Investors who use genuine multi-asset funds will do so because they want a core holding or are simply using a one-stop-shop for their portfolio.
As a result, these are funds where not only is outperformance important, but capital preservation is vital as investors will not want the value of their savings fluctuating massively over the longer term.
Basically, they are there to steadily, year after year, eke out returns and make their investors wealthier over the long term in the process.
Of course, as with any sector, some are better at achieving that aim than others. It is also true that the past is no guide to the future.
However, given the importance of capital preservation when it comes to multi-asset funds, FE Trustnet looked through the IA Mixed Investment 0%-35% Shares, IA Mixed Investment 20%-60% Shares, IA Mixed Investment 40%-85% Shares and IA Flexible Investment sectors to see which have managed to outperform over the long term, but have done so with the lowest maximum drawdown.
Maximum drawdown calculates the most an investor would have lost if they had bought and sold at the worst possible times so while it is not definitive, it gives a good indication of which funds have given the smoothest ride over a certain period.
As the table below shows, there are only eight funds out of the 177 that make up those four peer groups which have been top quartile for both their total returns and maximum drawdown over the past 10 years in both their own sectors and the four sectors combined together.
Source: FE Analytics
Out of those eight funds, the highest returner has been the £275m CF Ruffer European fund with its gains of 182.38 per cent over the past 10 years.
It sits in the IA Mixed Investment 40%-85% Shares sector, so it comes as little surprise that it is near the top of the table as it is allowed to hold larger amounts in equities. Nevertheless, managers Timothy Youngman and (more recently) Guy Thornewill have shown they have been very effective at shielding their investors.
FE data shows it has had the lowest maximum drawdown in its sector over that time at just 12.19 per cent, meaning it ranks third out of the eight funds on the list in that respect.
The reason for that performance is because it has beaten the sector average in six out of the last 10 years, but its major outperformance has come during periods of extreme market stress. The fund, for instance, made 9.77 per cent during the crash year of 2008 while the sector lost more than 20 per cent.
As the fund’s name suggests, CF Ruffer European focuses on UK and continental markets (both equities and bonds). Currently, the managers hold 76 per cent in equities – the UK being their largest exposure at 33 per cent – 14 per cent in index-linked gilts, 5 per cent in cash, 3 per cent in options and a minor 2 per cent in gold.
The table shows that Ruffer, as a group, came out very well in this study with three of their funds featuring on the list, showing that their managers have largely stuck to their objective of “producing consistent returns and not losing money”.
For example, the £2.9bn CF Ruffer Total Return fund – which is co-run by the FE Alpha Manager duo of Steve Russell and David Ballance – has topped the IA Mixed Investment 20%-60% Shares sector over the past 10 years with its gains of 91.32 per cent.
However, it has also had the lowest maximum drawdown in the peer group at just 9.91 per cent (ranking second out of the eight funds listed in this article).
Like with CF Ruffer European, Russell and Ballance’s fund has come into its own turbulent conditions. It has only lost money in one out of the last 10 calendar years (2005 when it fell 2.75 per cent) and was able to make more than 20 per cent in 2008 when fears of a total economic collapse intensified.
Performance of fund versus sector and index in 2008
Source: FE Analytics
Charles Younes, research manager at FE Research, say there were a number of reasons for that outperformance during the global financial crisis.
“The managers had already been shifting the portfolio towards more protective assets in 2006-2007 at the expensive of equities. In terms of their equity exposure, the managers only really focused on large defensive companies like Unilever, Microsoft and Novartis,” he said.
“However, CF Ruffer Total Return’s outperformance in 2008 was mainly due to the fund’s high weighting to ‘safe-haven’ government bonds, gold and the fact they held the majority of their assets outside of sterling as a result of concerns about the impact potential rate cuts in the UK would have on the currency – a decision which subsequently benefitted their investors.”
The fund has also beaten in the sector in seven out of the last 10 calendar years and has had the best risk-adjusted returns in the peer group over the past decade.
While Ballance and Russell are viewed as perma-bears due to the nature of their process, the managers say they are looking to increase their weighting to risk assets following the recent sell-off.
“Sentiment on emerging markets and related areas such as commodities also now appears to be excessively negative, impacting equity markets in general and discounting a weaker environment than we see,” they said.
“Therefore we are maintaining our equity weighting and looking for opportunities to add to oversold positions.”
The other Ruffer fund to feature is the group’s Equity & General offering, which has a relatively unique strategy as FE Alpha Manager Alex Grispos only holds equities and cash but gradually ups his exposure to the money market as markets rise so that he has firepower to take advantage of sell-offs.
This has been put to good use, as the £200m fund has been a top quartile performer in the IA Flexible sector over 10 years with gains of 92.74 per cent and the third lowest maximum drawdown of 14.52 per cent.
Another group which has come out well in this study is the little-known McInroy & Wood Portfolios Ltd with both its Balanced and Income funds sitting on the eight-strong list.
Both funds have been run since launch by FE Alpha Manager ‘hall of famer’ Victor Wood and, like Ruffer, he aims “provide investors with the highest overall real return consistent with a lower risk investment approach”.
This has certainly been the case with both sitting in the IA Mixed Investment 40%-85% Shares sector’s top decile for total returns and maximum drawdown over 10 years. The traditional mixed asset funds also occupy the top decile for their annualised volatility and risk-adjusted returns.
Performance of funds versus sector over 10yrs
Source: FE Analytics
The portfolio with the lowest maximum drawdown in this study is Sebastian Lyon’s £2.5bn Troy Trojan fund, as the most an investor could have lost in it (despite its gains of 90 per cent) is 9.81 per cent over the last decade.
Lyon has come under increasing scrutiny recently as his extremely cautious positioning in comparison to others has meant the fund is underperforming the sector over one, three and five years and even managed to lose 3.13 per cent in 2013 despite roaring equity gains that year.
Nevertheless, this is the only calendar year that Trojan has lost money and it is still the sector’s second best performer since its launch in May 2001 and has nearly doubled the gains of the FTSE All Share over that time.
Performance of fund versus sector and index since launch
Source: FE Analytics
Lyon runs the fund as if it is his own portfolio of savings so is consistently aiming to minimise downside risk. This has led him to hold 32 per cent in bonds, 10 per cent in cash, 16 per cent in gold and 41 per cent in equities.
Speaking about the recent sell-off, Lyon warned that investors were right to be concerned that the current situation feels similar to the two last major market falls – the dotcom bubble and the global financial crisis.
“History rarely repeats itself, but the number of large UK companies being forced to cut their dividends bears some resemblance to those two wealth-destroying periods,” Lyon said.
“Companies keen to feed their income starved investors have understandably sought to pursue progressive dividend policies. However, (when setting their shareholder distributions) many company boards look to have assumed a rigorous and widespread global economic trajectory that has failed to materialise.”
“The result has been the familiar emergence of falling dividend cover, stretched balance sheets and corporate hubris in the form of ill-judged empire building.”
