Less than 2 per cent of the funds in the Investment Association’s four multi-asset sectors have managed to deliver top-quartile returns and annualised volatility over the past three years, according to research by FE Trustnet, with more than a quarter of these portfolios run by Premier Asset Management.
The past three calendar years have offered a tough environment for active managers to operate in. While 2013 was a strong bull year – the FTSE All Share made a 20.81 per cent total return – the following two were much more challenging and left some investors sitting on losses.
Across the three-year period the FTSE All Share made a 23.43 per cent total return and outperformed the average fund in all four multi-asset sectors, although IA Mixed Investment 40%-85% Shares – the highest risk peer group – was just 19 basis points behind.
Performance of sectors vs index over 2013, 2014 and 2015
Source: FE Analytics
However, the average multi-asset fund has offered investors a smoother ride than the index, where annualised volatility has been 10.57 per cent. As is to be expected, the lowest volatility has come from the IA Mixed Investment 0%-35% Shares sector (4.25 per cent) while the highest was from IA Mixed Investment 40%-85% Shares, at 7.63 per cent.
Adrian Lowcock, head of investing at AXA Wealth, said: “The last three years haven’t been easy for multi-asset funds which look to make a positive return but retain low volatility.”
“Global markets have very much been led by central bank actions, which means that managers have been hanging on every word from the Federal Reserve, Bank of England, European Central Bank or Bank of Japan and more recently the People’s Bank of China.”
“With the Fed commentary, which caused sell-offs in the market such as the taper tantrum, and the ‘will they, won’t they’ debate on interest rate rises, it has made it a tough environment to make the big calls.”
But how many funds have been able to combine the highest returns with the lowest volatility over the three years in question? FE Analytics shows that only 11 out of 494 reside in the top-quartile for both metrics.
Within the IA Mixed Investment 0%-35% Shares sector, no funds have managed to achieve this.
JPM Cautious Managed leads for total return, making investors 22.77 per cent over three years, but its annualised volatility of 4.38 per cent pushes it into the second quartile. The fund is currently at its maximum weighting to equities, helping to explain its strong gains.
When it comes to volatility, Barclays Wealth Global Markets leads with 3.11 per cent – although a 3.87 per cent gain means it sits in the bottom quartile for total return.
In the IA Flexible Investment sector, Unicorn Mastertrust and TB Wise Income are the only portfolios in the first quartile for returns and volatility.
Performance of funds vs sector over 2013, 2014 and 2015
Source: FE Analytics
Peter Walls’ Unicorn Mastertrust is a fund of investment trusts, with invests across asset classes and geographical areas with a contrarian approach.
This approach means that the portfolio does contain some under-pressure names, such as BlackRock World Mining and City Natural Resources, which have been hit by plunging commodity prices. However, its top 10 includes the likes of Acorn Income, Foreign & Colonial, TR Property, Caledonia and SVG Capital.
Owing to its strong performance and volatility profile, Unicorn Mastertrust has the best Sharpe ratio of the sector, while it is also first decile for alpha generation and maximum drawdown.
TB Wise Income is managed by Tony Yarrow. It holds direct securities and funds, with top holdings including Princess Private Equity, Picton Property Income, Murray International, GlaxoSmithKline and HSBC.
The fund is also among the top quartile of its peer group for metrics such as alpha generation, maximum drawdown, downside risk and Sharpe ratio, FE Analytics shows.
Its aim of producing income is something is common with other funds that will be highlighted in this article for high returns and low volatility. Lowcock said: “The role of income in delivering solid returns during challenging markets stands out amongst the list of funds. Income means you get a return even if markets have fallen and income producing assets tend to have some defensive qualities.”
In keeping with this, all five of the IA Mixed Investment 20%-60% Shares highlighted in our study have a mandate to generate income for their investors.
Source: FE Analytics
Senior investment manager Simon Evan-Cook, who works on the two Premier funds mentioned here and on another to come, says the portfolios are run with little regard paid to how the rest of the sector is performing from a total return point of view – the focus is on the income they can generate.
He argues that the funds’ valuation discipline has driven much of their relative outperformance over recent years: “It was valuation concerns that led us to avoid commodities and gold, which have produced large losses over the last three years with a lot of volatility. Avoiding those areas undoubtedly helped.”
“Valuation also drew us to open-ended commercial property funds late in 2013, which have since provided the exact opposite experience to commodities: decent returns with low volatility.”
“Ignoring indices and using highly active funds has helped. This meant we didn’t have loads of exposure to mining and energy companies just because they decided to list on the UK stock exchange. That arbitrary nature of passive investing has always been off-putting, particularly outside of the US. That has gone in our favour over the last few years.”
From the final multi-asset sector – IA Mixed Investment 40%-85% Shares – there are four funds sitting top quartile for returns and volatility. As the below table shows, Premier Multi-Asset Growth & Income has been the best performer for returns by a decent margin while Old Mutual Managed has been the least volatile.
Source: FE Analytics
Again, three of these funds are tasked with generating income as well as capital returns for their investors. The exception is the Old Mutual fund, which aims for long-term capital growth through other portfolios managed by Old Mutual Global Investors.
