FP CRUX European Special Situations, MI Metropolis Value and Fidelity Asian Special Situations are among some of the non-UK value-labelled equity funds to boast the strongest risk-adjusted returns over the last five years, according to an FE Trustnet study.
This comes following an article published earlier this month, which looked at how the value, recovery and special situations-labelled UK equity funds fared in terms of their risk metrics versus the FTSE All Share index over the last five years.
Following last year’s growth/value rotation and the sharp pullback this trend has suffered to-date, style diversification had become an increasingly popular point of discussion. For those looking to achieve this but don’t a strong stomach for risk (value funds are historically more volatile than their quality growth peers), we decided to find the funds providing this bias while offering investors a smoother ride.
To accompany the UK equity funds we have already discussed, we decided to look at the non-UK funds using the same methodology for those who are looking to regionally diversify their value exposure.
Out of 34 non-UK equity funds labelled as ‘special situations’, ‘value’ or ‘recovery’ mandates, 25 of them have a five-year track record to the end of last month (at time of writing – 31 May).
We then ran their Sharpe ratios (which measure risk-adjusted returns), maximum drawdowns (which measure the most money lost when bought and sold at the worst times), downside risk ratios (which predict a fund’s susceptibility to lose money during falling markets) and annualised volatility over this time frame.
Nine of the 25 funds reside in the IA Global sector and, as such, we compared their risk metrics to the MSCI AC World index, which is the most common benchmark among the applicable funds.
Those that remained in the study are listed below:
Source: FE Analytics
As shown above, the only value, special sits or recovery-focused global equity fund to beat the index across all four metrics is MI Metropolis Value. This is no mean feat, given that global equity funds are notorious for underperforming their benchmarks.
The £90m fund, while small and not a household name, is available across most platforms. It has been headed up by Jonathan Mills and Simon Denison-Smith since its launch in 2011 and, over this time frame, it has outperformed its average peer and MSCI World benchmark by 35.32 and 6.39 percentage points respectively with a total return of 112.2 per cent. It has also outperformed the MSCI AC World index – which we used for the purpose of this study – by 17.8 percentage points.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The duo aim to achieve growth through a highly concentrated portfolio of up to 25 equities, most of which are listed companies from Europe, the US or Canada.
Aside from selecting stocks they believe are undervalued by the market, Mills and Denison-Smith look for stocks with strong balance sheets, a history of solid cash flow generation and leading positions within their respective fields.
A further two global value-focused equity funds beat the MSCI AC World on two of the four risk metrics we used.
One of these is HL Multi Manager Special Situations, which is managed by Lee Gardhouse and Roger Clark. Investors should note that, while the fund resides in the IA Global sector, it is benchmarked against the FTSE All Share index and has a 43 per cent regional exposure to the UK.
The £1.5bn fund-of-fund aims to identify exceptional long-term managers with a special situations tilt to their portfolios which can add value over the long term. Examples of its largest holdings include Findlay Park American, Stewart Investors Asia Pacific Leaders and FP CRUX European Special Situations.
Over five years, it has performed broadly in-line with the MSCI AC World index and has outperformed its average peer and benchmark by a respective 15.26 and 28.76 percentage points. While its Sharpe ratio is one basis point lower than the MSCI AC World’s and it has a slightly higher downside risk ratio, it has achieved a lower annualised volatility and maximum drawdown over five years to the end of April.
The second fund to have beaten the index on two out of four risk metrics is Investec Global Special Situations, which was launched in 2007 but has been managed by Steve Woolley and Alessandro Dicorrado since the start of last year.
The four crown-rated fund has a comfortably higher Sharpe ratio and a lower downside risk than the MSCI AC World, but has been more volatile and has a higher maximum drawdown of 13.15 per cent over five years to the end of April.
When it comes to total returns, it is in the top quartile relative to its sector average over one, three and five years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
A further eight of the non-UK value, recovery and special sits-labelled funds invest in European equities. Again, for the purpose of the study, we chose the MSCI Europe index as a benchmark as it is one of the most widely-used among those on the list.
Source: FE Analytics
FP CRUX European Special Situations was one of only two funds on the list to beat the index on all four of the aforementioned risk metrics. Headed up by FE Alpha Manager Richard Pease and James Milne, the five crown-rated fund adopts a bottom-up, long-term approach to stock selection which results in a concentrated portfolio of companies ranging across the cap spectrum.
Over five years, the fund has returned 142.2 per cent compared to its average peer and FTSE World Europe ex UK benchmark’s respective returns of 117.71 and 122.62 per cent. It has outperformed the MSCI Europe index by 43.33 percentage points.
The second fund to beat all four risk metrics over five years is GAM European Growth & Value, which is headed up by a team of five co-managers. While it is just £8m in size, it is available on most platforms. Those looking for regional diversification should note that the vehicle is pan-European and currently has a 6.6 per cent weighting to the UK.
The fund aims to provide long-term returns through a diversified portfolio of stocks which span across 13 sub-sectors including deep value financials, e-commerce, global travel & trade and global stimulus. It currently holds 13.3 per cent in cash and liquidity.
Over five years, it has performed broadly in-line with its average peer and has outperformed its MSCI Europe benchmark by 4.63 percentage points with a total return of 103.5 per cent.
It is interesting to note that every value, special sits or value-labelled European equity fund beat the index’s Sharpe ratio and, in contrast, not a single US value-labelled equity fund (of which there are seven in the Investment Association universe) outperformed the Sharpe ratio of the S&P 500 index. This may not come as a surprise to investors, given that the maturity and efficiency of the US stock market has been well documented.
Source: FE Analytics
One of the seven funds managed to beat the index on two out of four risk metrics, though. Eaton Vance International (Ireland) US Value has a lower downside risk and annualised volatility than the S&P 500. However, the $60m Sicav is unavailable on most investment platforms.
A further two funds managed to beat one risk metric each: the five crown-rated Fidelity American Special Situations fund which has a maximum drawdown one basis point lower than the S&P 500 over five years to the end of April, and Janus Perkins US Strategic Value which has a lower annualised volatility by two basis points.
There is only one recovery, special situations or value-labelled equity fund within the IA Asia Pacific ex Japan sector. Nevertheless, it has outperformed its MSCI AC Asia ex Japan benchmark index in terms of its Sharpe ratio, maximum drawdown, downside risk and annualised volatility to the end of April.
Fidelity Asian Special Situations has four FE crowns and has been managed by Suranjan Mukherjee since July 2012.
The Luxembourg-domiciled Sicav is £1.5bn in size and has a diversified portfolio of 85 stocks.
Over five years, it has returned 97.5 per cent compared to its average peer and benchmark’s respective returns of 74.27 and 79.46 per cent.
Performance of fund vs sector and benchmark
Source: FE Analytics
Mukherjee selects stocks on a bottom-up basis and favours companies which are cheap relative to improving earnings – this could either be the result of markets not factoring in long-term growth prospects or the impact of cyclical recovery. He also looks for stocks that are well-established leaders in terms of their technology, scale or cost structure as well as companies benefitting from turnaround situations or long-term themes.