Schroder Global Healthcare, Legg Mason Clearbridge US Appreciation, Morgan Stanley Global Brands and Trojan Income are among the funds with the lowest maximum drawdowns in open-ended universe over the last 10 years, according to the latest FE Trustnet study.
Investors will often turn to fund’s volatility when assessing its risk characteristics, but its maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times over a given period – goes largely unused.
Of course like any of ratio, maximum drawdown relies on past performance and is therefore no guide to the future, but it gives a good indication whether a manager has been able to preserve his or her investors’ capital effectively in differing market conditions.
Given that investors have had to deal with some decidedly different markets over the past decade, from the financial crises in 2008/09 and the sovereign debt crises of 2011 to the bull markets of 2012 and 2013, we have pulled together data from FE Analytics to look at every equity fund within the Investment Association universe to see which portfolios have lost the least possible amount of money over the last 10 years.
While by no-means the most well-known, the fund that has had the lowest maximum drawdown over the last decade – out of the 754 funds included in the study – is Schroder Global Healthcare, which has been managed by John Bowler since 2004 and weighs in at just £250m.
The most an investor could have possibly lost from the fund over the period is just 19.48 per cent, despite enduring a financial crisis and a global stock market slide within the time frame.
It has also performed well from total return basis as our data shows it has returned 244.98 per cent over 10 years. However, as the graph below shows that it has closely mirrored the performance of its MSCI Global Healthcare benchmark over that time.
Performance of fund versus index over 10yrs
Source: FE Analytics
Given that information, it isn’t too surprising to see that the index has had a very low maximum drawdown of 21.34 per cent over the period.
In fact, the next three funds that have the lowest maximum drawdown also focus on the sector – L&G Global Health & Pharmaceutical Index, Invesco Global Health Care and Fidelity Global Health Care – highlighting its dominance over the past 10 years.
Ben Willis (pictured), head of research at Whitechurch Securities, said: “Healthcare is a relatively defensive sector and predominantly US-led as well. This means that the majority of the sector consists of mega-cap pharma, which usually provides marginal relative 
growth but relative security compared to say, for example, smaller companies.”
“Healthcare in particular has hit a bit of a purple patch in the last couple of years due to these attributes (its US bias and the sector’s defensive qualities). Therefore, it’s not a great surprise that its drawdown is low.”
US funds, in general, have also shown particularly low maximum drawdowns, coming in at a close second to the healthcare sector.
Legg Mason Clearbridge US Appreciation, managed by Scott K Glasser and Mike Kagan, has achieved a maximum drawdown of 23.23 per cent over the last decade, placing it in the list of top five equity funds that have had the smallest fluctuation between peak and trough performance.
The fund invests at least 70 per cent of its net asset value in medium and large-cap companies as a means of generating long-term capital appreciation.
As a result of the managers’ growth approach and its large-cap bias, its top ten holdings include household names such as include Walt Disney, Apple and Microsoft.
Other US funds to join the Legg Mason portfolio high up the list include Jupiter North American Income, GAM North American Growth and Neptune US Opportunities.
Meera Hearnden, senior investment manager at Parmenion, is not surprised that US funds rank highly for low drawdowns – especially given that the S&P 500 fell just 13 per cent in the crash year of 2008 and has posted gains in the other nine calendar years over the past decade.
“US funds have performed well in more recent years and this may skew the numbers for maximum drawdowns over a 10 year period,” she said.
Data from FE Analytics shows that the IA North America peer group has had the lowest maximum drawdown out of any of the open-ended equity sectors over the period in question.
A factor that funds with low drawdowns seem to share is their allocation to large-caps and mega-caps – especially those with defensive characteristics such as reliable earnings and strong barriers to entry.
An example of this is with the Morgan Stanley Global Brands fund, which counts giants Nestle, British American Tobacco and Unilever as top three holdings and, as it names suggests, only invests in market leading businesses with strong franchises.
The fund, which has been managed by William Lock since 2009, has also performed well generally, achieving a total return of 192.16 per cent over the last decade meaning it has beaten both the MSCI World index by 44 percentage points and its peer average by 66.16 percentage points.
Performance of fund vs index and sector over 10yrs
Source: FE Analytics
Not only does the fund have a maximum drawdown of 23.33 per cent, which is lower than any other truly global funds in the study, it also been top-decile for its annualised volatility in the IA Global sector over 10 years.
The study showed the equity fund with the second-lowest volatility, behind the Morgan Stanley portfolio, is Francis Brooke’s Trojan Income fund, which also boasts a very low maximum drawdown of 25.2 per cent.
The fund, which is the only UK equity income fund in the top ten list for low drawdowns, aims to achieve above-average income as well as potential for capital growth in the medium-term. Brooke does this through investing in large companies such as Unilever, GlaxoSmithKline and Sky.
Brooke is renowned for his focus on capital preservation and his fund sits in the sector’s top quartile, and has comfortably beaten the FTSE All Share, over 10 years thanks to its top decile performances in the turbulent markets of 2007, 2008 and 2011.
Performance of fund versus sector and index in 2008
Source: FE Analytics
Trojan Income also currently holds 9 per cent in cash.
While many of the funds mentioned so far may come as no surprise to investors, the GLG Japan Core Alpha fund is a more unexpected result.
Managed by Stephen Harker and Adrian Edwards, the fund has achieved a top percentile maximum drawdown in the IA Japan sector of 27.43 per cent.
Though not outstanding compared to other funds talked about so far, Harker and Edwards – with their value approach – should be applauded given that Japanese equities have had the highest maximum drawdown out of any developed markets over the past 10 years due to the country’s crippling deflationary spiral.
The fund has also performed well from a total return point of view, achieving total returns of 179.61 per cent, which is 82.3 percentage points more than its benchmark and more than double that of its sector.
Performance of fund vs index and sector over 10yrs
Source: FE Analytics
Turning to the other end of the spectrum now and the fund with the highest maximum drawdown, interestingly, is one of GLG Japan Core Alpha’s main competitors; namely Legg Mason Japan Equity fund,
FE data shows its maximum drawdown over the last 10 years has been an eye-watering 82.71 per cent.
However, the fund is also susceptible to massive gains as well as falls, due to the high risks that manager Hideo Shiozumi takes through buying small company stocks within a concentrated portfolio.
While the fund has underperformed its sector average by almost four times over a decade, Legg Mason Japan Equity has achieved a top-decile performance over three and five years – a period when Japanese equities have shown signs of revival.
Legg Mason Japan Equity is joined at the bottom of the list by the likes as Invesco Perpetual Japanese Smaller Companies and M&G Japan Smaller Companies, which have both had maximum drawdowns of more than 66 per cent over 10 years.
Outside of Japan, other funds which have had severely high maximum drawdown over the past decade include CF Ruffer Gold, Pictet Eastern Europe, Blackrock Global Funds World Mining and JPM Global Financials – which is understandable given the tough periods those different asset classes have faced over recent years.
Source: FE Analytics
While Hearnden says that maximum drawdown is a useful measure for assessing a fund’s performance, she warns that, like with any ratio, it shouldn’t be relied upon too heavily.
“Maximum drawdown can give you an idea of how a fund manager copes (or not) with difficult periods in the market or indeed his or her investment style. However, this factor should not be used in isolation when it comes to making an investment decision,” she explained.
“Investors should take into account other factors such as the manager’s experience, their investment style, their long-term cumulative and discrete performance, and importantly whether the fund is above or below peer group volatility over say one, three and five years.”
She added: “What is also important is how a manager controls risk and what measures are in place to deal with adverse conditions.”