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Funds for capital protection: UK Equity Income

04 November 2012

As part of a new series, Joshua Ausden looks at which funds in a particular sector most effectively shelter investors' cash from market crashes without sacrificing upside potential.

By Joshua Ausden

News Editor, FE Trustnet

It is understandable that so many investors have felt uneasy about the equity markets since the events of 2008. 

Some have cut back on their exposure, or got rid of it altogether, fearing another Lehman-style crash is just around the corner.

The average UK equity fund fell by almost 30 per cent in 2008, and even now many are still down over a five-year period.

While various headwinds in the market place remain – most notably the eurozone crisis, the US fiscal cliff and the slowdown in the Chinese economy – sentiment has undoubtedly improved in recent months.

A resumption of quantitative easing in the US, the ECB’s bond-buying programme and signs of the Chinese slowdown bottoming out have been welcomed with open arms by most fund managers.

The UK itself had some good news last week, with GDP growth up 1 per cent in the third quarter of this year, signaling the end of the double-dip recession. 

Many managers have upped their exposure to economically sensitive companies and funds as a result of this renewed optimism.

For investors who feel it could be time to re-enter the markets, but are still worried about the potential for losses, an equity fund with a proven record in crashes provides a good balance between the two. 

In the next few weeks, FE Trustnet will highlight some of the portfolios that fall into this category, delivering  
consistent top-quartile performance in terms of volatility, max drawdown, downside risk and Sharpe ratio. 

The three stand-out portfolios in the UK Equity Income sector for these measures are all headed up by at least one FE Alpha Manager, and two of the three have five FE crowns. 

Performance of funds over 5-yrs

Name Volatility (%)  Downside risk (%)  Max drawdown 
Trojan Income 12.31  13.27  -24.61 
Invesco Perp UK Strategic Income 15.74  18.08  -32.48 
Artemis Income  16.9  19.56  -35.34 
IMA UK Equity Income  17.71  19.97  -42.29 
FTSE All Share  22.83  24.58  -43.84 

Source: FE Analytics

Trojan Income, Artemis Income and Invesco Perpetual UK Strategic Income are all within the top 25 per cent of their sector for the four measures of capital protection over a five-year period. 

Francis Brooke’s Trojan Income fund is the standout performer, boasting the best figures across the board. 

In a sector comprising 100 portfolios, Trojan Income has the second-lowest annualised volatility, the second-lowest downside risk and the lowest max drawdown. 


It also has the second-highest Sharpe ratio, which measures risk-adjusted returns, in the sector, meaning that it has managed to deliver a competitive return while protecting effectively against the downside. 

Only John McClure’s Unicorn UK Income fund has returned more than Brooke over the five years, although this was with significantly more volatility. 

Performance of funds vs sector and index over 5-yrs

ALT_TAG 

Source: FE Analytics

The Sharpe ratio measures an investment’s return relative to a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund's volatility.

The max drawdown calculates the maximum an investor would have lost if they bought and sold at the very worst moments over the last five years. 

Unlike volatility, which calculates a fund’s deviation from the mean, downside risk measures the deviation of returns below the risk-free rate – again, cash in this case.

Trojan Income is comfortably in the top-quartile for all of these measures over one and three years as well. It does not yet have a 10-year record. 

The £821m portfolio has a minimum investment of £1,000, a total expense ratio of 1.05 per cent and is currently yielding 4.22 per cent. 

Adrian Frost and Adrian Gosden's Artemis Income fund is also consistently near the top of the tables for volatility, max drawdown, downside risk and Sharpe ratio. 

According to FE Analytics, it is in the top quartile for all four performance measures over five and 10 years, but lags slightly in the shorter term. 

 Frost and Gosden – both FE Alpha Managers – have returned 161.49 per cent over the last decade, with an annualised volatility of just 12.75 per cent. This compares with returns of 125.14 per cent from the All Share, which has a volatility of 13.46 per cent. 

Performance of funds vs sector and index over 5-yrs

ALT_TAG

Source: FE Analytics

An investor who had bought and sold Artemis Income at the worst possible moments over the 10 years would have lost 38.46 per cent; if they had done the same with the average UK Equity Income fund they would have lost 44.75 per cent. 

The very worst performer – Henderson UK Strategic Income – has a max drawdown of 64.82 per cent.  


Artemis Income, which has £4.5bn assets under management, has a minimum investment of £1,000, a TER of 1.55 per cent and is currently yielding 4.5 per cent. 

Last but by no means least is FE Alpha Manager Mark Barnett’s Invesco Perpetual UK Strategic Income portfolio. 

It is less volatile than Artemis Income over one, three, five and 10 years and also has a lower max drawdown and downside risk.

However, it has fallen short of Trojan Income over all four measures over three and five years. 

Barnett is in a similar mould to fellow Invesco Perpetual manager Neil Woodford, in that he aims for above-average returns with below-average volatility.

However, Woodford’s Invesco Perpetual Income and High Income funds have not outperformed their sector by as much as Invesco Perpetual UK Strategic Income over five years, which is why they are second quartile in terms of their Sharpe ratio. 

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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.