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The funds to hold if you’re bearish on UK equities

30 May 2017

Following last week’s article on UK funds that thrive during bull markets, we now find the funds that capture the fewest losses compared to FTSE All Share for those with a more cautious outlook.

By Lauren Mason,

Senior reporter, FE Trustnet

Invesco Perpetual High Income, JOHCM UK Opportunities and Newton UK Opportunities are among some of the funds to achieve the strongest relative returns during down markets compared to the FTSE All Share over the last decade, according to research from FE Trustnet.

They have also achieved a lower downside risk (which measures a fund’s susceptibility to lose money during falling markets) and a lower bear beta ratio (which measures the relative sensitivity of a fund’s return to negative changes in the index) over the same time frame.

With FTSE 100 sitting around the 7,500 mark, some investors might be concerned that the index could pull back its historic highs. Therefore, this article follows on from a piece published last week, which focused on the UK equity funds that have thrived during bull markets.

While many household names (Neil Woodford and Leigh Himsworth to name but a few) have increased their exposure to domestic-facing cyclicals over recent months, there are a number of investors who believe the current bull market is long in the tooth.

Tony Cousins, who runs the £2.4bn Pyrford Global Total Return fund, told FE Trustnet earlier this month that his portfolio is more defensively positioned than it has ever been in 22 years. He is particularly cautious on UK equities, given the highly-leveraged population and the prospect of rate rises over the medium term.

What’s more, it was announced last week that UK growth was downgraded for the first three months of 2017 from 0.3 per cent to 0.2 per cent. Household consumption also fell from 0.7 per cent to 0.3 per cent.

We therefore decided to look at the equity funds that could be well-suited to investors who are cautious on the outlook for the UK, but still want to retain exposure to the home market.

As mentioned above, we made a list of all funds in the IA UK All Companies sector that have achieved a lower downside risk ratio, bear beta ratio and downside capture ratio than the FTSE All Share over the last decade to the end of last month.

Out of 195 funds with 10-year track records in the sector, 28 funds made it onto the list. However, only six of these achieved a bear beta ratio of less than 0.8 over this time frame, which means for each 1 per cent fall in the index, the fund fell by 0.8 per cent. They are listed in the below table.

 

Source: FE Analytics

As can be seen above, three Invesco Perpetual funds have achieved the top spot for their performances during falling markets. The two funds with the joint-lowest bear beta out of all funds with a 10-year track record within the market area are Invesco Perpetual High Income and Invesco Perpetual Income at 0.72.

Both funds are of course headed up by star manager Mark Barnett and were previously run by UK equity veteran Neil Woodford.


Over the last decade to the end of April, Invesco Perpetual High Income has returned 94.14 per cent and Invesco Perpetual Income has returned 89.23 per cent.

Performance of funds vs sector and index over 10yrs to May 2017

 

Source: FE Analytics

Based on an initial £10,000 investment, the former would have paid out £3,705.91 in income alone while the latter would have paid out £3,704.04 over the same time frame.

The third fund on the list is also headed up by FE Alpha Manager Barnett (pictured). Invesco Perpetual UK Strategic Income has been under the manager’s tenure since 2006 (he has managed the previously-mentioned funds since Woodford’s departure in 2014).

Not only does it have a bull beta ratio of 0.78, it is in the top five within the whole of the IA UK All Companies sector for its downside capture and downside risk ratios over 10 years to the end of April 2017.

Over this time frame, it has outperformed the FTSE All Share and its average peer by 44.63 and 45.01 percentage points respectively with a total return of 113.51 per cent. Again, based on an initial £10,000 investment, it would have paid out £4,025.84 in income alone.

As with the aforementioned funds, Invesco Perpetual UK Strategic Income adopts an unconstrained approach to stock selection and has a focus on valuation combined with a macro overlay. Examples of its largest individual holdings include Reynolds American, BP and British American Tobacco.

Next up for its bull beta ratio of 0.79 is Newton UK Opportunities, which is managed by FE Alpha Manager Christopher Metcalfe. However, it should be noted that he only took the helm of the five crown-rated fund in 2016 after Paul Stephany stepped aside.


Over 10 years to the end of April 2017, it has returned 107.81 per cent. As with most Newton funds, the manager adopts a thematic and cautious approach to stock selection. Its largest individual weightings include Diageo, RELX, British American Tobacco and Prudential.

Performance of fund vs sector and benchmark over 10yrs to May 2017

 

Source: FE Analytics

With bear beta ratios of 0.8, CF Lindsell Train UK Equity and JOHCM UK Opportunities have won fourth and fifth place on the list respectively.

The former, which is headed up by FE Alpha Manager Nick Train, has a concentrated, low-turnover portfolio with a focus on high-quality companies.

Over 10 years to the end of April, the five crown-rated fund has comfortably doubled its benchmark and average peer with a total return of 198.19 per cent.

The latter – which also has five FE crowns –  has again achieved a strong return over this time frame with gains of 110.49 per cent.

Investors should note that Wood will step down from managing the fund in September this year, handing responsibility over to current co-managers Rachel Reutter and Michael Ulrich. However, many investment professionals are confident that his approach to investing – which evolved largely from Wood’s time at Newton – will be maintained.

A further 10 funds achieved a bear beta ratio of 0.9 or less and are listed below. These include Newton UK Equity, Jupiter UK Special Situations and Majedie UK Equity.

 

Source: FE Analytics

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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.