Some funds excel at capturing the upside but can leave investors exposed to greater pain if the market takes a turn for the worse.
Conversely, funds with a defensive tilt aim to protect their clients from the worst of a market fall but fail to make the most of the gains that come in the following recovery.
The bear/bull ratio aims to identify funds that skirt in the middle of these two extremes.
It’s derived from looking at a fund’s bull beta, which is a measure of sensitivity of performance relative to upswings in the benchmark, and its bear beta, which measure a sensitivity to downturns.
A bear/bull ratio greater than one indicates better ability to ride the upswings in the market and less risk in the down markets.
Bull beta of more than one suggests a fund will beat the market when it’s rising while bear beta below indicates it will fall less in a downturn.
In the below study, we look at funds from the IMA All Companies and UK Equity Income sectors with a bear/bull ratio of more than one over the past 10 years to find candidates for funds that can serve you well in uncertain markets.
In addition, we screened for an FE Crown-rating of four or above. The fund with the highest bear/bull ratio is Kevin Murphy and Nick Kirrage’s £120.1m Schroder Specialist Value UK Equity fund, which FE Analytics shows as having a score of 1.39 against the FTSE All Share.
Looking at the individual ratios, the four FE Crown-rated fund tends to do better in bull markets as would be expected from its value approach. Its bull beta stands at 1.26 while its bear beta is 0.91.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund lost 21.94 per cent in the crash market of 2008 when the All Share dropped 29.93 per cent although it did less well in 2011, making a 6.53 per cent loss when the index fell 3.46 per cent.
This was better than the average fund in its peer group, however.
In both 2012 and 2013 it returned about 14 percentage points more than the benchmark. Its maximum drawdown over 10 years is also better than the All Share’s at 39.19 per cent but its volatility is broadly in line with the index and slightly more than the sector’s.
Schroder Specialist Value UK Equity is not accessible to retail investors, however, and is aimed at the institutional market.
Nick Purves’ £841m SJP Equity Income fund, which holds five FE Crowns, is in second place with a 10-year bear/bull ratio of 1.34. Its bull beta is 1.23 while its bear beta is 0.91.
The fund protected investors’ money than its peers in 2008 and 2011 but did lose more than the index in 2011.
Its annualised volatility over 10 years is 16.05 per cent - less than the All Share’s 17.97 per cent - and it has a lower minimum drawdown.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
SJP Equity Income has ongoing charges of 1.64 per cent, according to its latest Key Investor Information Document, but is only available to clients of St James’s Place. It yields 3.50 per cent.
One fund that scores highly and is available to most retail investors is the £339.7m JOHCM UK Growth fund, which is ran by FE Alpha Manager Mark Costar and Vishal Bhatia.
The four FE Crown-rated fund’s bear/bull ratio is 1.30, with bull beta of 1.27 and bear beta of 0.97.
The fund has been less volatile and has a slightly lower maximum drawdown than the All Share and the IMA UK All Companies sector over the past 10 years.
Its performance in 2011, however, left a lot to be desired after it lost 17.39 per cent thanks to a bias towards small caps.
It did perform better than the market and the sector in 2008, while achieving strong outperformance in the up markets of 2009, 2012 and 2013.
JOHCM UK Growth, which has clean ongoing charges of 0.84 per cent and appears on the FE Research Select 100, has a strong long-term track record - returning 166.39 per cent against the All Share’s 112.51 per cent and the sector’s 108.59 per cent.
The five FE Crown-rated Schroder Income fund, which has been managed by Murphy and Kirrage since May 2010 after the departure of Nick Purves, has a bear/bull ratio of 1.29, following its bull beta of 1.20 and its bear beta of 0.93.
Under Purves, the fund outperformed the All Share when markets tanked in 2008 but with the current managers at the helm it lost five percentage points more than the index during 2011.
This is down the managers inheriting a portfolio with more than 25 per cent in financials, which were hit hard in the aftermath of the eurozone debt crisis.
Outperformance since then has been strong, with the fund returning 25.27 per cent in 2021 and 32.53 per cent the following year. This compares with the FTSE All Share’s respective gains of 12.30 per cent and 20.81 per cent.
The fund’s 10-year maximum drawdown is below that of the sector and All Share at 41.96 per cent and it is less volatile than the index.
Its maximum gain is higher than the All Share’s by around seven percentage points, but its maximum is slightly above the index at 27.74 per cent.
Schroder Income has clean ongoing charges of 0.91 per cent.
Performance of funds vs sector and benchmark over 10yrs
Source: FE Analytics
Other highly rated funds with 10-year bear/bull ratio of more than one include Chris Murphy's £67.1m Royal Bank of Scotland Equity Income, Alastair Mundy's £1.3bn Investec UK Special Situations and the £1.5bn Schroder UK Opportunities fund, where leadership recently changed from Julie Dean to Matt Hudson.
FE Analytics shows all three funds have significantly outperformed the FTSE All Share and their respective peer groups over the past 10 years.
