Markets have also had to contend with the earthquake and consequent nuclear disaster in Japan, the Arab Spring and numerous banking crises across the globe, including here in the UK.
However, in spite of these numerous issues, equity markets have flourished in most places, with the MSCI World up almost 50 per cent over a five-year period. Many funds have proved to be even more successful, with some doubling investors’ money since the summer of 2008.
In the first article of a new series, FE Trustnet looks at which funds have been able to deliver stellar returns over the turbulent period, with a particular focus on those that have done so with minimal volatility and downside risk.
Very soon, the significant losses sustained during 2008 will be wiped off funds’ five-year track records, so we thought it was a good idea to identify those that have managed to perform well in both up and down markets over this time-frame.
To kick off the project, we look at funds in the IMA UK Equity Income sector, and trusts in the IT UK Growth & Income sector.
IMA UK Equity Income
The best-performing funds in the IMA UK Equity Income sector are dominated by those with a small and mid cap focus. Unicorn UK Income is number-one over the period by some distance, with returns of 179.58 per cent, followed by PFS Chelverton UK Equity Income, with returns of 105.89 per cent.
Both have a specific focus on small caps and are the only ones in the sector that have doubled investors’ money over the period.
Performance of funds, sector and index over 5yrs
Source: FE Analytics
The Unicorn fund lost only slightly more than the FTSE All Share in the aftermath of the Lehmans crash, but the Chelverton fund fell significantly further, losing more than 35 per cent between August 2008 and March 2009.
In 2011, again both funds suffered heavier losses than the All Share and IMA UK Equity Income sector average. Thus, in both cases, the majority of the outperformance came as a result of the funds’ stellar performance during the up markets following the crash.
Performance of funds, sector and index over 5yrs
| Name | 5yr return (%) |
|---|---|
| Unicorn - UK Income | 179.58 |
| PFS - Chelverton UK Equity Income | 105.89 |
| JOHCM - UK Equity Income | 97.78 |
| Cazenove - UK Equity Income | 77.88 |
| Schroder - Income | 76.38 |
| Royal London - UK Equity Income | 75.05 |
| Invesco Perp - UK Strategic Income | 71.04 |
| Royal Bank of Scot - Equity Income | 70.14 |
| Natwest - Equity Income | 70.12 |
| Trojan Income | 69.4 |
| IMA UK Equity Income | 50.03 |
| FTSE All Share | 49.14 |
Source: FE Analytics
Looking further down the performance tables, those that have proved successful have tended to be those that have excelled in the up markets of 2009, 2010, 2012 and 2013.
JOHCM UK Equity Income, which has returned 97.78 per cent over five years, has a significant bias towards mid caps, as is the case for Schroder Income, which has a big chunk of its assets in recovery stories.
There are some funds, however, that have been able to return in excess of 70 per cent while also protecting investors’ capital much more effectively during tough periods. The likes of Trojan Income and Invesco Perpetual UK Strategic Income, have been particularly effective at doing this; they have an annualised volatility of 10.61 and 12.61 per cent over five years respectively, which compares with 16.84 per cent from the All Share and 15.5 per cent from the IMA UK Equity Income sector average.
The duo lost less than 20 per cent in 2008 and managed a positive return in 2011.
To illustrate this point more clearly, it is useful to look at the Sharpe ratio of the funds over the period, which is a good measure of calculating risk-adjusted returns. This particular ratio calculates 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.
Given the dominance of Unicorn UK Income in the total return standings, combined with the fact that it is only a fraction more volatile than its sector average over five years, it is unsurprising that it retains the number-one spot on a risk-adjusted return basis; however, overall the top-10 has a different feel to it when looking at this alternative performance measure.
Risk-adjusted return of funds, sector and index
| Name | Sharpe ratio |
|---|---|
| Unicorn UK Income | 1.39 |
| PFS Chelverton UK Equity Income | 0.93 |
| Trojan Income | 0.66 |
| JOHCM UK Equity Income | 0.57 |
| Invesco Perp UK Strategic Income | 0.52 |
| Cazenove UK Equity Income | 0.48 |
| Royal London UK Equity Income | 0.45 |
| Royal Bank of Scot Equity Income | 0.45 |
| Natwest Equity Income | 0.45 |
| Schroder Income | 0.44 |
| IMA UK Equity Income | 0.31 |
| FTSE All Share | 0.21 |
Source: FE Analytics
Francis Brooke’s Trojan Income portfolio shoots up the table to third when looking at the Sharpe ratio, thanks to its low volatility score. The opposite is true for the Schroder Income fund, which falls from fifth place in the total return standings to 10th.
While it did not break into the top-10, Neil Woodford’s Invesco Perpetual High Income and Income funds improve significantly when looking at risk-adjusted returns. Only the Trojan Income fund has been less volatile than them over a five-year period.
Other funds that have beaten the IMA UK Equity Income sector average and FTSE All Share with less volatility over five years include Aviva UK Equity Income, Fidelity Moneybuilder Dividend and Threadneedle UK Equity Income.
IT UK Growth & Income
Narrowing discounts and the use of gearing during up periods has led to a number of investment trusts in the IT UK Growth & Income sector delivering in excess of 100 per cent over a five-year period.
The standout performer by some distance is FE Alpha Manager Nick Train’s Finsbury Growth & Income IT, which has returned 156.74 per cent over the period. It has done this with almost exactly the same annualised volatility as its sector average and FTSE All Share benchmark.
Performance of trusts, sector and index over 5yrs
Source: FE Analytics
The other three UK equity income trusts that have more than doubled investors’ money are Temple Bar IT, Lowland Investment Company and Neil Woodford’s Edinburgh Investment Trust.
With the exception of James Henderson’s Lowland trust, all have been less volatile than their sector average and the FTSE All Share index, and lost less than both in 2008. This is in sharp contrast with the results in the open-ended universe.
Alastair Mundy’s Temple Bar IT has been particularly effective at protecting against the downside, thanks to the manager's strategic use of cash when he believes markets have risen too much. He lost just 13.82 per cent in 2008 and managed a positive return in 2011. The manager’s cash weighting is currently 11.2 per cent, which is high compared with Temple Bar’s long-term average. Mundy told FE Trustnet earlier this year that he was struggling to find value anywhere because valuations had risen so high.
Another standout performer has been the Perpetual Income and Growth IT, which is run by FE Alpha Manager Mark Barnett. It has achieved top-10 performance in its sector over five years, with returns of 96.84 per cent, and has also been the least volatile in the sector.
Our data shows it has an annualised volatility of just 13.38 per cent since the summer of 2008; however, its ability to protect against the downside has not been enough to displace Train (pictured) and Mundy’s trusts in the risk-adjusted returns standings.
Looking at movements in net asset value (NAV) strips out the impact of a closing discount on returns, thus giving a fairer reflection of the managers’ performance. There is little change, however, with the Finsbury Growth & Income IT and Temple Bar IT still dominating the field, with returns of 100.62 and 58.51 per cent, respectively.
