income has struggled in this year’s flat market, but it currently has an above average yield of 4.01 per cent.
The fund’s ongoing charges figure (OCF) is 1.06 per cent.
Standard Life UK Equity Unconstrained
Sticking in the UK equity space, Ed Legget’s Standard Life UK Equity Unconstrained fund has grown in popularity over recent years due to its strong track record and the manager’s flexible approach.
Legget (pictured) has a value-orientated strategy and will tend to invest in unloved areas of the market as a result.It means the £1.2bn fund has rallied strongly when markets have spiked; turning in top decile returns in 2009, 2010, 2012 and 2013.
However, because of its style, the fund fallen much further than most when markets have turned “risk-off”.
Over seven years, the Standard Life UK Equity Unconstrained has returned 158.22 per cent, which is more than three times the return of the IMA UK All Companies sector average.
However, its maximum drawdown over that time is just shy of -60 per cent.
The manager says, however, that the future return profile of the fund is likely to be different than it has been in the past.
Legget told FE Trustnet that he had been moving away from cyclical domestic stocks and was upping his exposure to mega-cap multinationals on valuation grounds.
The end result, he says, is that the current portfolio should hold up better in a falling market. Its OCF is 1.15 per cent.
Old Mutual Global Equity
Ian Heslop, Amadeo Alentorn and Mike Servent’s five crown-rated Old Mutual Global Equity fund has been one of the leading lights in the IMA Global sector recently, delivering top decile returns of over, three and five year periods.
It is has also comfortably outperformed over seven years with returns of 69.48 per cent, beating its benchmark – the MSCI World index – by around 10 percentage points.
The fund has had a maximum drawdown of -45 per cent over that time, though – unlike the PFS Chelverton and Standard Life funds – the reason for that isn’t because of its losses in 2008, but its bottom quartile returns in the rebound year of 2009.
Performance of fund vs sector and index in 2009
Source: FE Analytics
Heslop, Alentorn and Servent take a different approach to the large majority of their peers because instead of having either a value or growth bias in their funds, the managers attempt to create a more blended portfolio of stocks that can perform in any given market environment.
This style has worked recently, as the fund delivered top quartile returns and beat its benchmark in 2010, 2011, 2012 and 2013.
It is also top quartile in 2014. Its OCF is 1.24 per cent.
Consistent Practical
FE Alpha Manager Sean Ashfield’s five crown-rated Consistent Practical fund is one of very few funds of investment trusts available to investors.
The structure of closed-ended funds does help them to outperform their open-ended rivals in rising markets and, although Ashfield’s portfolio positioning will have been the major driving force, the managers preference for trusts will have helped Consistent Practical to be the top performing fund in the IMA Mixed Investment 40%-85% sector over five years with returns of 95.78 per cent.
However, as investors in trusts can have to deal with the unfortunate combination of a falling NAV and a widening discount during a sell-off, closed-ended funds tend to underperform during falling markets.
While the £66.7m Consistent Practical fund has been top quartile over seven years, its bottom decile losses of 30 per cent in 2008 means the fund has the eighth worst maximum drawdown in the sector over the period.
Ashfield currently counts the likes of The London & St Lawrence Investment Company, Aberforth Geared Income Trust and Temple Bar Investment Trust as top 10 holdings.
The fund of trusts has a yield of 3.19 per cent and its OCF is 1.1 per cent.
Royal London Sterling Extra Yield Bond High Yield
Bonds have had a phenomenal run over recent years and Eric Holt’s five crown-rated Royal London Sterling Extra Yield Bond fund is one portfolio which has taken full advantage of the rally.
Though the fund sits in the IMA Sterling Strategic Bond sector, Holt’s £1bn fund will only tend to invest in lower rated credit.
The fund has been the best performing fund in the sector over five years with returns of 115.58 per cent, beating the sector average by more than 70 percentage points.
However, lower rated credit is usually more volatile than investment grade and therefore it isn’t too surprising to see that Royal London Sterling Extra Yield Bond was the second worst performing fund in 2008 with losses of more than 30 per cent.
Performance of fund vs sector over 7yrs
Source: FE Analytics
It means that, though Holt’s fund has been top quartile over seven years with returns of 52.99 per cent, its maximum drawdown has been more than double that of the sector average over the period.
The Irish-domiciled fund has a decent yield of 6.82 per cent, but Holt currently holds 40 per cent in BB or lower rated bonds and 40 per cent in unrated credit. Its OCF is 0.85 per cent.
