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The top-performing UK funds to hold if you can stomach short-term losses

31 May 2017

FE Trustnet looks at the UK funds in the top quartile of the IA UK All Companies sector but with some of the highest volatility and maximum drawdown figures.

By Jonathan Jones,

Reporter, FE Trustnet

Market uncertainty has led many investors to flee to more stable funds but some of the top-performing UK funds over the last five years have come with greater risk attached, according to data from FE Trustnet.

Investors have avoided medium and smaller companies in recent years as people have become more cautious about the UK economy, particularly following the EU referendum, seeking out more internationally-focused large cap stocks.

However, it is not just in the UK equities space where this effect has been felt. As the recent rise in popularity of absolute return funds has shown, investors are willing to take lower returns for safety.

Changing attitudes to risk have been felt across many asset classes, with investors also willing to accept lower and, in some cases, negative yields in the fixed income space.

As the below shows, bond prices – represented by the Bloomberg Barclays Global Aggregate index – have risen significantly over the past five years, up 27.29 per cent during the period, leading to historic low yields during 2016.

Performance of index over 5yrs

 

Source: FE Analytics

With interest rates at current record lows in the UK and around the world, even the ultra-cautious savers have been affected by the unusual environment.

But by focusing on those funds and sectors that have been relatively stable, investors may have missed out on some strong returns from riskier funds, FE Trustnet can reveal.

Indeed, 18 of the 59 top quartile funds over the last five years to the end of April also sit in the bottom quartile for maximum drawdown – the most an investor could lose if buying and selling at the worst possible moments – and volatility.

Psigma senior investment analyst Dan Adams said: “The equity market has gone up over the last five years so anything with a high amount of risk would have done better, so you need to take that into account.”

And when making a call on risk, he added that “with all these risk metrics you should use them together and not in isolation”.


While investing in riskier assets would have been an against the grain move, investors may have missed out on top returns by being too risk-averse.

Below FE Trustnet looks at the funds that have been riskier based on their volatility and maximum drawdown, but have topped the charts for total returns over a five-year period. It should be noted, however, that past performance is not an indication of future gains.

Funds in the top quartile of the IA UK All Companies sector for total return but bottom quartile for max drawdown and volatility over 5yrs

    

Source: FE Analytics

As the above chart shows, there are a number of mid-cap funds among the most risky funds and Psigma’s Adams said this is likely due to the tough time the sector experienced after the Brexit vote.

“Given that focus they would have had a heck of a lot of volatility around Brexit because the mid-caps got spanked then,” the analyst said.

Indeed, of the 14 mid-cap dedicated funds, three – Threadneedle UK Mid 250, Schroder UK Mid 250 and Franklin UK Mid Cap – are among the most volatile and have high maximum drawdowns while providing strong returns.

Performance of indices over 5yrs

 

Source: FE Analytics

As seen above, the FTSE 250 has been more volatile than the FTSE 100 over the past five years, falling 15.47 per cent from its peak in 2015 to its low in February 2016.


Additionally, in June 2016 the FTSE 250 dropped 13.65 per cent in a matter of days after the UK voted in favour of leaving the EU.

Away from the mid-cap funds, value strategies have also fallen into the ‘most risky’ category, with the £1bn Schroder Recovery, returning 101.97 per cent while experiencing a maximum drawdown of 19.77 per cent.

The fund, run by FE Alpha Managers Nick Kirrage and Kevin Murphy, is joined on the list by peers L&G UK Special Situations Trust, Standard Life Investments UK Equity Recovery, and R&M UK Equity Long Term Recovery.

The value style has come back into focus over the last 18 months with interest rates appearing to bottom out, boosting the unloved banking sector; while rising commodities prices have improved the prospects for oil and mining stocks.

This has caused a rebound for value funds, although many have struggled over five years. While the four value funds above have been top performers, they are also among the most volatile and have high maximum drawdowns.

Indeed, Standard Life Investments UK Equity Recovery has the third highest maximum drawdown of the funds on the list (23.45 per cent) and the highest volatility (19.47 per cent).

Performance of index over 5yrs

 

Source: FE Analytics

But the £47m fund, run by Andrew Hunt, has also been the best performer of the list, returning 126.28 per cent. The R&M UK Equity Long Term Recovery has been the second best performer, returning 124.47 per cent.


While performance for the value style has been mixed over the past five years, growth funds have generally prospered. So, it is relatively surprising to see four growth funds included on the list.

The largest is Steve DaviesJupiter UK Growth, which has returned 90.18 per cent over the last five years but also has the highest maximum drawdown on the list (25.18 per cent).

The £1.4bn fund was caught out by the Brexit vote last year and was the worst performing fund in the IA UK All Companies sector in 2016, losing 6.41 per cent.

It should also be noted that of the four growth funds on the list, Unicorn UK Growth was a top quartile performer last year, suffering its biggest drop between 2014 and 2015.

The £25m fund has a much higher weighting to smaller companies than the others with no FTSE 100 companies among its top 10 holdings, reacting differently to market conditions than other growth funds.

One final category of funds on the list are those with an unconstrained approach to investing. Most notable in this category is the £201m Invesco Perpetual UK Focus overseen by FE Alpha Manager Martin Walker.

The fund has an unconstrained approach, allowing the manager to invest in various areas, rather than just one theme.

This means that Walker has moved into various sectors over the last 18 months as he looks to take advantage of pricing anomalies.

“The fund manager has taken advantage of what he views as irrational pricing scenarios, while maintaining a long-term investment approach,” he said in the fund’s latest factsheet.

“The fund’s largest sector exposure continues to be to integrated oils, in part a reflection of the fund manager’s view on the oil price.

“Despite the challenging regulatory outlook for UK banks, the fund manager maintains the view that these businesses are better capitalised than at any point since the financial crisis.”

It is joined on the list by two other unconstrained funds: Standard Life Investments UK Equity Unconstrained and RWC UK Focus. All three funds suffered their largest falls from peaks in 2015 to shortly after last year’s EU referendum.

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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.