It’s been a very difficult time since April, with equity market falls and wider asset class volatility characterising most investors’ experiences over the past few months.
While equities did recover somewhat at the back end of last week following the calamitous ‘Black Monday’ – which turned out to be one of the worst days for markets since the global financial crisis – most indices are down by more than 10 per cent over the last four months and have fallen some 2 per cent this morning.
Performance of index since April 2015
Source: FE Analytics
The reasons for the falls have been well documented, with headwinds such as the Greek debt negotiations, a bond market rout and significant falls in commodity prices along with a crisis in China all playing their part.
One of the major concerns, however, is that while bonds have taken up their role as a natural hedge against equity market volatility, many warn this dynamic is unlikely to continue given the very low yields on offer.
Therefore, investors may need to find other ways to protect their portfolios.
Nevertheless, while may seem like a good time to panic and hoard cash, FE Trustnet studies have shown that buying when others are most fearful has proven to be a successful strategy for long-term investors.
Despite that, few experts recommend piling into risk assets at this point in time given China’s woes, the possibility of higher interest rates while at the same time, the threat of deflation.
Therefore, for those investors who want a little more defence within their portfolios to help them sleep better at night, here we highlight the FE Research team’s top-rated funds for capital preservation.
Insight Absolute Insight – for the ultra-cautious
First on the list is the £854m Insight Absolute Insight fund, which is headed up by FE Alpha Manager Sonja Uys.
The fund aims to generate positive returns over any rolling 12-month period and is therefore more cautious than many of its peers.
It is also relatively unique given it is a fettered fund of funds, meaning Uys rotates her portfolio between Insight’s Equity Market Neutral, Credit, Emerging Market Debt, Currency and Liquidity funds (along with two other BNY portfolios) to try and deliver a smooth return which is lowly correlated to bonds and equities.
It was launched in February 2007, since when it has returned 39.13 per cent.
While that return is lower than equities, government bonds and corporate credit, the graph below shows how smooth the returns have been. In fact, its maximum drawdown of just 3.5 per cent is half the amount of gilts, six times less than corporate credit and 15 times lower than equities.
Performance of fund versus indices since launch
Source: FE Analytics
Insight Absolute Insight has also made a positive return in every calendar year since launch except the crash year of 2008, though it only fell 0.17 per cent.
The FE Research team says it is a very good option for investors who want diversification and capital protection.
“The risk/return profile of the fund may look boring, but this is exactly what its managers are aiming for: to provide small but regular positive returns, minimise volatility and preserve investors’ capital,” they said.
“Derivatives are used heavily within the underlying funds and Insight regards this as a quicker and cheaper method of implementing its views. However, these instruments can be risky if not carefully controlled and although Insight has extensive experience in this area and a robust process for managing these risks, investors must be aware of the pitfalls involved.”
Insight Absolute Insight has an ongoing charges figures (OCF) of 0.39 per cent.
CF Ruffer Total Return – for a more traditional mixed-asset approach
Insight Absolute Insight is obviously for a more cautious investor, but for those who want a little more upside potential the FE Research team likes the £3.1bn CF Ruffer Total Return fund.
It is run by the FE Alpha Manager duo of David Ballance and Steve Russell and is a more traditional mixed-asset portfolio, investing across global equity and bond markets as well as its decent weightings to cash and gold.
Given the quality of its management team and its long track record, the FE Research team rates CF Ruffer Total Return highly.
“The fund falls in the IA Mixed Investment 20-60% Shares sector rather than IA Targeted Absolute Return, but its managers focus on protecting investors’ money rather than beating rivals,” they said.
“Unlike many absolute return funds, the team has a good record of meeting its objectives, with only a few exceptions over the fund’s history. The investment process relies on a constant review of the fund’s allocation between ‘greed’ and ‘fear’ assets, which requires the team to make calls on the state of the global economy.”
“Implementing these ideas also depends on the team’s capacity to identify assets with contrasting behaviours.”
According to FE Analytics, CF Ruffer Total Return has been the best performing portfolio in its sector since Russell and Ballance took charge in October 2006 with returns of 94.14 per cent, beating its composite benchmark (FTSE Brit Govt All Stocks and FTSE All Share 50/50 split) by 35 percentage points in the process.
Performance of fund versus sector and benchmark since launch
Source: FE Analytics
It has also made a positive return in every year since they have been at the helm, including a 20.86 per cent gain in the crash year of 2008. As a result, CF Ruffer has the lowest maximum drawdown in its sector over that time and has the best risk-adjusted returns, as measured by its Sharpe ratio.
The fund currently holds 38 per cent in index-linked bonds, 44 per cent in equities (which is primarily held in Japanese stocks), 9 per cent in cash and 3 per cent in gold. Its OCF is 1.23 per cent.
Henderson UK Absolute Return – for those who want to hedge equity risk
The final fund on the list is quickly becoming one of the most popular in its space; namely FE Alpha Managers Ben Wallace and Luke Newman’s Henderson UK Absolute Return fund.
It is a long/short equity fund, but unlike many of its peers which uses shorts to hedge against the index, the two managers use their short book as a ‘profit centre’ to generate alpha by betting against individual companies.
This stock-picking approach has its own risks of course, but the FE Research team thinks it is a good option for those who want a less risky approach to the UK equity market.
“This fund could be a good option for an investor who wants to invest in the stock market while limiting risk,” they said.
“The ability to short stocks has allowed the managers to limit losses in falling markets in the past and sometimes to make a lot of money. However, the correlation to the equity market is higher than the typical global macro absolute return fund, so this may not be the best fund to diversify an equity portfolio.”
They added: “The managers have run this strategy for over a decade for different fund houses and have an impressive track record over that time.”
The now £738m Henderson UK Absolute Return fund launched into the Investment Association in April 2009, but the overall strategy has been going since 2005 and delivered a return of more than 25 per cent in 2008 when the wider UK equity market fell 30 per cent.
Since April 2009, though, the fund has gained 47.10 per cent (which is around half the return of the FTSE All Share).
Performance of fund versus index since April 2009
Source: FE Analytics
However, as the graph above shows, those returns have been far smoother than the index’s with the fund delivering a maximum drawdown of just 5 per cent over that time while the FTSE All Share’s has been 15 per cent.
It has also fared much better than the index during more turbulent market conditions. For example, it has eked out a small gain since April while the index is down 10 per cent. Henderson UK Absolute Return, which has 93 long positions and 42 shorts, has an OCF of 1.06 per cent.
