IA Global funds have found it very difficult to combine top quartile returns with low volatility over recent years, the latest FE Trustnet research shows, although those in the global equity income sector have had slightly better luck.
One of the ‘holy grails’ of investing is achieving high returns through a relatively smooth investment journey, although investors usually face a choice of maximising returns by embracing volatility or taking less risk but seeing lower returns as a result.
However, there are a number of funds that have managed to do both. In this study, we looked across the Investment Association’s Global, Global Equity Income and Global Emerging Markets peer groups to which – if any – funds sat in the top quartile for both total return and annualised volatility over the three years to the end of 2015.
When it comes of the global sector, only three funds out of 263 – or 1.14 per cent – are in the top 25 per cent of their peers on both metrics, with JOHCM Global Opportunities leading the way.
Source: FE Analytics
The £135.3m fund, which has been managed by FE Alpha Manager Ben Leyland since launch in June 2012, focuses on achieving absolute returns over a three to five-year time horizon and tends to invest in high quality blue-chips with solid balance sheets.
Leyland’s unconstrained approach is shown in the fund’s active share of 96.40 per cent, which suggests his portfolio is highly differentiated to its MSCI AC World index benchmark. FE Analytics also shows the fund is top decile when it comes to alpha generation, maximum drawdown and risk-adjusted returns (as measured by the Sharpe ratio) over three years.
During last year’s turbulent conditions, JOHCM Global Opportunities made a 12.89 per cent return – some 10 percentage points more than its average peer. Leyland expects the volatility to continue into the “foreseeable future” and is running his portfolio accordingly.
“The contrast with the 2013-14 period could well be akin to that between a cruise liner and a white water kayak. In order to be successful, we need to be prepared to navigate some pretty choppy waters without losing sight of our long-term objective, which is to protect and grow our clients’ capital,” the manager said in a recent update.
“We must spot and respond appropriately to both risks and opportunities as they present themselves, to make sure we are moving forward but don’t capsize the boat. Sudden grand gestures, such as shifting between ‘quality’ and ‘value’ stocks (or indeed funds), may work for a few months but are unlikely to be successful in the long term and entail significant risk of capital destruction.”
Performance of fund vs sector and index since launch
Source: FE Analytics
Just behind the JOHCM fund is Matthew Dobbs and Richard Sennitt’s Schroder ISF Global Smaller Companies fund. While small-caps tend to be riskier than large-caps, the fund targets companies that have strong earnings and cash flow growth prospects while trading at reasonable valuations, which helps smooth its performance profile.
The fund has more than half of its assets in US companies, although this is an underweight to its benchmark. Its largest overweight is to Asia, reflecting Sennitt’s experience and track record in this part of the market.
The remaining global fund to sit first quartile for returns and volatility over the last three calendar years is an index tracker: Vanguard FTSE Developed World ex UK Equity Index. Vanguard is one of the best regarded passive fund managers and this fund holds a ‘recommended’ rating from Square Mile Investment Consulting & Research.
Moving over to the IA Global Equity Income sector and two members meet the criteria for inclusion in this article – representing 5.6 per cent of the 36-strong peer group.
As the graph below shows, Daniel Roberts’ Fidelity Global Dividend and James Davidson's JPM Global Equity Income funds outperformed their average peer over the three years in question, although the JPM offering was slightly behind the MSCI AC World index.
Performance of fund vs sector and index over 2013, 2014 and 2015
Source: FE Analytics
Fidelity Global Dividend’s unconstrained approach seeks to make a dividend-based total return with a focus on capital preservation. Roberts views valuation as the most important determinant of future returns but is looks for stocks with strong free cash flow and the potential to increase the dividend.
Its top holdings include a number of household names, including Johnson & Johnson, Wolters Kluwer, Relx, British American Tobacco and Proctor & Gamble. It is underweight North America and emerging markets, but overweight Europe and the UK.
JPM Global Equity Income focuses on large-cap stocks, with an emphasis on value. It is also North America and emerging markets but overweight Europe and the UK, with its top holdings being Exxon Mobil, Microsoft and Roche.
