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Which funds are topping FE’s risk-targeted sectors?

20 August 2015

Risk-targeted funds are becoming an increasingly popular choice but comparisons between them are difficult, so FE Trustnet uses its purpose-built sectors to put them under review.

By Gary Jackson,

Editor, FE Trustnet

The MyFolio funds run by Standard Life Investments’ Bambos Hambi are topping the tables when it comes to total return and other closely-watched metrics for risk-targeted portfolios, an FE Trustnet review shows, although Alliance Trust Investments’ funds also perform well.

Risk-targeted funds are increasingly in the spotlight as greater numbers of advisers use them in an attempt to match clients’ portfolio to their risk tolerances. However, as many of these funds are split between the Investment Association’s multi-asset or unclassified sectors, comparisons between them are difficult.

Last week saw Heartwood Investment Management move its range of funds into the IA Unclassified sector, making it the latest group to join the peer group after failing to find a suitable sector for risk-rated portfolios.

The sector now has 475 members with many of these being run with a risk-targeted approach. However, there are many others in the peer group pursuing very different aims, such as investing in equities or seeking absolute returns, meaning that standard sector comparisons are not appropriate.

Last year, FE launched a universe for risk-targeted, multi-asset funds to enable comparisons between them.

We reviewed these sectors to see which funds have performed best for their investors when it comes to total return, as well as other metrics such as volatility and maximum drawdown, over recent years. Given the short track record of many of these funds, we have only looked back to the start of 2011.

While this is shorter than the 10 years or market-cycle time frames we’d usually prefer, it does include the down market of 2011, the rising markets of 2012 and 2013, and the flat 2014, meaning a range of conditions are covered.

 

UK RMA Risk-targeted Multi Asset Risk Band 1

Funds within this sector have an FE Risk Score of 30, which means they have shown 30 per cent of the FTSE 100’s risk over recent years and are therefore the most cautious funds.

Between the start of 2011 and 18 August 2015, Hambi’s (picturedStandard Life Investments MyFolio Managed II fund posted the best total return out of 19 portfolios after gaining 30.79 per cent compared with a sector average of 20.30 per cent.

Performance of fund vs sector since 1 Jan 2011

 

Source: FE Analytics

The fund has also been the second least volatile member of the group over the period in question; Architas MA Active Reserve (which was the sector’s 14th best performer) has the lowest annualised volatility at 2.37 per cent.


 

Hambi’s five FE Crown-rated fund also has the peer group’s lowest maximum drawdown – which shows the most an investor would have lost if they had bought and sold at the worst possible times – at 2.21 per cent and the third highest Sharpe ratio, which measures risk-adjusted returns.

Other funds in the sector’s top quartile since the start of 2011 include Santander Atlas Portfolio 3, FP Verbatim Portfolio 3, SVS Cornelian Defensive and Standard Life Investments MyFolio Market I.

 

UK RMA Risk-targeted Multi Asset Risk Band 2

The highest returning fund in this sector, which covers those with FE Risk Scores between 30 and 50, is Standard Life Investments MyFolio Managed III – also headed by Hambi. It’s up 36.63 per cent over the time frame looked at.

However, the fund in second place is not far behind after a tough few months for the Standard Life Investments offering. Steven Andrew’s M&G Episode Income trails by just 60 basis points with a 36.03 per cent total return.

Performance of funds vs sector since 1 Jan 2011

 

Source: FE Analytics

The M&G fund is also the fund with the sector’s best risk-adjusted returns when it comes to the Sharpe, Sortino and Treynor ratios, as well as being first quartile for maximum drawdown and alpha generation.

This means it has outperformed Standard Life Investments MyFolio Managed III on all of these metrics, as well as annualised volatility. However, it only ranks 27th out of 53 for volatility, with the top spots being taken by 7IM Personal Injury, Marlborough Defensive and Standard Life Investments MyFolio Multi Manager II.

Other funds that posted high total returns from the sector include two more of Hambi’s portfolios (Standard Life Investments MyFolio Multi Manager III and MyFolio Market III), HSBC WSSF 3 Balanced Portfolio and Premier Liberation IV.

 

UK RMA Risk-targeted Multi Asset Risk Band 3

Funds in this sector could be suitable for ‘balanced’ investors, as they have FE Risk Scores of between 50 and 70.

Out of the 85 funds in the peer group, Hambi’s Standard Life Investments MyFolio Managed V has made the most with a 41.53 per cent total return. His Standard Life Investments MyFolio Managed IV, MyFolio Multi Manager V and MyFolio Multi Manager IV take up the next three spots.

Readers do not have to be particularly eagle-eyed to notice that Hambi runs quite a few funds, which spread across six ranges. In a coming article, we will catch up with the manager and take a closer look at his portfolios as part of a wider series focusing on risk-targeted funds.


 

The four funds also stack up well for the maximum drawdown, annualised volatility and risk-adjusted returns although it must be noted that the top-performing MyFolio Managed V funds in the bottom quartile for volatility. 

Investors wanting the least risky option in the peer group will see that the Close Conservative Portfolio has the sector’s lowest volatility, maximum loss, maximum drawdown and downside risk, while having a top-quartile Sharpe ratio.

This less aggressive track record is reflected in its third-quartile 26.42 per cent total return, however, which is less than a percentage point higher than the average return of the UK RMA Risk-targeted Multi Asset Risk Band 2 sector.

 

UK RMA Risk-targeted Multi Asset Risk Band 4

Alliance Trust Sustainable Future Managed, which is headed up by Peter Michaelis and Simon Clements, has made the highest return in this sector after gaining 41.80 per cent since 1 January 2011.

Performance of fund vs sector since 1 Jan 2011

 

Source: FE Analytics

Hambi’s only fund in this space made 30.48 per cent, putting Standard Life Investments MyFolio Market V at the bottom of the second quartile.

The Alliance Trust fund, which is a member of the FE Select 100 list, focuses on equities that fit into its key themes of climate change, quality of life, sustainable consumption and resilient businesses. It has the sector’s best Sharpe ratio and is first quartile for volatility, maximum drawdown and downside risk.

Our analysts said: “This fund provides a one-stop shop for ethical global equity and bond exposure, with a particular bias for the UK. The team has achieved above average returns using a blend of macroeconomic and fundamental analysis, and both managers have ample investment experience.”


 

Close Growth Portfolio, SVS Cornelian Progressive, 7IM Adventurous, Fidelity Wealthbuilder, Aviva Investors Multi Asset IV and Margetts Greystone Global Growth complete the top quartile of this 41-strong peer group.

 

UK RMA Risk-targeted Multi Asset Risk Band 5

This is the smallest of FE’s risk-targeted sectors, containing just five members – and only three of these have track records going back to the start of 2011. The peer group is home to funds with an FE Risk Score of more than 85.

Out of the three, Michaelis and Clements’ Alliance Trust Sustainable Future Global Growth has made the highest total return of 44.90 per cent. The other two members – Alliance Trust Sustainable Future Absolute Growth and Aviva Investors Multi Asset V – are up about 30 per cent.

The fund has a similar approach to the rest of the Sustainable Future range – achieving long-term capital growth through companies that meet its environmental and social responsibility rules – although it will typically have at least 70 per cent of assets in equities.

As mentioned in the article, FE Trustnet will be taking a closer look at the risk-targeted ranges that sit within the IA Unclassified sector.

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