The £7bn fund has returned 14.83 per cent in 2014 – a figure beaten by only four Asia funds. Two of these are also run by First State’s Asia team, which Tulloch heads up.The FE Alpha Manager joins a raft of typically cautious investment managers who are topping the tables so far this year, following underperformance in 2013, and in many cases 2012 as well.
Sebastian Lyon’s Trojan fund endured a miserable 2013, losing money over a calendar year for the first time in more than a decade, and also delivered bottom-quartile performance the year before.
John Wood’s JOHCM UK Opps and Bruce Stout’s Aberdeen World Equity funds also suffered underperformance in 2012 and 2013, while Hugh Young’s Aberdeen Emerging Markets Equity and Andy Headley’s Veritas Global Equity Income funds struggled badly last year.
However, all of the funds mentioned above, which have a defined emphasis on protecting against the downside, have delivered top-quartile returns in their sectors this year.
Source: FE Analytics
The last two calendar years were defined by fast rising markets for developed market equities, with economically sensitive stocks – many of questionable quality – leading the way.
Such an environment didn’t suit the likes of Lyon, Wood and Stout, who all have serious concerns over valuations in developed markets, and prefer quality companies with strong balance sheets and predictable earnings.
Wood and Lyon have held high levels of cash to protect against the risks, weighing even more heavily on their performance.
However, poorer-than-expected economic data, a raft of earnings downgrades, geopolitical unrest and more generally a concern over valuations have seen more cyclical areas of developed markets stutter this year.
Quality large cap companies have picked up the slack, while typically “safe” investments such as gilts and gold have buoyed the performance of Lyon’s multi-asset Trojan fund.
Performance of funds vs sectors over 1yr
Source: FE Analytics
The scene has been slightly different in emerging markets, which more generally struggled in 2012 and 2013.
Tulloch and Young, who usually prosper in difficult periods, were caught up in the sell-off that swept across the asset class last year, though a renewed appetite for defensive stocks has helped them outperform so far in 2014.
Performance of fund and sector over 1yr
Source: FE Analytics
Although they performed generally in line with their sector last year, other typically bearish funds that have prospered this year include Mark Barnett’s Invesco Perpetual Income fund, Neil Woodford’s SJP UK High Income fund and Francis Brooke’s Trojan Income fund.
It is not the first time funds such as these have come into their own after a year or two of relative underperformance.
The rebound after the financial crisis resulted in below-par returns in both 2009 and 2010 for Trojan, JOHCM UK Opps, Invesco Perpetual Income and Aberdeen World Equity.
However, all four delivered top-quartile returns in the down year of 2011, defined by a euro crisis-led summer sell-off.
Although these funds tend to underperform during rising markets, they are all top-quartile performers over the longer term.
Performance of funds and sectors over 10yrs
Source: FE Analytics
Rob Morgan, investment and pensions analyst at Charles Stanley Direct, says that the managers mentioned here have more in common than just being defensive.
The likes of Tulloch, Young, Lyon and Wood are all ultra long-term in their approach and as a result have a very low turnover in their portfolios. This can lead their funds to go through significant periods of underperformance, but over the long-term their patience has been rewarded.
“If you take Aberdeen as an example, investors were moving away from consumer staple stocks last year, which had a negative impact on performance,” he said.
“They were deemed to be 'expensive defensives,' but this year the trend has reversed. It just goes to show why you shouldn’t look at one or even three-year periods – you should be looking at the entire market cycle, and Aberdeen has been very successful investing in this way.”
“Young has a very low turnover. He is not trying to time the market, but identifies long-term champions and sticks with them through thick and thin. He’s not a trader.”
Young explained this in more detail in an interview with FE Trustnet earlier this year.
Such funds, Morgan says, are very strong core options for investors’ portfolios – not least because they tend to protect them against the downside when they need them most.
In an article last year, I explained why I prefer holding defensive funds in my own portfolio, as they don’t fall as far in down markets, but still tend to deliver decent returns when markets rise. Wood’s JOHCM UK Opps fund, for example, made almost 11 per cent in 2012 and 22.19 per cent in 2013, even though it was fourth and third quartile, respectively.
Morgan says it is perhaps better to blend core defensive holdings with higher-turnover funds which attempt to take advantage of valuation anomalies.
“The Henderson Asian Dividend Income fund has a turnover of 200 per cent according to one note I read recently, which is very high,” he said.
“You’ve got someone like Julie Dean as well, who is trying to outperform in different environments. This isn’t the way Hugh Young and co do things.”
Whitechurch’s Ben Willis came to a similar conclusion in light of a recent FE Trustnet study looking at the relationship between consistency and long-term cumulative outperformance.
