But there are enough fund managers making bullish moves to suggest that risk aversion is starting to take a back seat to the opportunities presented by attractive valuations. In this article we examine factors that can inform investors who are contemplating a return to the equity market.
Alpha is a familiar gauge of the extent to which a fund has outperformed its peer group, and so we have trawled the Financial Express database for those funds that have scored best on this measure. The three-year period to 15 December covered by our table encompasses the moribund tail of the last bull run, and the past two years of adversity.
Total Return Bid-Bid performance table from UK IMA UT & OEICs universe (Rebased in £ Sterling)
| Fund name |
1-yr | 3-yr |
Alpha |
R-squared |
Volatility |
Info Ratio |
| M&G Recovery |
42.91 | 11.28 |
8.36 |
0.96 |
20.27 |
2.03 |
| Majedie - UK Equity |
33.53 | 15.69 | 8.73 | 0.94 | 17.47 | 1.66 |
| Majedie - UK Focus |
41.62 | 14.66 | 8.82 | 0.95 | 18.77 | 1.90 |
| Rensburg - UK Mid Cap Growth Trust |
42.28 | 4.38 | 7.42 | 0.90 | 22.45 | 0.92 |
| Royal London - UK Mid-Cap Growth |
51.17 | 7.89 | 7.31 | 0.89 | 22.93 | 0.82 |
| Standard Life Inv - UK Equity Unconstrained |
103.66 | 13.01 | 13.82 | 0.89 | 33.21 | 0.57 |
| L&G - UK Alpha |
94.12 | 25.96 | 17.19 | 0.66 | 23.55 | 1.17 |
| Sector: IMA UK All Companies |
31.48 | -11.50 | 0.00 | 1.00 | 19.53 |
Source: Financial Express Analytics (data to 15/12/2009)
It is fair to say that any fund posting positive Alpha over this period can claim success, and this group, our magnificent seven, has done prodigiously well. L&G's whopping 17.2 per cent claims our attention, but the fund's accompanying statistics remind us that it is as well to look behind such headline numbers.
The R-squared column sets out the degree of correlation a fund has to its benchmark - in this case the sector average - and on this hangs the robustness of other key measures such as Alpha.
If 1.0 is a perfect match, and 0.75 is nudging the twilight zone, we must regard L&G's result with great circumspection. The 0.89s of Royal London and Standard Life render their Alphas more reliable and, in the latter case, investors could be drawn to the big 13.8 per cent, especially in conjunction with the fund's storming 103 per cent return in the past 12 months.
The tightest correlation here belongs to the venerable M&G Recovery fund, which celebrated its 40th anniversary this year, and we can have confidence in the fund's Alpha. In this company, the result may appear middling but, again, we should delve deeper.
The Standard Life performance comes with a price tag in the form of higher risk. That 33.2 per cent volatility is appreciably the highest in the group, and exceeds the sector average by far. And so we must come to the risk/reward relationship that lies behind the big Alpha results. In this respect, Information Ratio (IR) is an acid test for managers seeking active outperformance, in that it strips the fund's gains of a notional risk-free rate and any return that could be attributed to benchmark movements. The result is divided by its volatility, and records the amount of net net return per unit of risk.
On this count, Standard Life's attention-grabbing numbers fall into perspective and its IR, though still good, is overshadowed. M&G Recovery bubbles to the top with an impressive IR of 2.0, and this speaks of skilled management in its target market of undervalued and distressed businesses. Snapping at its heels, though are the Majedie funds, which seem to tick a number of right boxes. Investors should have no complaints about the combination of below-average volatility and strong Alpha and IR measures.
And so what about the L&G UK Alpha fund? Despite the unreliable Alpha, we can see that strong returns over both 3 years and the past 12 months are accompanied by volatility that is raised, but not so much as to compromise what is still, by any standard, an excellent IR. If we can take anything from this exercise it is that the Alpha statistic may be useful as a pointer to the better funds, but that, in informing investors' decisions, a lot more lies beneath.