Last week we searched for IA UK All Companies funds that sit in the top quartile for total returns over recent years but have done so with some of the lowest volatility of the peer group, finding that offering such as Neptune UK Mid Cap, Mark Barnett’s flagship Invesco Perpetual income funds and Liontrust Special Situations have achieved this feat.
Within the 269-strong sector, there were just 12 funds that are in the top quartile for three-year returns, five-year returns and annualised volatility over five years. FE Alpha Manager Mark Martin’s £608.6m Neptune UK Mid Cap leads the pack from a returns point of view, while Barnett’s £6bn Invesco Perpetual Income fund has the lowest annualised volatility.
After the publication of the original article we had a request from regular commenter Jen, who said: “It would be good for Trustnet to do the reverse, both ways, best returns with highest volatility (to take advantage of large falls) and worst returns with lowest volatility, Gary Jackson.”
With this in mind, we’ve re-run the numbers to show the outcomes requested by Jen. In a similar fashion to the previous study, we filtered down the IA UK All Companies sector to find the funds that are sitting in the top quartile over challenging last three years and the more balanced past five years, as well as being in the bottom 25 per cent of their peers when it comes to annualised volatility.
IA UK All Companies funds with the best returns with highest volatility
Source: FE Analytics
The average fund on this list has annualised volatility of 13.73 per cent over five years and its total return over the same period has been 79.86 per cent. In contrast, annualised volatility of the average high return/low volatility fund was 10.30 per cent and it made a 74.26 per cent return.
As the table above shows, FE Alpha Manager Luke Kerr’s £394.1m Old Mutual UK Dynamic Equity has the highest return out of the most volatile funds, making its investors 113.33 per cent over the past five years. The fund is a long/short product that mainly invests outside of the FTSE 100.
While its return is slightly lower than Neptune UK Mid Cap’s over the same period and its annualised volatility is 2.5 percentage points higher, Jen was interested in how these funds fared after large falls – although it must be noted that timing the market is a difficult strategy to pull off.
Between the end of 2015 and 12 February 2016, Old Mutual UK Dynamic Equity fell by close to 14 per cent while the average IA UK All Companies fund was down 11.4 per cent; between 12 February and now, however, the fund has made 11.25 per cent while its average peer is up 8.62 per cent.
Looking further down the table and many of the funds included are those that focuses on the mid-cap part of the market while a handful have a recovery or value approach to investing.
Funds such as AXA Framlington UK Mid Cap, Old Mutual UK Mid Cap and Franklin UK Mid Cap have made returns significant higher than the rallying FTSE 250 index over the past five years but have been more volatile than even this higher-risk part of the market.
Performance of funds vs index over 5yrs
Source: FE Analytics
Fidelity Special Situations and L&G UK Special Situations Trust are examples of funds that have a value bias in their investment process. These kinds of funds tend to be more volatile than the average portfolio owing to their ownership of under-pressure businesses, but they have potential for high returns – as shown over recent years, which have presented difficult conditions for this kind of investor.
IA UK All Companies funds with the worst returns with lowest volatility
Looking at the second of Jen’s requests, the below table shows the UK funds that have managed to keep volatility levels down to some of the lowest in the peer group but at the same time have fallen into the bottom quartile for total returns.
The funds in the below table are those that are in the fourth quartile over three and five years but the top quartile for annualised volatility.
Source: FE Analytics
The FTSE All Share index has made a 29.08 per cent total return over the past five years while its annualised volatility has been 11.20 per cent.
As can be seen, all of the above funds have fallen short of the FTSE All Share’s return while three – NFU Mutual UK Growth, Mirabaud Equities UK High Income and Virgin UK Index Tracking – have been more volatile.
Candriam Equities L United Kingdom has made the lowest five-year return after gaining just 16.16 per cent. The fund’s top 10 positions are large-cap names, including Royal Dutch Shell and BP, which have been hit hard by the plunging oil price, as well as HSBC, Vodafone and Unilever.
Mirabaud Equities UK High Income has been the most volatile funds in the article at 11.54 per cent annualised (The most volatile in the whole sector has been Standard Life Investments UK Equity Recovery, with 23.09 per cent).
The fund’s top holdings are predominately large-caps favoured by income investors such as Royal Dutch Shell, AstraZeneca and GlaxoSmithKline although it does hold less frequently seen names such as Intermediate Capital Group and Manx Telecom.
How much attention do you pay to past volatility when looking at funds? Is there any analysis you'd like running on this area in future articles?
