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The UK value and recovery funds you can still hold and sleep at night

18 May 2017

FE Trustnet looks at the special situations, value and recovery-labelled funds in the IA UK All Companies sector that have achieved better five-year risk metrics than the FTSE All Share index.

By Lauren Mason,

Senior reporter, FE Trustnet

Liontrust Special Situations, Jupiter UK Special Situations and Artemis Special Situations are three value and recovery-marketed UK equity funds achieving the best risk metrics over five years, according to research by FE Trustnet.

In fact, of the 20 applicable funds in the sector, they are the only three to have beaten the FTSE All Share index in terms of their annualised volatility, Sharpe ratio (which measures risk-adjusted returns), maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) and downside risk (which predicts susceptibility to lose money during a falling market) over this time frame.

This data comes following 2017’s pullback in the aggressive growth/value rotation seen across markets during the second half of last year.

After several years of high-quality growth stocks outperforming and the valuation gap widening, expectations for US rate hikes and global fiscal loosening sparked a mass move into value plays.

Those who decided to gain exposure to this market area last year might be questioning their decision now though as, year-to-date, the FTSE World Growth United Kingdom index has almost tripled the performance of its value counterpart.

Performance of indices in 2017

 

Source: FE Analytics

However, this comes with the usual mantra of looking through short-term falls and maintaining a long-term time horizon.

For those that wish to add style diversification to their portfolios but don’t have the stomach to endure the heightened rises and falls that often accompany value funds, we looked at the vehicles in the IA UK All Companies sector that have offered investors the smoothest ride relative to the FTSE All Share index over five years.

The best-performing fund over five years of the three aforementioned vehicles is Jupiter UK Special Situations, which has five FE crowns and is headed up by Ben Whitmore.

Over five years, the £1.6bn fund has returned 105.12 per cent compared to its average peer and benchmark’s respective returns of 81.22 and 74.53 per cent. It has done so with a maximum drawdown of 11.07 per cent, which is just a few basis points less than the FTSE All Share’s drawdown at 11.12 per cent. What really sets it apart, however, is its Sharpe ratio of 1.16, which is almost double that of the index.

 

Source: FE Analytics

Jupiter UK Special Situations has a concentrated 41-stock portfolio, which consists of holdings that pass two initial quant screens: that they’re undervalued relative to their own long-term history and that they offer the most attractive combinations of low valuation and high return on capital.

While there is a further qualitative selection process, Whitmore will invest in companies before meeting the management teams as he prefers to remain emotionally detached from stocks. Examples of his largest holdings include BP, Standard Chartered and Aviva.


Hot on its heels with a five-year total return of 104.74 per cent is the £2.6bn Liontrust Special Situations fund, which is headed up by FE Alpha Manager duo Anthony Cross and Julian Fosh.

Out of the three UK value, special sits and recovery vehicles to have beaten the FTSE All Share index on four risk metrics, the five crown-rated fund has the lowest five-year maximum drawdown, downside risk ratio and annualised volatility. It also has the highest Sharpe ratio.

Cross and Fosh approach stock selection through their Economic Advantage process, which focuses on company characteristics that are difficult for competitors to replicate. The three main company traits they look for are intellectual property, strong distribution channels and significant recurring business.

This process has worked in their favour as, over the last decade, the fund has returned 201.64 per cent compared to its sector average and benchmark’s respective returns of 69.65 and 72.43 per cent.

Performance of funds vs sector and benchmark over 10yrs

 

Source: FE Analytics

The third fund on the list is Artemis UK Special Situations, which is £1bn in size and is co-managed by FE Alpha Manager Derek Stuart and Andy Gray. Over five years, it has returned 80.91 per cent, outperforming the FTSE All Share by 6.38 percentage points but marginally underperforming its average peer by 31 basis points.

That said, it has done so with a top-quartile maximum drawdown, downside risk ratio and annualised volatility as well as a higher Sharpe ratio.

Stuart and Gray adopt a benchmark-agnostic approach to structuring their portfolio and aim to invest in companies with simple and sustainable business models, but which are undergoing short-term difficulties. The fund will hold between 60 and 80 stocks at any one time; approximately 40 to 50 per cent of these tend to be large-caps, a further 40 to 50 per cent are often mid-caps, and the remaining percentage has historically been allocated to small-caps. Its largest current holdings include BP, Micro Focus and Tesco.

While these three funds are the only special situations, recovery or value-labelled UK funds to beat the FTSE All Share on all four aforementioned risk metrics, a further four fell just short of the mark.

 

Source: FE Analytics

Investec UK Special Situations, which is headed up by Alastair Mundy, is one of two funds to have beaten the FTSE All Share on three out of the four risk metrics we used. However, it has underperformed the FTSE All Share by 3.51 percentage points over the past five years with a total return of 71.02 per cent. This can be attributed to small annual losses in 2014 and 2015, two years the manager has previously described as “value hell”. As such, it has a higher maximum drawdown than the index at 13.75 per cent.


That said, it still has a higher Sharpe ratio than the index over the time frame, as well as a lower annualised volatility and downside risk. While past performance is of course no guide to future returns, this could mean it still presents itself as a viable option for those looking to increase their portfolio’s style diversification.

Mundy is well-known for his very deep value approach to investing and his love of banks. RBS, for instance, accounts for more than 5 per cent of the overall portfolio. Investors may therefore need to exercise patience when holding the fund. Over 10 years, it has outperformed its sector average and benchmark by 26.49 and 23.71 respectively with a total return of 96.14 per cent.

The other fund beating the FTSE All Share on three out of the four risk metrics used is Rathbone Recovery, which achieved a lower maximum drawdown, higher Sharpe ratio and lower downside risk ratio than the index.

Managed by Joanne Rands and Alexandra Jackson, the £62.4m fund aims to invest in stocks that are showing recovering returns and have clear catalysts for change such as new management or improving industry dynamics. The resultant portfolio is high-conviction and will hold between 40 and 60 individual weightings at any one time.

Over five years, Rathbone Recovery has returned 90 per cent and has comfortably outperformed its average peer and benchmark.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

The two funds to have beaten the FTSE All Share on two out of the four risk metrics are Marlborough Special Situations and Fidelity Special Situations, both of which have comparatively lower maximum drawdowns and higher Sharpe ratios.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.