The Freehold Income Trust
has the best risk-adjusted return of any fund in the IMA unit trust and OEIC universe over a 10-year period, according to FE Trustnet
The £156m property-focused fund has returned 96.4 per cent over the last decade, with an annualised volatility only marginally higher than cash. By contrast, the FTSE All Share has returned 68.79 per cent over the period, with a significantly higher rate of risk.
Performance of fund vs indices over 10-yrs
Source: FE Analytics
The study used the Sharpe ratio to determine which funds had the best risk-adjusted performance over the set periods. The ratio measures a fund's return relative to a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund's volatility.
Topping both the five- and 10-year tables with a score of 1.5 and 1.41 respectively, the Freehold Income Trust is the overwhelming winner in the risk/return tables.
A recent FE Trustnet
series revealed the masters of risk/return across a number of IMA sectors. However, Freehold Income Trust, which is hidden away in the IMA Unclassified sector, did not feature in the study, as there are very few sources of comparison.
The fund attempts to provide a secure and stable return primarily through acquiring freehold ground rents which offer an attractive income stream and capital growth prospects. It currently has a target yield of 4.25 per cent after charges, but the yield is slightly higher than this at present.
It has an unbroken track record of positive returns for almost two decades and has consistently outperformed cash, gilts and inflation over each calendar year.
It has also been less volatile than many ‘safe haven’ assets over the period; according to FE data, it has an annualised volatility of 1.76 per cent, compared with 5.83 per cent from the average UK Gilt fund.
The fund is managed by Alpha Real Property Investment Advisers. It has a minimum investment of £5,000 and a total expense ratio (TER) of 1.9 per cent.
Neil Shillito, director of SG Wealth Management, is a big fan of the portfolio.
"I’d recommend this fund to just about anybody as a risk diversifier," he said. "Alpha owns many tens of thousands of properties across the UK, which it collects regular ground rents from."
"These rents are very modest – perhaps just £150 – but the income is very regular and predictable. Even if there are a few defaults here and there, this doesn’t make any difference to the overall return."
"The one problem with the portfolio is a lack of liquidity. Some big IFA firms were using the fund as an alternative to cash, which is unworkable because of the volumes of properties involved."
Unfortunately, the fund’s status as an unregulated collective investment scheme (UCIS) means that it is out of reach of many IFA firms, since the FSA does not look on favourably at its poor liquidity.
However, it can be accessed directly by investors, and Alpha has confirmed that it is considering turning the portfolio into a PAIF – a property authorised investment fund – meaning that it will be more easily accessible by IFAs.
"It’s certainly an option, but not being on the radar of the big IFAs also has its benefits," said manager Nigel Ashfield.
"The fund’s strength is its consistency of return, which requires consistent inflows. If we had a sudden influx of money, we’d need to buy more quality stock. However, only so many houses are being built every year."
"Becoming a PAIF would be more beneficial due to improved tax efficiency and transparency rather than for the sake of inflows," he added.
Ashfield confirmed that the fund has now beaten inflation for the 19th year in a row.
"We just got in our yearly figures to March this year of 6.2 per cent, which beats last year's figure," he commented.
The relatively unknown portfolio pipped a number of high profile funds to the post in the risk/return standings. The likes of CF Ruffer Total Return, Trojan
, Aberdeen Emerging Markets
and Marlborough Special Situations
are among the top funds with the highest Sharpe ratio since May 2002.
Top risk-rated funds over 10-yrs
Source: FE Analytics
Eight of the 10 funds are headed up by at least one FE Alpha Manager. The remaining two – Aberdeen Emerging Markets and the Freehold Income Trust – are headed up by teams rather than individuals, so do not qualify for FE Alpha Manager status.
Although funds with the highest Sharpe ratio over five years tend to have a pure fixed interest or property focus, CF Ruffer Total Return also makes an appearance in the top-20 list. The fund has returned 57.08 per cent over the period, with a volatility of just 8.43 per cent.
Of those funds without a 10-year track record, FE Alpha Manager Richard Woolnough’s M&G Corporate Bond
and M&G Optimal Income
portfolios are standout performers, with Sharpe ratios of 1.08 and 0.98 over five years respectively. Investec Emerging Market Local Currency Debt also makes it into the top-10 list.