The likes of CF Woodford Equity Income, Findlay Park American and Jupiter Special Situations are some of the best equity funds to protect against the downside, according to FE Alpha Manager John Chatfeild-Roberts, head of the very popular Jupiter Merlin range of funds of funds.
Equity markets and the funds that invest in them move up and down on a daily basis as volatility is fact of life for investors, but as most will be aware, they also trend in long term cycles which include prolonged period of falling markets as well as long periods of upside gains.
The FTSE All Share, for example, has seen several significant bear markets where the index has fallen rapidly by a substantial amount over the past thirty years and stocks have fallen between 20-50 per cent over the course of several months.
Performance of index since 1986
Source: FE Analytics
Chatfeild-Roberts says the Merlin team look for fund managers who create a portfolio that protects more against these downside periods, therefore compounding their returns over time so as to have a greater long term performance
The top positions across the £1.4bn Jupiter Merlin Balanced Portfolio, £31m Jupiter Merlin Conservative Portfolio, £1.8bn Jupiter Merlin Growth Portfolio, £3.9bn Jupiter Merlin Income Portfolio, £572m Jupiter Merlin Worldwide Portfolio are mostly all three funds that Chatfeild-Roberts says have top downside protection credentials.
Here, he runs FE Trustnet through his three favourite funds.
The $8.7bn Findlay Park American fund, which is headed by James Findlay, is the largest position in Jupiter Merlin Balanced Portfolio (11.2 per cent) and Jupiter Merlin Growth Portfolio (19.12 per cent) and Jupiter Merlin Worldwide Portfolio (26.2 per cent).
Chatfeild-Roberts: “If you look at Findlay Park American for instance, they don’t use nay derivatives at all but they do have cash buffer which is currently at 12 per cent.”
“He is an absolutely fantastic example of somebody who is really focused on compounding returns. However, he also has always had about 10 per cent in cash which he uses as a means of having optionality.”
Having lost a lot in the 1980s, Findlay adopted a style of looking at stocks’ intrinsic value and the possibility of downside Chatfeild-Roberts said which has worked well over the longer term. It means it has been one of the very few US active funds which has genuinely added value over time.
Findlay’s strategy, which Chatfeild-Roberts says is akin to Warren Buffet, has worked very well as far as the fund’s track record goes back: April 2000. The fund has gained 437.45 per cent while its sectors peers have made on average 134.51 per cent and the Russell 1000 index has gained 117.03 per cent.
Performance of fund, sector and index since 2000
Source: FE Analytics
Its maximum drawdown, volatility and alpha generation are the best in the FO Equity Small Cap sector as well. Due to its substantial size, though, it is now closed to new investors.
In the UK, Chatfield Roberts says star manager Neil Woodford, manager of the £7.6bn CF Woodford Equity Income fund, is best for downside.
In his latest fund, which is yet untested in a huge bear market such as 2007/8, Woodford has done well in 2015’s market falls clocking up the sixth lowest drawdown in the 80-strong IA UK Equity Income sector.
This has helped the portfolio the best performance in the sector since its launch with a return of 22.01 per cent.
Performance of fund, sector and index since June 2014
Source: FE Analytics
Woodford also did much better than his peers in his former main two funds: Invesco Perpetual High Income and Invesco Perpetual Income during the financial crisis of 2007/8 scoring the sixth and seventh lowest maximum drawdowns.
CF Woodford Equity Income is the largest fund in the Jupiter Merlin Income Portfolio (14.27 per cent), the second largest in the Jupiter Merlin Growth Portfolio (12.38 per cent) and the Jupiter Merlin Balanced Portfolio (8.35 per cent).
Last up Chatfeild-Roberts tips his Jupiter colleague Ben Whitmore who heads the Jupiter Special Situations fund.
Whitmore’s contrarian approach, which means looking for companies that are undervalued due to several potential reasons, is generally more volatile than Woodford’s quality/income bias.
However it has worked well for Whitmore since he has managed Jupiter UK Special Situations. The fund has been a top quartile performer and beat the returns of the FTSE All Share by more than 25 percentage points since he took charge in November 2006.
Performance of fund versus sector and index under Whitmore
Source: FE Analytics
The fund is also ahead of the FTSE All Share index over three and five-year periods but is bottom quartile over one year reflecting the more volatile nature of contrarian investing.
However, he has been relatively consistent and as Jupiter UK Special Situations has outperformed its sector average in five out of the last eight calendar years his maximum drawdown has also mostly been ahead of his peers.
The fund did very well from a capital preservation point of view during the financial crisis with the seventh lowest drawdown out of 223 funds in its sector.
The fund features in the top 10 of Jupiter Merlin Conservative Portfolio, Jupiter Merlin Growth Portfolio, Jupiter Merlin Income Portfolio and Jupiter Merlin Worldwide Portfolio.