The blue-chip index closed a shade under 6,350 on Friday as most of the major equity indices lost ground over the week when investors reacted to concerns such as the health of the eurozone economy, the spread of the Ebola virus and the conflict with Islamic State moving closer to the Turkish border.
FE Analytics shows that the FTSE 100 has dropped 6.97 per cent since the start of September, more than double the 3.37 per cent slide seen in the MSCI World index.
The Euro Stoxx 50 has fallen 5.99 per cent, the S&P 500 1.27 per cent and the Nikkei 225 just 1.01 per cent.
Performance of indices since the start of Sep
Source: FE Analytics
While many issues that caused markets to tumble were not new, they look set to continue for some time to come.
This, alongside other factors such as the likelihood of interest rate rises over the next year, could be prompting investors to look for more cautious funds.
FE Trustnet has used its new fund analysis tool to identify portfolios in the FE AFI Cautious portfolio that are ran by an FE Alpha Manager and have four or more FE Crowns.
The tool can be found here, if you wish to do your own research.
Due to ongoing worries about fund size - with IBOSS’s Chris Metcalfe and Thesis’ Steven Richards telling us they tend to avoid funds that are already popular with the crowd - we also looked for smaller, more nimble options by screening for those with assets under management of less than £500m.
Investors wanting to build some downside protection into their portfolio might be interested in the first fund thrown up by the research - Ben Wallace and Luke Newman’s £416m Henderson UK Absolute Return fund.
The five FE Crown-rated fund has made a positive return in each full calendar year since launch in 2009, apart from 2011 when it dropped 0.44 per cent.
The average fund in the IMA Targeted Absolute Return sector, meanwhile, lost 1.26 per cent that year while the FTSE All Share was down 3.46 per cent. Since launch, Henderson UK Absolute Return has risen 36.11 per cent.
While this is underperformance against the All Share, absolute return funds ares designed to reduce volatility in a portfolio not match the gains in equities, so this is to be expected.
It has, however, significantly outperformed the average fund in its sector.
Performance of fund vs sector and index since May 2009
Source: FE Analytics
Over five years, the fund’s volatility stands at 4.15 per cent, compared with the All Share’s 14.86 per cent, and its maximum drawdown over the period was 5.03 against the index’s 15.94 per cent. The fund also has a correlation to the All Share of 0.73.
The FE Research team, which hold the fund on its Select 100, said: “Despite being expensive, this portfolio offers investors access to a successful hedge fund strategy.”
“Wallace and Newman have extensive experience of UK equity markets and the entire investment process is centred on their ability to spot inefficiencies.”
“Having been confronted with very different market conditions over the last 10 years, the investment process has proved to be successful and has met the managers’ risk and return objectives.”
Henderson UK Absolute Return has an ongoing charges figure of 1.07 per cent.
Another fund highlighted by the FE Trustnet analysis tool is Kames Ethical Cautious Managed, which is run by Audrey Ryan and FE Alpha Manager Iain Buckle.
This five FE Crown-rated fund, which assets under management of £233.8m, sits in the IMA Mixed Investment 20-60% Shares sector and invests in a mix of UK equities, bonds and cash.
It uses a ‘dark green’ ethical screening process, which is the strictest set of criteria used by ethical investors.
It has been considerable less volatile than the All Share over the seven years of the last market cycle at 8.46 per cent, compared with the index’s 20.17 per cent.
It also has a much lower maximum drawdown than the All Share and has experienced more positive weeks. This is reflected in performance.
Since launch in March 2007, the fund has outperformed the FTSE All Share by around eight percentage points and has made almost double the return of the average fund in its sector, as the graph below shows.
Performance of fund vs sector and index since Mar 2007
Source: FE Analytics
Kames Ethical Cautious Managed has a clean OCF of 0.82 per cent. Daniel Hanbury’s £213m R&M UK Equity Income fund could be another option for the cautious investor.
It holds four FE Crowns and appears on the FE Research Select 100 list, as well as being an AFI Cautious fund.
Hanbury took over the fund in July 2013 and since then it has returned 8.35 per cent, which is outperformance against the All Share’s 5.62 per cent but just under the 8.37 per cent made by the average fund in the IMA UK Equity Income sector.
The fund’s record over five years shows it has been more volatile than the index and has experienced a higher maximum drawdown at 17.82 per cent.
However, the FE Research team suggests it may be less risky under Hanbury’s leadership.
“The fund has become more defensive this year, cutting the amount it holds in small and mid-sized companies and increasing its cash position, which should help it if the UK market continues to struggle.”
“However, it still buys more small companies than many equity income funds, so is potentially a riskier bet in tough stock market conditions,” the team said.
“Hanbury took over the portfolio last year and has a track record of doing better than his peers in down markets, which would suggest the fund could be less risky in future.”
R&M UK Equity Income has clean ongoing charges of 0.92 per cent.
Performance of fund vs sector and index since July 2013
Source: FE Analytics
