Financial advisers have consistently tipped funds such as Invesco Perpetual Income, Lazard Emerging Markets and Standard Life Investments UK Smaller Companies for investors with higher risk tolerances, data from FE’s AFI indices show.

The FE Adviser Fund Index (AFI) is made up of the recommended portfolios of a panel of leading UK financial advisers and is based on the funds they actually recommend to their clients. The AFI has been running since November 2004 and has gone through 24 rebalancings since then.

Performance of AFI Aggressive vs IA Flexible Investment since November 2004

Source: FE Analytics

The above chart shows that the AFI Aggressive index, which is the focus of this article, has outperformed its equivalent Investment Association sector since launch. The index is also ahead of the IA Flexible Investment sector over the past one, three, five and 10 years

In the following article, we find out which current AFI Aggressive members have been recommended by the advisers on our panel for at least 18 rebalancings and see how they’ve performed over the past decade.

Lazard Emerging Markets

Source: FE Analytics

This £1bn fund has been headed up by James Donald since inception; it is one of two funds to be included in the AFI Aggressive index for the past 18 rebalancings. Lazard Emerging Markets has beaten the average return of the IA Global Emerging Markets sector and its MSCI Emerging Markets benchmark over the past 10 years after gaining 121.48 per cent. It has been slightly more volatile than both over this period, but has one of the best Sharpe ratios of the sector as well as being in the top quartile for alpha generation and maximum drawdown. Although Donald is the named manager on the portfolio, it is run with a team approach and with a bottom-up investment process that seeks firms trading on attractive valuations and showing signs of improving financial productivity. Its biggest holding is China Construction Bank, followed by Russia’s Sberbank and Taiwan Semiconductor Manufacturing Company.

Standard Life Investments UK Smaller Companies

Source: FE Analytics

FE Alpha Manager Harry Nimmo has run this £1.2bn fund since its launch in January 1997 and it has also been in the AFI for 18 rebalancings. Standard Life Investments UK Smaller Companies has outpaced the average IA UK Smaller Companies member and the Numis Smaller Companies ex Investment Trusts index over the past 10 years with a 168.29 per cent total return. Nimmo tends to invest in quality, growing businesses that are or have the potential to be leaders in their fields; current holdings include JD Sports Fashion, Telecom Plus and Ted Baker. The manager makes use of a quantitative tool called the Matrix, which he helped develop and which ranks companies on a number of predicative variables such as value, growth, momentum, dynamic and quality factors. One important element of the approach is Nimmo’s willingness to hold onto winning companies even if they have moved up the market cap spectrum, leading to FTSE 100 names such as Hargreaves Lansdown appearing in the top 10 in the past.

Invesco Perpetual Income

Source: FE Analytics

There are two funds to have been including the index for 20 periods and first up is FE Alpha Manager Mark Barnett’s Invesco Perpetual Income fund; this was managed by Neil Woodford for the bulk of the period in question. The £5.7bn fund is in the IA UK All Companies sector but was in the IA UK Equity Income peer group until 2014, so we’ve shown its performance against both. As can be seen, its 92.04 per cent return is comfortable outperformance of both sectors over the past 10 years. Like Woodford before him, Barnett takes a long-term approach when building the portfolio and aims to offer an attractive total return, rather than focusing on income alone. That said, the potential for dividend growth is one of the most important factors when the manager is deciding whether a stock should be held by the fund. Current top holdings include Reynolds American, BP and British American Tobacco.

Invesco Perpetual Global Smaller Companies

Source: FE Analytics

This £691.7m fund, which has Invesco Perpetual chief investment officer Nick Mustoe as lead manager, has also been included in the AFI Aggressive index for the past 20 rebalancings. The fund’s focus on smaller companies means that it has outperformed the average IA Global fund by a wide margin over the past decade, making a total return of 177.45 per cent. It has also been more volatile than its average peer and has a higher maximum drawdown, but it is in the top quartile when it comes to risk-adjusted returns as measured by the Sharpe, Sortino and Treynor ratios. UK investors have a limited number of options for global smaller companies portfolios and the FE Invest team, which has the fund on its Approved List, says Invesco Perpetual Global Smaller Companies “offers a useful strategy for those with a higher risk tolerance”. Mustoe takes a valuation-based approach to investing; Stocks are selected by eight regional specialist managers and Mustoe heads up the regional asset allocation.

Dimensional UK Small Companies

Source: FE Analytics

In joint second place we have the £428.3m Dimensional UK Small Companies fund, which has been included in 23 rebalancings. As the chart above shows, the fund – which is managed by Dimensional’s portfolio management team – has outperformed its average IA UK Smaller Companies peer and the MSCI UK Small Cap index over the past 10 years with a 118.79 per cent total return. Dimensional’s investment approach is based on “putting financial science to work for investors”. The group makes use of academic research into the behaviour of markets and attempts to avoid “futile forecasting or trying to outguess others”; instead the firm looks for certain characteristics that suggest a stock will offer higher than expected returns. In UK smaller companies fund, this has resulted in a portfolio of 326 companies, with top holdings including Rentokil Initial, Melrose Industries and Rightmove.

AXA Framlington UK Select Opportunities

Source: FE Analytics

Also in second place with 23 entries into the index is the £3.8bn AXA Framlington UK Select Opportunities fund, which has been headed up by FE Alpha Manager Nigel Thomas since September 2002. Thomas has more than 30 years of asset management experience and has built a strong track record, reflected in the 107.76 per cent total return of his fund over the past decade. His process concentrates on companies that have attractive growth prospects, although the manager will not overpay for them. This leads him to companies that generate above average growth in earnings and produce high cash returns on invested capital. Top holdings include Paddy Power Betfair, GlaxoSmithKline and Dixons Carphone. The fund has fallen into the IA All Companies sector’s third quartile on a three-year view but remains a popular offering for long-term investors.

Stewart Investors Asia Pacific Leaders

Source: FE Analytics

In top spot we have the £9.4bn Stewart Investors Asia Pacific Leaders fund, which has been in the AFI Aggressive index in each of the 24 rebalancings. It is managed by FE Alpha Manager David Gait and Sashi Reddy but for the bulk of the period in question it was led by Asian equity veteran Angus Tulloch, who is still involved in the investment process. As the chart makes clear, the fund has outperformed its average IA Asia Pacific ex Japan peer and its MSCI AC Asia Pacific ex Japan benchmark by a significant margin during the past decade. It has achieved this while being in the top decile for metrics such as alpha generation, maximum drawdown, annualised volatility and Sharpe ratio.  Gait and Reddy have maintained the conservative stance established by Tulloch, who thought that taking additional risk in the current market is unlikely to be rewarded. This has given the fund a reputation as one that can protect capital in uncertain markets as it was hit by around half of the losses of its benchmark in the bear years of 2008 and 2011.

Funds in the AFI Aggressive for more than 10 rebalancings

Source: FE