This is especially appealing for investors with a low tolerance to risk, but also for those who are retired and remain invested, living off their income.
For these investors, a fund with a low chance of losing money or moving sharply to the downside is likely to be particularly appealing.
Volatility is the measure that is usually used in the industry to measure risk, but it does not quite capture this motivation.
The volatility measure treats price gains as it does price falls, simply measuring the dispersion of these changes around the mean.
The downside risk measure, which can be examined in FE Analytics, measures only the moves to the downside, and therefore gives us the volatility of the fund when it makes negative movements: that is to say how much it tends to lose when its price falls.
Some funds prove to be particularly adept at limiting losses to the downside, which could make them appealing to risk-averse investors.
Michael Clark’s five crown-rated Fidelity Moneybuilder Dividend portfolio is one that looks even better when the downside risk is considered separately from the volatility.
The £622m fund has the fourth-lowest downside risk in the sector over the past three years, but only the 10th-lowest volatility.
The fund has managed top-quartile returns over the past three years of 50.14 per cent, compared with 40.81 per cent from the average fund, according to data from FE Analytics. The FTSE All Share has made 36.8 per cent in this time.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Like many UK funds, Clark’s portfolio is currently overweight the mid cap sector, with 20 per cent of its assets in the FTSE 250 compared with 13.8 per cent from the benchmark.
Over the past three years, it has had one of the lowest betas to its own benchmark – the FTSE All Share – in the sector, at just 0.58. The portfolio is currently yielding 4.23 per cent.
FE Alpha Manager Neil Woodford’s Invesco Perpetual Income fund is another that outperforms on the downside.
The £10.3bn fund, which also has five FE Crowns, has the fifth-lowest downside risk in the sector but the eighth-lowest volatility. It is yielding 3.33 per cent.
Woodford’s funds have enjoyed a strong 2013 after lagging their sector last year. The strong performance of pharmaceutical giants AstraZeneca and GlaxoSmithKline has been a major driver, with Woodford strongly supportive of the turnaround strategies used by the companies' management teams.
At the other end of the scale, the £28.3m Evenlode Income fund, managed by Hugh Yarrow, is another five crown-rated fund that fares well in down markets.
The fund, which is yielding 3.47 per cent, has the sixth-best downside risk score in the sector, but is just 11th in terms of volatility.
FE Trustnet recently looked at the portfolio in more detail in an article on top-rated funds that get little press attention.
FE Alpha Manager Mark Barnett’s Invesco Perpetual UK Strategic Income fund is another whose defensiveness is underplayed by its volatility.
The five crown-rated fund, which yields 3.31 per cent, has the 10th-lowest downside risk in the sector but just the 15th-lowest volatility.
Strong performance over the last three years has seen it achieve gains of 55.42 per cent, well ahead of the sector average.
Performance of fund versus sector and average over 3yrs
Source: FE Analytics
Miton's James Sullivan, who runs fund of funds portfolios, says he prefers Barnett's portfolio to Woodford's currently, thanks to its numbler size.
Downside risk and volatility of UK Equity Income funds
| Fund |
Downside Risk |
Rank |
Volatility |
Rank |
| Fidelity Enhanced Income |
10.76 |
1 |
10.15 |
1 |
| Rathbone Income | 10.95 | 2 | 10.97 | 7 |
| Querns Monthly Income | 11.18 | 3 | 10.21 | 2 |
| Fidelity Moneybuilder Dividend | 11.33 | 4 | 11.22 | 10 |
| Invesco Perpetual Income | 11.47 | 5 | 11.1 | 8 |
| Evenlode Income |
11.57 | 6 | 11.31 | 11 |
| Invesco Perp High Income | 11.64 | 7 | 11.21 | 9 |
| AXA Framlington Monthly Income | 11.88 | 8 | 10.59 | 4 |
| PFS Chelverton UK Equity Income | 11.9 | 9 | 10.72 | 5 |
| Invesco Perp UK Strategic Income | 12.18 | 10 | 11.59 | 15 |
Source: FE Analytics
The sector’s leading fund over this time period, Unicorn UK Income, comes out far better on volatility rather than downside risk.
FE Alpha Manager John McClure’s £159m portfolio, another with five FE Crowns, is third over the period in terms of volatility but just 13th in terms of downside risk.
The portfolio is a small to mid cap affair, meaning it is prone to suffer greater losses when markets fall, and the figures may reflect that.
However, the fund is still near the top on both measures, as well as the leading fund in total return terms over three years, with gains of 82.24 per cent. It is yielding 2.92 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Franklin UK Equity Income is also more defensive than its volatility would suggest. The £148m portfolio, which has been managed by Colin Morton since 1995, appears at 27th in terms of volatility but just 20th in terms of downside risk.
The fund has four FE Crowns and currently yields 3.5 per cent.
