A gain of 12.3 per cent in the All Share in 2012 was followed with a 20.81 per cent rally in 2013, but FE data shows that the index is down 2.32 year-to-date.
The market was treading water for much of the year, threatening its all-time high on a number of occasions only to fall back to the 6,500 mark.
However, worries over the economic recovery – particularly in Europe – as well as geo-political tensions in Iraq and the threat of the Ebola virus have pushed the FTSE 100 down below 6,400 for the first time since 2012, with mid-cap cyclicals suffering particularly badly.
Performance of indices in 2014
Source: FE Analytics
If someone had told you that the markets would suffer a set-back this year, which income-focused UK funds would you have backed to perform the best? Presumably, you’d go for the managers who have a proven track record of protecting against the downside.
Low and behold, it’s been the same old names in the IMA UK Equity Income and IMA UK All Companies sectors that have performed best so far this year.
Neil Woodford’s SJP UK High Income fund, Mark Barnett’s Invesco Perpetual High Income fund and Francis Brooke’s Trojan Income fund are all top decile performers year-to-date, with returns ranging from 3.75 and 5.15 per cent.
The average UK Equity Income and UK All Companies funds have lost money over the period.
Performance of funds and sectors in 2014
Source: FE Analytics
All were top decile in the down years of 2008 and 2011 as well.
Michael Clark’s £970m Fidelity Moneybuilder Dividend fund and Colin Morton’s Franklin UK Equity Income fund also have strong records on the downside, and haven’t disappointed investors this year.
Woodford’s CF Woodford Equity Income fund was only launched in June, but has made a great start, topping the IMA UK Equity Income sector.
It is the only fund of its kind to generate a positive return over the period.
All of the managers in question have a large cap quality focus, targeting companies with strong balance sheets and cash flow as well as a high return on equity.
These characteristics often see funds underperform during fast-rising markets – indeed, SJP UK High Income, Invesco Perpetual High Income, Trojan Income and Fidelity Moneybuilder Dividend were all bottom quartile in their respective sectors in 2009 and 2012.
However, these companies prove popular with investors when confidence falls, which translates into strong relative performance in down markets.
Stocks such as AstraZeneca, British American Tobacco and National Grid are favoured by the managers, and all have made double digit gains so far this year, even though the wider market has fallen.
While past performance is of course no guide to the future, Rowan Dartington’s Tim Cockerill says the consistency of the likes of Woodford, Barnett and Brooke in down markets shows it’s possible to predict which funds will deal with certain market conditions better than others.
“I would say that for me, the main objective is understanding the fund and the process to help you predict how it will perform in certain conditions. That then allows you to build a portfolio of funds that complement each other,” he said.
“There are some managers out there like Woodford and Barnett who are very clear in their positioning. Others may be defensive but their process means they might change their focus, but these guys are very predictable.”
FE Trustnet examined this theme in more detail in an article earlier this year.
Cockerill says predictable funds that have a knack of protecting on the downside make them good choices for hands-off retail investors.
“If you have a moderate amount of money and don’t want to actively manage your fund and look out for opportunities to buy and sell, a defensive manager like this is very attractive,” he said.
“Yes they may not keep up when the market is roaring, but they don’t lose money – they still make decent returns.”
Indeed, though the likes of Trojan Income underperformed in 2009 and 2012, it still managed returns of 14.73 and 20.15 per cent, respectively.
It’s not just income-focused UK funds that have proven predictable.
Paul Stephany and Richard Wilmot’s Newton UK Opportunities fund was the best performer in the IMA UK All Companies sector in 2008, and is once again at the top of the tables in 2014.
Again, the team concentrates on quality defensives, with top-10 holdings including Diageo, BAT, AstraZeneca and Capita.
JOHCM UK Growth and Franklin UK Blue Chip have also proven consistently resilient.
Performance of funds and sectors in 2014
Source: FE Analytics
Though defensive large cap managers dominate the best performers list across the two UK sectors, there are a few surprises along the way.
George Godber and Georgina Hamilton’s CF Miton Undervalued Opportunities has a sizeable weighting to small and mid-caps, but has still managed to generate top decile returns of 4.67 per cent.
Godber and Hamilton are deep value managers, targeting cheap stocks with low downside risk.
In some ways the strategy does therefore lend itself to difficult market conditions.
Mark Martin’s Neptune UK Mid Cap fund has also managed top decile returns, in spite of investing exclusively in the FTSE 250.
However, he has a keen emphasis on protecting on the downside by investing in quality names.
Elsewhere, managers who you automatically associate with outperformance during down markets have had a strong 2014.
Sebastian Lyon’s Trojan fund, Alexander Darwall's Jupiter European fund, Michael Clark and Ian Spreadbury’s Fidelity Moneybuilder Balanced fund and Terry Smith’s Fundsmith Equity fund are all top quartile performers in their sectors in 2014.
Lyon has actually made money in the last week, even though global equity markets have fallen across the board.
It’s been a little more disappointing for Ruffer – a firm that has long been associated with outperformance during tough times. The CF Ruffer European and CF Ruffer Japanese are both bottom quartile this year, while CF Ruffer Equity & General and CF Ruffer Total Return are third quartile.
