For investors who want to understand the risks to their capital, the downside ratio can be very useful.
The measure essentially calculates the volatility of the fund when it is falling, giving a more accurate reflection of risk than volatility, which interprets sharp upward price movements as risk.
Some funds have a much better record in terms of downside ratio than they do in terms of volatility, which means they may be overlooked by those who rely on the latter measure.
The average downside risk is higher than the average volatility in the IMA Asia Pacific ex Japan sector, which means the funds on average suffer sharper falls to the downside than gains to the upside.
This means it makes more sense to compare the funds’ rankings against their peers rather than their absolute scores.
Schroder Asian Alpha Plus is just 21st in terms of volatility in the IMA Asia Pacific ex Japan sector, but 13th in terms of downside ratio, according to data from FE Analytics, with a lower score in absolute terms.
The three-year annualised volatility of 17.36 per cent is higher than the 17.2 per cent annualised downside risk. It is the only fund in the sector with a higher volatility than downside risk.
Matthew Dobbs’ £494m portfolio has five FE Crowns and sits sixth out of 44 funds in the sector over three years, with returns of 39.57 per cent, and third over five, wih returns of 77.92 per cent.
It has beaten its benchmark, the MSCI AC Far East ex Japan index, over both periods.
Over five years the benchmark is up 40.73 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Although Dobbs’ fund is underweight mainland China, he makes up for it with a large overweight position in Hong Kong.
The fund was picked by Bestinvest’s Jason Hollands as a suitable portfolio for a first-time investor in the sector earlier this month.
Baillie Gifford Pacific is another fund to outperform on the downside. Our data shows that the fund is just 24th in terms of volatility over the last three years but 16th in terms of downside risk.
The £52m portfolio was taken over by Roderick Snell last month, and has four FE Crowns.
Baillie Gifford aims to be a long-term, buy-and-hold investor with a growth bias, and is happy to underperform in the short-term.
However, our data shows the fund has outperformed its sector in every calendar year since 2008.
Performance of fund vs sector since 2008
| Name | 2013 returns (%) | 2012 returns (%) | 2011 returns (%) | 2010 returns (%) | 2009 returns (%) | 2008 returns (%) |
|---|---|---|---|---|---|---|
| Baillie Gifford | 7.35 | 18.85 | -11.48 | 23.3 | 67.13 | -47.84 |
| UT Asia Pacific Excluding Japan Retail | 3.18 | 15.9 | -15.97 | 22.97 | 51.4 | -33.19 |
Source: FE Analytics
As a result, it is top quartile over three years, with returns of 34.39 per cent, and second-quartile over five years, with returns of 38.82 per cent.
It has a very different geographical bias than the Schroders fund, with 23.2 per cent in South Korea the biggest weighting.
Another fund with better relative performance on the downside is the £654m Newton Oriental fund, run by Jason Pidcock with the assistance of Caroline Keen.
The fund is only 23rd in the sector in terms of volatility, but 17th in terms of downside risk.
It is a growth-oriented portfolio that has performed roughly in line with its benchmark recently, although it lags behind it over five years.
It has made just 33.08 per cent over this time compared with 37.52 per cent from the sector and 43.41 per cent from the FTSE Asia Pacific ex Japan index.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The best figure for downside risk in the sector is from the First State Asia Pacific Sustainability fund, which has a three-year annualised score of 12.26 per cent.
Pidcock’s Newton Asian Income fund is second with 13.04 per cent and First State Asia Pacific third with 14.13 per cent.
All the funds in the top-10 for downside risk are also in the top-10 for volatility, albeit in a slightly different order.
Five of the top-10 are income funds, which is not surprising given they tend to buy stocks in defensive sectors that are less volatile.
Four of the five are top quartile over three years for total return: L&G Asian Income, Newton Asian Income, Schroder Asian Income and Schroder Asian Income Maximiser. Only Henderson Asian Dividend Income falls into the second quartile.
The Schroder Asian Income Maximiser fund is less volatile and has a lower downside risk than Scroder Asian Income, despite the fact that it is a very similar portfolio with the addition of a derivative overlay to enhance income.
Finding funds that can protect against the downside is of particular importance in the emerging Asian market at the moment given the significant headwinds facing investors, recently highlighted by ING Investment.
