Investors who went into 2016 holding some IA UK All Companies funds that have given a smooth ride over recent years would have fared better than the average active fund and, in some cases, beaten the index by a decent margin, according to research by FE Trustnet.
Moving into the new year with widespread concerns over the health of the global economy and the Brexit referendum on the horizon led some investors to expect rocky conditions in 2016, which turned out to be a fair prediction.
In early February, the FTSE All Share was down close to 11.5 per cent but then headed upwards – until the sharp falls seen in the immediate aftermath of the UK’s vote to quit the European Union. Since then, however, the market has trended upwards and is now sitting on an 11.62 per cent total return.
In the end, the summer has been one of relatively low volatility – despite the upset caused by the Brexit result – thanks in part to continued loose monetary policy from the world’s central banks.
But, as has been noted on several occasions, these events appear to have tripped up the average active manager. FE Analytics shows that the average IA UK All Companies fund is 4.72 percentage points behind the index.
Performance of sector vs index over 2016
Source: FE Analytics
We were interested in what would have happened if an investor had listened to concerns of increased volatility at the start of the year and bought the funds that had been the sector’s least volatile over recent years.
To do this, we took all the funds from the peer group whose annualised volatility for the five years to the end of 2015 has remained in single-digit territory; over this period, the FTSE All Share’s was 11.26 per cent while the average IA UK All Companies member posted annualised volatility of 11.36 per cent.
This left us with 11 funds - Allianz UK Unconstrained, EdenTree Amity UK, Evenlode Income, Henderson UK Strategic Income, Invesco Perpetual High Income, Invesco Perpetual Income, Invesco Perpetual UK Strategic Income, JOHCM UK Opportunities, Jupiter UK Special Situations, Liontrust Special Situations and Rathbone Income.
When these funds are put into a composite portfolio, we can see that the average member has delivered an 8.43 per cent total return over 2016 so far. This means it has beaten the wider sector but has still failed to outperform the index.
Performance of portfolio vs sector and index over 2016
Source: FE Analytics
As well as boosting the sector’s lowest volatility numbers, all of the above funds aside from Henderson UK Strategic Income have outperformed the FTSE All Share and their average peer from a total return point of view over the past five years.
At an individual fund level, it’s been a mixed bag for performance this year, however. Five of the funds are in the top quartile of their peer group and are beating the FTSE All Share; the remaining six are behind the index with two in the third quartile and four in the bottom quartile.
| Performance of low volatility IA UK All Companies funds in 2016 | |
| Evenlode Income | 18.16% |
| Liontrust Special Situations | 13.64% |
| Jupiter UK Special Situations | 13.44% |
| JOHCM UK Opportunities | 12.67% |
| Allianz UK Unconstrained | 12.12% |
| FTSE All Share | 11.62% |
| IA UK All Companies | 6.90% |
| Henderson UK Strategic Income | 6.52% |
| Rathbone Income | 6.40% |
| EdenTree Amity UK | 3.59% |
| Invesco Perpetual High Income | 2.78% |
| Invesco Perpetual Income | 2.24% |
| Invesco Perpetual UK Strategic Income | 1.76% |
Source: FE Analytics
As can be seen the table, it’s Evenlode Income – which was recently moved from the IA UK Equity Income sector into this peer group – that has made the highest total return out of these low volatility funds.
The fund, which is managed by Hugh Yarrow with Ben Peters as deputy, is also the third best performer in the entire IA UK All Companies sector over 2016, after making 18.16 per cent. The five FE Crown-rated fund is currently in the sector’s top decile over one, three and five years.
Yarrow and Peters focus on companies that benefit from sustainable growth with limited need for capital reinvestment, therefore giving them scope to return cash to shareholders by way of dividends. The fund’s largest sector allocations are to consumer goods and technology, with Diageo, Unilever, Sage Group and Microsoft sitting in its top holdings.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
“By avoiding the more cyclically sensitive areas of the market (for example commodities-related stocks and certain financials), which can be subject to more variable dividend payments as company profits fluctuate with the economic cycle, the managers believe that the stocks they hold can provide a more reliable dividend stream,” the analysts at Square Mile said.
“Patience is required however, and while the underlying holdings should be better insulated from a sharp market downturn, the fund is unlikely to outperform in a strong rising market.”
Liontrust Special Situations, Jupiter UK Special Situations, JOHCM UK Opportunities and Allianz UK Unconstrained are also sitting on double-digit returns and counting themselves among the relatively few active UK funds to beat the index in 2016.
At the bottom of the table and underperforming both the sector average and index are three of FE Alpha Manager Mark Barnett’s funds - Invesco Perpetual High Income, Invesco Perpetual Income and Invesco Perpetual UK Strategic Income.
Although all three funds maintained strong longer term track records, they have dropped into the bottom-quartile of the sector in 2016. In a coming article, FE Trustnet will take a closer look at the funds to identify why their returns have slipped in the short term.