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Why every portfolio needs the likes of Ruffer, Troy and Newton Real Return

20 November 2015

FE Trustnet looks at how these well-regarded defensive funds have fared in a portfolio alongside UK equities.

By Daniel Lanyon,

Senior reporter, FE Trustnet

Investors have been rewarded for holding highly defensive funds emphasising downside protection such as the likes of Troy Trojan and Ruffer Total Return alongside core equities over the longer term, according to research by FE Trustnet.

As an investment strategy the avoidance of a permanent loss of capital as the number one priority is the preoccupation of just a few fund managers.

Most are concerned about growing their assets over time by taking on risk that they consider to be priced accordingly. Or to produce a regular and, hopefully, growing income stream over time for their investor.

There are good reasons for this as most investors want to see an improvement in their spending power in both absolute and real terms.

However, there are several notable portfolios that look – and indeed market themselves – to provide downside protection over the longer term.  This can mean prolonged periods where the portfolios lag some of the racier bull runs in a particular asset class, mostly equites.

A stellar run for a market can be a tempting reason to buy but the history of markets is one of cycles and with few exceptions most asset classes have seen a crash that few saw coming.  

Take 2015, many were still bullish on emerging markets and the Asia Pacific region at the start of the year despite their strong rally, only to see their gains wiped out in August’s Black Monday crash. There are other countless examples from other crashes such as in 2011, 2008 and 2000.

This is the argument for holding funds that have the next market crash permanently in sight and our data shows over the longer term investors have been rewarded for doing so alongside a more regular investment in the FTSE All Share.

According to FE Analytics, portfolios equally blending three of the some of the mostly highly rated defensive portfolios:  the £9.3bn Newton Real Return, £3bn CF Ruffer Total Return and £2.5bn Troy Trojan funds with the FTSE All Share in varying amounts have bolstered returns as well as dampened volatility over the longer term.

Source: FE Analytics 

In the six composite portfolios shown in the table, named Defensive 1-6, you have a varying blend of the FTSE All Share and a tranche of these three funds with the Defensive 1 portfolio having the lowest weighting to the FTSE All Share index at 40 per cent and Defensive 6 having the highest at 90 per cent.

Over the past 1, 2, 8, 9, 10, 11, 13 and 14 year periods investors have performed better by holding a weighting to these three funds than just holding the FTSE All Share in terms of total return and lower volatility. Looking any further back involves removing Troy Trojan as this was launched in May 2001.


As the graph below shows since this date the highest returns have come from Defensive 1 to 6 in numerical order by the level of the FTSE All Share in each portfolio with the lowest weighting first and highest weighting last, with the FTSE All Share offering the lowest return and the highest volatility.

Performance of fund, sector and index since May 2001


 
Source: FE Analytics 

However, over 3, 4, 5, 6, 7 and 12 years while volatility has been lower in the six composite funds, the FTSE All Share has returned more. This is likely because in 2003 as well as since 2008 the equity market was heavily depressed and subsequently rising fast. Of course, you will never see the exact return of the FTSE All Share if simply tracking the index and this is more likely to be lower.

Defensive 1 is also better from the point of risk-adjusted returns, as shown in the graph below, over 10 years offering almost half the volatility of the index.

Risk Adjusted returns over 10yrs


 

Source: FE Analytics 


All three of the funds have long term managers. Iain Stewart has managed Newton Real Return since 2004, David Balance and Steve Russell Ruffer Total Return since 2006 and Sebastian Lyon has headed Troy Trojan since 2001. All except Lyon are FE Alpha Managers.

Ruffer Total Return is best performing over the longest comparable period of the three funds longer-term performance is thanks in part to a particularly good 2008 when the fund managed to deliver 20 per cent in spite of the FTSE falling almost 30 per cent.  

Performance of funds and index since 2001


Source: FE Analytics 

It has made money in every year since it was launched except one, only losing 2.76 per cent in 2006.

The fund sits on the FE Approved list of recommended funds with FE analyst Charles Younes pointing to the Ruffer team’s good record of meeting its objectives, with only a few exceptions.

“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,” he said.

However he adds this task is becoming more difficult as current economic challenges are causing most types of investment to move in tandem making it harder to successfully diversify risk.

Newton Real Return has also made a positive return in nine out of the last 10 calendar years, including a 3.98 per cent gain in 2008. The only year it lost money was in 2011 when it was only just down, by 0.75 per cent.

Troy Trojan has also made a positive return in every year bar one since its inception, 2013 when the portfolio lost 3.13 per cent as equites markets in developed countries rallied hard.

Russell and Balance, Stewart and Lyon all hold a mixture of securities. Russell and Balance and Stewart have a broader array than Lyon who mainly holds defensive equities, gold and cash as well as some fixed interest currently.


The other portfolios also have some of the high quality defensive stocks but more in government, corporate and index-linked bonds as well as commodities, infrastructure and floating rate notes.
Stewart also uses index futures and options to hedge against equity market risk.

Charles Stanley Direct’s Rob Morgan thinks holding such funds it can be a good move, particular or cautious investors, although he thinks they can hamper growth over the longer term.

He current owns Newton Real Return as he admires the investment process and “sensible approach” of Stewart.

“It really depends on an investor’s objective if it is worth holding these sorts of funds. Over the long term they could hold overall growth back, as they are essentially ballast in a portfolio if equity markets remain positive.

“However, for more cautious investors wishing to make more consistent but overall lower returns they can be a perfect core to a portfolio.”

CF Ruffer Total Return has an ongoing charges figure (OCF) of 1.23 per cent. Newton Real Return has a clean OCF of 1.11 per cent. Troy Trojan’s OCF is the cheapest at 1.06 per cent.
 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.