Investors should never buy an equity fund with a one-month time horizon; however, most will want a portfolio that will gradually grow their capital over time without exposing them to too much volatility.
In a recent FE Trustnet article, we looked at the absolute return funds that had delivered the highest amount of positive monthly periods over recent years and some portfolios in the sector had proven their ability to protect their investors’ capital.
However, while equities are by far one of the riskiest asset classes available to retail investors, data from FE Analytics shows several UK managers have consistently grown their unit holders’ wealth.
Source: FE Analytics
As the table above shows, the £650m Unicorn UK Income fund has been the standout performer in terms of its consistency.
The fact that it has made a positive return in 47 out of the last 60 months is even more impressive when you consider that it primarily invests in mid and small-caps, which are perceived to be far more risky than larger companies.
The majority of its down months, seven in total, came between May 2011 and June 2012. However, after that, it posted positive returns in the next 21 months.
That consistency translates into strong outperformance on a cumulative basis. According to FE Analytics, it has been the sector’s best performing portfolio over five years with returns of 142.93 per cent, beating its benchmark – the FTSE All Share – by more than 80 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Despite its consistency it has been third quartile for its maximum drawdown, which measures how much an investor would lose if they bought and sold at the worst possible time, over the period. That’s because when it has lost money, the fund has tended to fall a big way.
The best example of this was in August 2011, when Unicorn UK Income lost 8.22 per cent, meaning it underperformed against both the sector and index.
Questions have to be asked whether the fund will be able to repeat its outperformance over the next five years, as the period after the financial crisis has been categorised by almost unprecedented outperformance by smaller companies relative to their larger counterparts.
John McClure, the FE Alpha Manager who launched the fund, died earlier this year.
While the current co-managers Simon Moon and Fraser Mackersie have the backing of a number of industry experts, most agree that it will be difficult for them to replicate McClure’s stellar returns.
Other genuine multi-cap income funds to feature on the list of consistent performers are the five crown-rated PFS Chelverton UK Equity Income fund, which is co-run by David Taylor and David Horner, and FE Alpha Manager James Henderson’s Henderson UK Equity Income & Growth fund.
The Chelverton fund has made money in 42 out of the last 60 months and the Henderson offering has done so in 41.
Henderson’s fund no-longer sits in the UK equity income sector, but as it only moved across last year, it was included in the study.
FE Alpha Manager Mark Barnett’s Invesco Perpetual UK Strategic Income fund also switched across to the IMA UK All Companies sector recently, but it features on the list due to the fact that it made positive returns in all but 19 of the last 60 months.
Barnett does tend to hold mega-caps in his top 10, but his relatively high weighting to the FTSE 250 will have contributed to that return profile.
Like the Unicorn fund, Chelverton UK Equity Income, Henderson UK Equity Income & Growth and Invesco Perpetual UK Strategic Income have all comfortably outperformed the IMA UK Equity Income sector and the FTSE All Share over the last five years.
Performance of funds vs sector and index over 5yrs
Source: FE Analytics
The study showed, however, that consistency doesn’t always translate into long-term outperformance.
George Luckraft’s AXA Framlington UK Equity Income fund, for example, has been the second most consistent portfolio in the sector over the last five years as it has lost money in just 17 of the last 60 monthly periods.
However, over five years it has returned 59.58 per cent, meaning it ranks 45 out of 75 in the sector over that time. It has also underperformed against its benchmark by close to 10 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Luckraft’s AXA Framlington UK Monthly Income fund has fared better from cumulative performance point of view, however.
It has been a second quartile performer over five years with returns of 73.74 per cent and ranks third in the list of most consistent funds over that time due to its positive returns in 42 of the last 60 months.
It’s also been top quartile for its maximum drawdown over that time.
As its names suggests, the £134m AXA Framlington UK Monthly Income fund pays its dividend 12 times a year, which will have undoubtedly contributed to its return profile.
The other two portfolios to feature on the list are Barclays UK Equity Income and HL Multi Manager Income & Growth, both of which have made positive returns in 41 of the last 60 monthly periods.
The HL portfolio, which is a fund of funds, is the pick of the two on a cumulative basis as it has been a top quartile performer and has beaten the FTSE All Share by 15 percentage points.
The Barclays portfolio has been second quartile over five years, beating the index by close to 10 percentage points.
The least consistent performers in the sector, on a month by month basis, have been Henderson UK Strategic Income, Jupiter Income Trust, M&G Dividend and Premier Optimum Income as they have made positive returns in 33 of the last 60 months.
Nevertheless, active managers have come out quite well in the study.
The FTSE All Share has made a positive return 35 of months over the last five years, while 84 per cent of IMA UK Equity Income funds have made money in at least 36 months over that time.
