Given the turbulence of the past five years or so, a fast-rising market on the back of improving fundamentals is a welcome sign, given that much of the sharp gains in recent years have largely been a result of relief rallies.
Certain managers have outpaced the rise in markets, with some funds up in excess of 30 per cent this year.
The best performer year-to-date is the Legg Mason Japan Equity portfolio, which has returned an incredible 64.63 per cent.
However, FE Alpha Manager Francis Brooke (pictured), who heads up the five crown-rated Trojan Income fund and Troy Income & Growth Trust, says it is often a bad idea to chase returns during a rally.
He told FE Trustnet that he has no intention of gearing his portfolio to take full advantage of the rising market, because he believes it is more important to focus on absolute performance – not the relative kind. "Investing is a long game," he said. "We’re never going to be concerned about short-term periods of underperformance, because we feel that over time it’s better to be cleverer on the downside than the upside."
"With my funds you might get a lot of relative volatility, but you won’t get absolute volatility. This is what investors don’t like."
"In an up-market someone might think 'I can make a lot more than that person,' but that same person is more likely to see a big drawdown when things so wrong.”
Year-on-year performance of fund vs sector and index
| Name | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) | 2007 (%) | 2006 (%) | 2005 (%) |
|---|---|---|---|---|---|---|---|---|
| Trojan Income | 9.88 | 6.28 | 14.35 | 14.73 | -12.14 | 4.93 | 16.8 | 11.71 |
| IMA UK Equity Income | 14.01 | -2.9 | 14.58 | 22.88 | -28.54 | -1.21 | 18.19 | 19.93 |
Source: FE Analytics
As Brooke suggests, his funds have underperformed the markets at certain periods during the last decade or so.
Trojan Income has been a bottom-quartile performer in three of the eight calendar years since its launch – in 2005, 2009 and 2012.
While this may sound disappointing, Brooke says the fact that the fund made money during all three of those years goes some way to justifying his approach. Over these three years, on average the fund returned 12.1 per cent.
"Absolute volatility is the real enemy, because it means you lose money," he said.
The fund has an excellent record during down markets, which has been a big contributor to performance over the long-term.
Our data shows Trojan Income is a top-quartile performer in its IMA UK Equity Income sector since launch, with returns of 114.22 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
Unsurprisingly, it has also been one of the least volatile in its sector, and has the lowest max drawdown by some distance.
An investor who had bought and sold Trojan Income at the very worst moments since its launch would have lost just 25.2 per cent, compared with losses of 44.75 per cent from the average UK Equity Income fund.
Given Brooke’s tone, it would be reasonable to expect his funds to have performed poorly so far this year, but the opposite is true: both Trojan Income and Troy Income & Growth are beating their FTSE All Share benchmark year-to-date, with returns of 12.05 and 12.81 per cent, respectively.
"This market has been quite interesting for us, because we’ve kept up pretty well," he said.
"Year-to-date the numbers for Trojan Income are looking pretty good. It’s been a bit quieter for the Trojan Income & Growth Trust because we haven’t got any gearing. That’s not to say we won’t in the future, but right now we don’t."
"I say it’s interesting because we haven’t chased the rally at all. We’re happy to participate, but a steep rising market isn’t our market."
"If you look at the fourth quarter last year, we didn’t participate at all really, and back in 2009 when the market was also led by risk-on high-beta, we didn’t keep up."
"There’s a lot of risk out there – nothing is black and white. You can make an argument that the US is recovering, but at the same time emerging markets aren’t looking all that great."
"At the moment we’re much happier running a defensive income portfolio," he added.
Brooke has a similar approach to the way he manages his funds’ yield, in that he targets slow and steady dividend growth, with little volatility.
"It’s always our intention to try and not surprise our investors, whether you’re talking about capital returns or the dividend," he said.
"Trojan Income is currently the 30th highest-yielder in the [UK Equity Income] sector, out of 95."
"At certain times I’ve been right at the bottom of the list and at others I’ve been higher, even though I’ve grown the dividend every year since inception."
"This is another example of what investors don’t appreciate. You don’t want to see a big drawdown in the yield – it’s far more important to be consistent."
Trojan Income is currently yielding 4.09 per cent, while the Troy Income & Growth IT is paying out 3.39 per cent.
The former has recently soft-closed to investors, but it is still available through certain platforms.
The £143m Troy Income & Growth IT has an ongoing charges figure (OCF) of 1.22 per cent according to the AIC, and is on a premium of 1.2 per cent. The trust uses a discount control mechanism (DCM).