An alternative to CF Ruffer Total Return
Hidden in the IMA Unclassified sector is a pure equity fund that has protected more effectively against the downside than many “absolute return” portfolios.
In a world of low economic growth and volatile markets, funds that provide above-average returns with below-average volatility are at a premium.
Multi-asset portfolios such as CF Ruffer Total Return and Trojan
are well-known to FE Trustnet
readers, regularly featuring in research articles on funds that match such a profile.
Both appeared on the list of 20 retail funds
to have made more than 100 per cent over the past decade with a volatility score of less than 10 per cent, for example.
There is one lesser-known fund, however, that offers cautious investors a similar risk/return profile: Kennox Strategic Value
Performance of funds over 5-yrs
Source: FE Analytics
The fund was launched in November 2007 into the teeth of the economic crisis, yet despite being composed entirely of equities it made 6.38 per cent in 2008, while the FTSE All Share ended the year down 29.93 per cent and the MSCI World index down 17.92 per cent.
Data from FE Analytics
shows it has beaten the Trojan fund over five years and almost matched the returns of CF Ruffer Total Return – making 53.32 per cent compared with 56.03 per cent from the Ruffer fund.
Its five-year volatility score of 11.51 per cent is comparable to the 8.5 per cent of Trojan and 8.07 per cent of the Ruffer fund, while the max drawdown – the most investors could have lost if they had bought and sold at the worst possible moments – is 13.28 per cent, slightly more than the 9.81 per cent and 9.91 per cent of the two better-known funds.
Charles L Heenan, principal manager on the fund, explains it achieved its positive results in 2008 thanks to its deep value style.
"We are looking for companies which already have very low expectations in the price, and some of those companies went up in 2008 – they had already had their bad times," he said.
Heenan explains that very few opportunities meet the team's criteria, as it looks for battered stocks with very little downside to already poor expectations.
The team invests on a long-term horizon and is happy to hold companies for many years before the investment pays off.
For example, the fund bought Mattel in late 2007 after a scandal surrounding lead paint in children’s toys, and sold in mid-2010 at a substantial profit.
The managers screen for companies that are trading within 5 per cent of their 52-week lows, or those that have attractive valuations or are trading below the value of current assets less liabilities.
These ideas are then researched in depth and are supplemented by "blue sky" ideas from non-quantitative sources.
The resulting portfolio is a high-conviction one made up of just 26 positions, with diversification between factors such as risk, growth, earnings, franchise and valuation, rather than between the standard industry sectors.
Kennox Strategic Value currently has just under 20 per cent in cash. Heenan explains this is not unusual, as the fund buys and sells very rarely and needs some liquidity to make its moves.
"In my 20 years in the industry I have never had a buy and sell opportunity on the same day," he said.
The fund sits in the IMA Unclassified sector, which is one reason investors may have overlooked it, and has a high threshold to entry of £20,000. It is currently yielding 2.36 per cent.
Peter Boyle, managing director of Kennox Asset Management, explains the group only seeks patient, long-term investors.
"We are very careful with the clients we choose," he said. "They need to understand the style. You should not keep this fund if you want to keep up with the bull markets. Capital preservation is the key to long-term performance."
The fund takes no benchmark and is unconstrained geographically, meaning that the managers have an almost limitless number of companies to choose from.
Heenan explains how it filters out firms.
"You have to know exactly what you are looking for and then build the process around that. A team of 20 analysts in a large fund house will only see certain things."
The portfolio has a total expense ratio of 1.5 per cent on its professional share class and is available via platforms.