The five most popular funds sold through Fidelity’s FundsNetwork last season all had a defensive bias, but the equity rally that started late in 2012 means three have underperformed their sector average since then.
Invesco Perpetual High Income
FE Alpha Manager Neil Woodford’s Invesco Perpetual High Income was the fund the majority of FundsNetwork customers added to their ISA in 2012.
It is now £12.4bn in size, but investor appetite shows no sign of abating, with the fund seeing inflows worth around 15 per cent over the past year.
The manager has remained defensively positioned while many of his peers have increased their risk exposure.
As a result, he has underperformed his sector average over the past year, returning 16.36 per cent compared with 18.08 per cent from IMA UK Equity Income.
However, the manager is sticking to his guns, preferring companies that are less exposed to the UK economy.
Woodford has considerably outperformed his peer group over the two and a half decades he has been running the fund, and the vast majority of advisers remain confident in his medium- to long-term prospects.
M&G Optimal Income
This fund is closing in on Woodford’s in terms of size, having now reached £12.2bn, according to FE Analytics data.
It has put on £3bn in a little over three months and is the most-bought fund in the IMA universe in this time, according to data from FE Analytics.
However, it is another to have done relatively poorly over the past 12 months, having made 9.86 per cent compared with 9.9 per cent from the sector.
Performance of fund vs sector over 1yr
Source: FE Analytics
This is a small margin of course, but FE Alpha Manager Richard Woolnough’s fund has also been questioned in the income stakes.
It is currently yielding 3.04 per cent, a bottom-quartile figure for the IMA Sterling Strategic Bond sector. The average figure is 4.41 per cent.
The fund can invest in any grade of bond it wishes, without limit, which gives it an advantage over Woolnough’s other entrant on this list, M&G Strategic Corporate Bond.
It currently has 46.4 per cent in investment grade corporates and 20.2 per cent in government bonds, with 18.4 per cent in high yield bonds.
The fund still sits near the top of the returns tables over three and five years.
This is in part due to Woolnough's performance during the crash, when he managed to protect investors’ money better than his peers, while managing to catch a great deal of upside in the subsequent recovery.
M&G Strategic Corporate Bond
Investment grade bonds currently make up 85.8 per cent of this fund, and its mandate allows it to hold only 20 per cent in credit instruments outside of this category.
This means that if such bonds continue to be expensive, investors are likely to see limited returns.
The fund’s returns of 7.54 per cent put it in the bottom quartile of the IMA Sterling Strategic Bond sector over the past year; the average fund has made 9.75 per cent.
Its yield of 3.14 per cent puts it 74th out of 79 in the sector.
However, the fund is number-one in the sector over five years in terms of total returns, having made 66.59 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Our data shows that strong performance in 2008 is the key factor. That year the fund made 3.23 per cent while the average fund in the sector lost 9.67 per cent.
Jupiter Merlin Income
John Chatfeild-Roberts, Peter Lawery and Algy Smith-Maxwell have been running this fund of funds since the late 1990s. They are all recognised as FE Alpha Managers.
The fund has an outstanding track record, ranking in the top quartile of the IMA Mixed Investment 20%-60% Shares sector over one, three, five and 10 years, according to FE Analytics data.
It is no surprise that the fund has won five FE Crowns.
The managers of this fund have remained cautious over the past year, and have put their faith in the defensively positioned Invesco Perpetual High Income and M&G Strategic Corporate Bond funds.
They even have a significant position in gold and warn that inflation is set to rise, as keeping it under control has become less of a priority for governments.
Aberdeen Emerging Markets
This is the exception to last year's defensive trend, although Aberdeen is known for its low-volatility, low-risk approach to a highly volatile and risky sector.
Those who bought this fund last year demonstrated good timing: it is now being soft-closed to protect existing investors.
Over 10 years it has topped the performance tables in the IMA Global Emerging Markets sector, making 684.35 per cent.
The past year has been almost as impressive, with the fund up 16.93 per cent while the sector has made half that – 8.91 per cent.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
M&G Global Dividend, Fidelity Moneybuilder Income and Invesco Perpetual Income were the next on the bestsellers list last year, all of which play to the defensive, income-seeking story. M&G Recovery was the only bullish fund on the list.
An FE Trustnet article earlier this week revealed that investors this year favour equity funds over bonds and global or Asian funds for income rather than those that concentrate on the UK.