However, losses are inevitable: managers can often hold the wrong assets at the wrong time and find themselves falling much further than their peers when conditions get tough. While this leads to some short-term pain, it means they can still go on to have some of the best returns of their sector.
FE Trustnet has looked at the managers that have proven themselves best able to protect their investors on the downside on several occasions in the past. However, in this article we thought we’d turn this on its head and look for funds that have suffered some of biggest losses in their sector but then gone on to make some of its best returns over the past 10 years.
We’re starting with the IA UK All Companies sector as it’s the largest peer group in the Investment Association universe and there’s a good chance most investors will have one of its members within their portfolio. It’s also home to some of the biggest names in the industry and contains a wide mix of funds.
Performance of sector vs index over 10yrs
Source: FE Analytics
To identify the funds, we screened for those in the bottom quartile for maximum loss – which shows the longest running consecutive loss without making a gain, on a monthly basis – and in the top quartile for 10-year returns.
FE Analytics shows the £111.7m SVM UK Opportunities fund, which has been managed by Neil Veitch since January 2006, has the highest maximum loss of the sector at 48.02 per cent. Over this 10 years it also has the peer group’s highest maximum drawdown at 66.09 per cent.
As would be expected and in common with other funds in the sector, this came in the aftermath of the financial crisis – halfway through 2007 the fund was strongly outperforming its average peer but by the end of the following year it was lagging by a significant margin.
Part of the reason for the underperformance is that the high conviction portfolio is built around ‘special situation’ stocks, which tend to fall more severely in times of weak investor sentiment.
However, over 10 years the fund has returned 134.34 per cent, compared with an average gain of 105.27 per cent in the IA UK All Companies sector and a 109.93 per cent rise in its FTSE All Share benchmark. What’s more, it also has the sector’s highest maximum gain at 128.65 per cent.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Fund research group Square Mile, which gives the fund an ‘A’ rating, says historically the fund has not been one for the timid but has tweaked how its portfolio is constructed since its large financial crisis losses.
“The fund suffered bruising underperformance during 2008 only to leap back to life as the stock market recovered in 2009,” the consultancy’s analysts said.
“Few investors are looking for such excitement, not least Mr Veitch, and over recent years the manager has introduced various changes to the way he constructs his portfolio in an attempt to moderate volatility. This has involved introducing a short component to the portfolio and better diversification with higher allocations in larger companies.”
The fund’s current top 10 shows a number of large companies, including BT Group, GlaxoSmithKline and AstraZeneca, sit along smaller names such as business process services firm Innovation Group and software business Micro Focus. There are also larger recovery stories in the portfolio, like Lloyds.
SVM UK Opportunities has a clean ongoing charges figure (OCF) of 1.09 per cent.
The £51.9m Standard Life Investments UK Equity High Alpha fund has a 10-year maximum loss of 40.78 per cent. Its maximum drawdown over this time is 53.70 per cent.
Despite these heavy losses, the fund has made a top decile 202.78 per cent over the past decade, with almost 100 percentage points more than the average fund in its sector. This also means it’s the fifth highest returning IA UK All Companies fund over this time frame.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The fund is currently managed by Henry Flockhart, who became primary manager in January 2013. However, the losses – and the majority of the strong outperformance since – came when the portfolio was being led by Ed Legget.
Its portfolio is relatively concentrated at 57 holdings, with 46 per cent of assets in the FTSE 100, 46.3 per cent in the FTSE 250 and 4.1 per cent in the FTSE Small Cap index. The largest holding is HSBC, followed by Synthomer, Standard Chartered, BP and International Consolidated Airlines Group.
Standard Life Investments UK Equity High Alpha has a 0.91 per cent clean OCF and currently yields 2.94 per cent.
Legget now manages the four FE Crown-rated Standard Life Investments UK Equity Unconstrained fund, which is currently first decile in the IA UK All Companies sector over the three and five years.
A number of mid-cap funds have also made some of the biggest losses of their sector but gone on to post some of the highest 10-year returns. This is in-keeping with the view that mid-caps are a more risky, but potentially more rewarding, way to get exposure to the UK.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
FE Alpha Manager Andrew Brough’s Schroder UK Mid 250 fund’s maximum loss, at 37.04 per cent, is the ninth highest of the sector but it’s up 140.27 per cent over the past 10 years. Andrew Neville’s Allianz UK Mid Cap fund’s 35.75 per cent maximum loss gave away to a 175.35 per cent return.
James Thorne and Matt Evans' Threadneedle UK Mid 250 fund has a 31.97 per cent maximum loss with a 212.56 per cent 10-year return, while Richard Watts’ Old Mutual UK Mid Cap fund has surged 266.86 per cent despite its 29.87 per cent maximum loss.
All of the above funds have significantly outperformed the sector average over 10 years. However, only the Old Mutual fund has managed to beat the FTSE 250 ex Investment Trusts index, which is ahead 214.54 per cent.
Other funds thrown up by our research include Liontrust UK Growth, which is now headed by the FE Alpha Manager duo of Anthony Cross and Julian Fosh. The fund’s maximum loss over 10 years was 36.08 per cent but its total return stands at 158.08 per cent.
Before March 2009, the fund was managed by Jeremy Lang but he left to launch boutique Ardevora Asset Management with William Pattisson, who was also at Liontrust, in 2010.
Schroder UK Alpha Plus, when it was under the leadership of UK equity veteran Richard Buxton, also turned in first quartile 10-year returns following a bottom quartile maximum loss as did Investec UK Alpha under Ken Hsia and Jupiter UK Growth, which is managed by Ian McVeigh and Steve Davies.
