In his annual letter to Berkshire Hathaway shareholders, the veteran investor said: “If the investor … fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things.”
“Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in ‘safe’ treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement.”
In his letter, Buffett focused on asset classes and highlighted the returns that investors would have missed out on in the long run if they avoided the risk of the stock market and remained in cash. However, in this article we simply aim to highlight some of the funds that have given their investors a volatile past decade but have made significant returns.
We screened the Investment Association, FCA-recognised offshore funds, exchange-traded funds (ETFs) and Association of Investment Companies universes for vehicles with 10-year returns of more than 250 per cent and annualised volatility greater than 20 per cent.
Out of a combined universe of 11,391 portfolios, only 46 funds got through the filter. Only 74 funds have made returns in excess of 250 per cent over 10 years but 615 posted annualised volatility of 20 per cent or more.
The above figures highlight an important point: there’s a good chance your higher returning fund is a volatile one, but conversely there’s a much lower likelihood that any volatile portfolio will be a top performer. Investors should therefore be cautious about thinking volatility will automatically lead to higher returns.
Source: FE Analytics
FE Analytics shows the fund that has made the highest return over the period in question is Frostrow Capital’s The Biotech Growth Trust, which has returned 682.17 per cent with annualised volatility of 22.09 per cent.
The four FE Crown-rated investment trust, which is run by OrbiMed’s Richard Klemm and Geoffrey Hsu, has significantly outperformed its Nasdaq Biotechnology index benchmark, which is up 431.72 per cent over 10 years.
Biotechnology is well represented in the volatile funds making high returns. The second best performing fund is Candriam Equities L Biotechnology, a Luxembourg-domiciled Sicav that has 10-year returns of 565.73 per cent with 21.98 per cent annualised volatility.
Other funds focusing on this sector in the 46 highlighted by our filter include AXA Framlington Biotech and UBS (Lux) Equity Biotech. The biotech space has attracted a lot of attention over recent years thanks to the strong returns that have been seen, although some have argued that it has entered bubble territory.
Looking from the other side of things and the most volatile vehicle on the list is the iShares FTSE A50 China Index. This tracks the 50 largest A Share companies listed on the Shanghai and Shenzhen stock exchanges and has annualised 10-year volatility of 37.31 per cent, with a total return of 276.86 per cent.
Source: FE Analytics
There’s a few more China-focused funds on the list, reflecting how the world’s second largest economy has handed some investors strong gains if they have been willing to stomach the volatility. The likes of Standard Life Investments China Equities, Fidelity China Focus, Robeco Chinese Equities, First State China Growth, Henderson China Opportunities and Invesco Perpetual Hong Kong & China all appear on the list.
India is also well represented. The GS Bank BeES EFT, which tracks India’s CNX Bank Index, posts the second highest annualised volatility at 35.99 per cent but has achieved a total return of 463 per cent over the past decade – which puts it in third place for performance.
First State Indian Subcontinent, Aberdeen's New India Investment Trust and JPMorgan India are a few of the India funds featuring. Experts have tipped the Indian stock market for further strong gains over the years ahead, following the election of pro-business reformist Narendra Modi and his plan to gradually overhaul the emerging market powerhouse.
The list also contains a few familiar names that have returned more than 250 per cent over 10 years with annualised volatility in excess of 20 per cent.
James Anderson's £3.2bn Scottish Mortgage Investment Trust is one, having returned 342.86 per cent with annualised volatility of 23.71 per cent, which makes it the second most volatile trust in the AIC’s Global sector.
The four crown-rated trust has been described by Winterflood as “the outstanding success story of the investment trust sector in recent years”. The manager builds a concentrated portfolio of ‘disruptive’ companies, which means it can often be in areas that are unloved by the wider market.
FE Alpha Manager Andrew Brough is another on the list, through the Schroder UK Mid Cap trust he runs with Rosemary Banyard. This has made 282.47 per cent over 10 years with 21.97 per cent annualised volatility.
The portfolio is one of the most volatile in its 12 strong AIC UK All Companies peer group. It sits in the first quartile over three and five years but has slipped into the bottom quartile over one year after mid-caps sold off after their strong recent run.
Electra Private Equity also appears, with annualised volatility of 27.84 per cent and 10-year returns amounting to 258.31 per cent. The fund targets an annual return on equity of 10 to 15 per cent over the long term, through a portfolio of investments taken from across the full private equity spectrum.
However, it must be noted that activist investor Sherborne Investors has stepped up efforts to influence the trust, after building up its stake to more than 25 per cent and reviving a campaign to increase its boardroom representation – including getting chief executive Edward Bramson a seat on the board.