A recent FE Trustnet poll showed that the overwhelming majority of investors crave consistency from funds. 
The poll asked whether readers preferred consistency of returns even if they are not the highest or the potential for strong outperformance even if there is the risk of underperforming. Some 73 per cent of those 1,016 who voted opted for the former.
Of course, investors would always love to find a fund that beats the market and its peers year in, year out and FE Trustnet has written numerous studies over the years looking at the funds which have managed to outperform on fairly consistent basis.
However, it is almost impossible to find a manager that will never underperform as investment styles will fall in and out of favour over a market cycle.
Instead, DFMs, wealth managers and fund of funds managers will often buy funds to play a designated role within an overall portfolio – whether that is to capture potential market upside, dampen down volatility or producing a growing income stream.
Therefore, given the results of the poll, we ask three multi-managers about the funds they use for a specific reasons which, so far, have not disappointed.
BlackRock UK Income – for a growing income stream
Finding a source of income is seen as vital in the current environment and Hawksmoor’s Ben Conway says he and his team are always looking for funds for their Distribution portfolio that can deliver a good and growing dividend, but also generate that yield without putting capital at risk.
This led them to the £321m BlackRock UK Income fund, which has strong long-term dividend track record but, up until recently, has struggled from a total return point of view.
“First of all, we like it due to the addition to the management team of Mark Wharrier in the summer of 2013, joining the incumbent Adam Avigdori,” Conway said.
“Prior to Wharrier joining the fund had been dogged by a long period of poor performance but it had one very strong redeeming feature. It is one of the very few elite number of funds to have ceaselessly increased the dividend for 30 consecutive years and above the rate of inflation. This is a true income fund.”
While the fund, which currently yields 3.33 per cent, has consistently grown its dividend for most of this century, it has underperformed in six out of the last 10 calendar years.
That performance has changed dramatically under Wharrier though, with the fund sitting in the top decile of the IA UK Equity Income sector and is beating the FTSE All Share by more than four times since the manager joined the team. T
“Wharrier was tasked with turning around overall performance and he has done this to stunning affect.”
Performance of fund versus sector and index under Wharrier
Source: FE Analytics
“He has overseen a change in the portfolio construction process placing much greater emphasis on companies with franchises generating high returns and sustainable free cash flow growth to back up the dividend yield.”
“He is keen to preserve the fund’s excellent dividend track record, but won’t be a slave to it. It is this kind of flexibility that will hopefully ensure good through-the-cycle performance and ease the temptation to purchase higher yielding shares in order to preserve the dividend at the expense of future performance.”
Henderson UK Absolute Return – for lowering overall equity market volatility
Given the market has not seen a severe correction since the global financial crisis, valuations are relatively high, earnings growth is subdued and macroeconomic headwinds persist, many investors may be looking for funds which can protect them on the downside.
In fact, that is exactly why Apollo’s Ryan Hughes bought the five crown-rated Henderson UK Absolute Return fund, which is a long-short equity vehicle, within his portfolios.
“Going into the 2015, we were looking at an election which was too close to call, the FTSE was nearing its record high and we were concerned about some of its largest constituents such as mining, oil and supermarkets,” Hughes said.
“Therefore, we didn’t want to have long-exposure to the UK large-caps and were looking for funds which dampen overall risk and volatility.”
The £930m Henderson UK Absolute Return fund is managed by FE Alpha Managers Luke Newman and Ben Wallace, who take both long and short positions within their portfolio and will make structural long-term bets as well as shorter term tactical calls.
Since inception in April 2009, the fund has unsurprisingly underperformed the wider UK equity market with returns of 57 per cent, but has been four times less volatile and had a maximum drawdown which has been four times lower than the index.
This year, however, Newman and Wallace’s strategy has really come into its own in 2015, as the graph below shows.
Performance of fund versus index in 2015
Source: FE Analytics
“The FTSE 100 has had a difficult year this year but the Henderson fund has given us exposure to the UK market and, given the manager’s hedge fund mindset, have been able to control their drawdown and dampen down my overall volatility.”
GAM Star European Continental Equity – taking advantage of a European bull market
Europe seems to be one of the most popular areas going into the New Year, given that the ECB is expected to continue to pump liquidity into the market and as there seems to be signs of a genuine economic recovery.
For those who want to capture as most market upside (but are willing to see their fund struggle if there is a risk-off period), GAM’s Charles Hepworth has been pleased with the performance of the GAM Star Continental European Equity fund, which is headed up by his colleague Niall Gallagher.
While the €1bn fund is currently geared towards more defensive industries, the manager’s overweight positions in peripheral markets has helped the fund to significantly outperform.
“Gallagher has delivered for us this year in European equity space on his expectation of a Draghi bounce following QE announcement at the start of the year,” Hepworth said.
“He was positioned for that domestic recovery we have now seen in European equities. Similarly Niall was among the top European managers following Draghi’s 2012 ‘do whatever it takes’ comments so upside capture for him is very strong.”
Since Gallagher took over the fund in December 2009, the fund has been a top quartile performer in the IA Europe ex UK sector and has more than doubled the MSCI Europe ex UK index with gains of 71.90 per cent.
Performance of fund versus sector and index under Gallagher
Source: FE Analytics
Those figures include top percentile gains in the strongly rising market of 2012 and top decile gains so far in 2015.
Legg Mason IF Japan Equity – taking advantage of a Japanese bull market
Japan was the other popular market going into 2015 thanks to its low P/E relative to other areas of the globe, changing dynamics within the economy and the fact the Bank of Japan is supporting growth with its huge quantitative easing programme.
Hughes has been a bull on Japanese equities for a number of years now and, given he has conviction in his view, he is willing to buy a fund which has the propensity to post significant drawdowns in the search of a high return over the longer term.
This led him to the Legg Mason IF Japan Equity fund, which is managed by Hideo Shiozumi and is £413m in size.
“We wanted to exposure to Japanese the market was undervalued and that the reforms of ‘Abenomics’ would come through,” Hughes said.
“We felt the best way to play this was through a high beta fund and the fund is very much high beta, is concentrated and small-cap biased. When Japan does well, this fund tends to win big but when Japan is out of favour, it has lost fairly spectacularly.”
Performance of fund versus indices since June 2014
Source: FE Analytics
“We bought the fund in the June last year and it has returned more than 50 per cent since. Yes, the fund delivers lumpy returns and the fund always either first or last in the sector.”
FE data shows the fund topped the IA Japan sector in the rising markets of 2005, 2011, 2013 and is top percentile in 2015 with returns of 42.66 per cent.
However, on a 10-year view, the fund is third quartile with returns of just 18.47 per cent thanks to its maximum drawdown of a whopping 82.71 per cent, which is more than double that of its peer group average. For example, it posted double digit losses in 2006, 2007, 2008 and 2009 – a period when Japanese equities were hugely out of favour.
Hughes added: “However, we know that. As we are bullish on Japan, this is the type of fund we want to own as it will capture market upside.”
