The last year or so has provided a tough hunting ground for investors, given that macroeconomic headwinds such as a slowing China and the plummeting price of commodities have resulted in choppy markets since the start of 2015, particularly across emerging market and Asia Pacific regions.
Performance of indices since 2015
Source: FE Analytics
As such, wary investors may feel more comfortable buying into their home market at the moment and strong risk metrics are likely to make potential purchases all the more appealing, although it must be kept in mind that past performance is no guide to the future.
When looking for a stable investment, it’s common practice to take a look at a fund’s maximum drawdown, which measures the most an investor would have lost of they’d bought and sold at the worst possible times, over one, three, five or even 10 years.
But which funds in the UK space have achieved an above-average maximum drawdown every individual year over the last decade?
Using FE Analytics, FE Trustnet took a look at every UK fund in the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors that have a track record of at least 10 years and have been first or second quartile for the metric in each year from the start of 2005 to the end of 2015.
Surprisingly, out of a total of 278 funds only two have managed to do this – one in the IA UK All Companies sector and one in the IA UK Equity Income space.
In IA UK All Companies, Invesco Perpetual UK Strategic Income was the only fund to achieve an above-average maximum drawdown on an annualised basis, finding itself in the top quartile every year with the exception of 2008.
It is of course run by FE Alpha Manager Mark Barnett (pictured), who has managed the five crown-rated fund since the start of 2006.
Over his tenure, it has provided a total return of 127.56 per cent, outperforming its average peer and benchmark by 61.73 and 69.13 percentage points respectively.
Performance of fund vs sector and index under Barnett
Source: FE Analytics
Not only is the £1.1bn fund in the top percentile for its maximum drawdown over this time frame, it is also in the top decile for its Sharpe ratio, which measures risk-adjusted returns, and for its annualised volatility.
Barnett’s fund also has a top-decile alpha generation over his tenure, as the manager adopts an unconstrained style which diverges significantly from the index and has a low turnover. In fact, as long as a stock has not been fully re-valued by the market, the manager is theoretically able to hold it forever.
These stocks are chosen for both their capital growth prospects and their ability to produce income, although he believes that dividend growth is ultimately the biggest indicator of strong future cash flows.
Examples of stocks in Invesco Perpetual UK Strategic Income’s top 10 holdings include Reynolds American, British American Tobacco, BT Group and Imperial Tobacco Group.
The fund has a clean ongoing charge figure (OCF) of 0.92 per cent and yields 3.35 per cent.
Only one fund in the IA UK All Companies sector has achieved an above-average maximum drawdown in nine out of the last 10 years (so narrowly failing to meet the criteria of this study) and that is Artemis UK Special Situations.
It has been managed by FE Alpha Manager Derek Stuart since its launch at the turn of the millennium, who was then joined by co-manager Andy Gray in 2014.
The £1.3bn fund, which fell into the third quartile in 2013 for its maximum drawdown, has provided a total return of 426.85 per cent since its launch, comfortably quadrupling the gains of both its sector and its FTSE All Share benchmark.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund aims to outperform its benchmark over the market cycle, which is usually between five and seven years, through a portfolio of between 60 and 80 stocks that the managers believe have been undervalued by the market.
Artemis UK Special Situations has a clean OCF of 0.81 per cent and yields 2.31 per cent.
Over in the IA UK Equity Income sector, FE Alpha Manager Francis Brooke’s Troy Trojan Income fund is the only open-ended investment vehicle to achieve an above-average maximum drawdown each year over the last decade.
In fact, it has been in the top quartile for this every year with the exception of 2012, when it fell into the second quartile.
Since its launch in 2004, the £2.5bn fund has provided a total return of 170.07 per cent, compared with its sector average of 116.73 per cent and its benchmark’s 110.62 per cent return.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Brooke aims to provide a growing income stream for investors as well as grow capital over the long term and does this through a concentrated portfolio of defensive stocks, half of which are typically in the FTSE 100.
The fund has achieved a Square Mile rating of AA for its lower-risk equity income strategy and for the manager’s focus on providing a premium yield over the market.
“This fund has a clear investment philosophy, sound investment process and impressive and dedicated team supporting it,” the research team said.
“As a strategy providing a reliable and growing income stream, and exposure to UK equities through a more sheltered return profile, there are few peers that can match it.”
Troy Trojan Income has a clean OCF of 1.02 per cent and yields 3.73 per cent.
Somewhat disappointingly, not a single fund in the IA UK Smaller Companies sector managed to achieve an above-average maximum drawdown each year over the last decade, although it’s well-known that small-cap funds exhibit higher volatility than their larger peers.
Out of the 36 funds in the sector with a 10-year track record, Marlborough UK Micro Cap Growth is the only investment vehicle not to be in the bottom quartile for its maximum drawdown in any of the last 10 years, although it was in the third quartile in 2007, 2011, 2014 and 2015.
It was launched by FE Alpha Manager Giles Hargreave in 2004, who was joined by co-manager Guy Feld in 2012.
Since its launch, the £517m fund has provided a total return of 386.48 per cent, outperforming its peer average by 193.74 percentage points.
Performance of fund vs sector since launch
Source: FE Analytics
The three crown-rated fund has also made it onto the FE Invest Approved list due to the fact that Hargreave is an FE Alpha Manager and the fund is supported by the AFI panel of leading financial advisers.
The portfolio has a bias towards technology, thanks to UK micro-caps providing a wealth of opportunities in this space and it being the area of the market that Feld specialises in.
The managers utilise the smallest companies on the market through the fact that there are a large number of technology stocks in this space, as this is.
Because of the small sizes of the stocks held though, they cannot be traded every day and as such the portfolio usually holds a cash weighting for liquidity purposes, which currently stands at 1.5 per cent.
“Marlborough UK Micro Cap Growth is one of the best UK funds in terms of performance and quality of investment team,” the FE Invest team said.
“Stock-picking is the main driver of performance in micro-cap investing, which puts the emphasis on in-depth knowledge of the companies and their management, and works in this fund’s favour.”
The fund has a clean OCF of 0.79 per cent.
