With markets struggling to make headway since Christmas many investors’ minds have turned to the possibility of a reversal of some of the gains of the past couple of years.
Performance of index and sectors in 2014
Source: FE Analytics
Last week we looked at the IMA Targeted Absolute Return funds to have the best record on the downside in recent years.
However, investors might be equally as concerned to know how their equity funds have performed when markets come off.
The £14m R&M UK Equity Unconstrained fund, run by FE Alpha Manager Daniel Hanbury, comes out on top in the IMA UK All Companies sector, despite the fact that the fund invests as much in mid caps as it does in large caps, and has a significant position in the volatile AIM market.
According to data from FE Analytics, the fund has a maximum drawdown – the most you could have lost if you had bought and sold at the worst possible times – of just 12.44 per cent over the past five years.
FE Alpha Manager Mark Martin’s £154m Neptune Mid Cap fund lost marginally more, at 13.68 per cent, while the third placed fund is the all-cap Liontrust Special Situations. All three funds are also top quartile for volatility.
Source: FE Analytics
A more large-cap focused fund to have a good record on the downside is the £1.3bn JOHCM UK Opportunities portfolio, run by FE Alpha Manager John Wood and Ben Leyland.
The Majedie UK Focus fund is also large-cap tilted, but does have an all-cap strategy, and also holds almost 14 per cent outside the UK.
Our data shows that many of the smaller companies funds have done very well in comparison even to the IMA UK All Companies sector.
Liontrust UK Smaller Companies and Marlborough UK Micro Cap both have a lower maximum drawdown than any of the IMA UK All Companies portfolios.
Artemis UK Smaller Companies, PFS Downing Active Management and TM Progressive UK Smaller Companies would all appear in a combined top-10 for lowest max drawdown across the UK equity sectors.
In terms of volatility the figures are even more starkly in favour of the small cap funds. The five least volatile funds over the period have all been small cap funds, and eight of the 10 least volatile.
Looking at the sectors as a whole the maximum drawdown figures are almost identical, while the IMA UK Smaller Companies funds have been significantly less volatile.
So does this mean you would be safer in a future crisis with the smaller companies funds? If so this would be quite a simple choice to make, as smaller companies have consistently outperformed their large stock rivals over the longer term.
Risk/return profiles of sectors
Source: FE Analytics
The data is affected by the events of last May, the most significant market correction since 2011.
During this period large caps sold off while small and mid-caps exposed to the UK domestic economy sailed serenely on. This is the reason for the superior volatility scores over the full period.
It cannot be assumed that the next market correction will display the same characteristics: in fact, we have been undergoing a more traditional rotation from large caps into small and mid caps in recent weeks.
For this reason a fund such as Liontrust Special Situations or JOHCM UK Opportunities might appeal more.
Martin Walker’s Invesco Perpetual UK Growth fund is another with a large-cap bias that could appeal: Walker’s cautiousness meant that he avoided the best of the rally in 2009 but also outperformed his peers in 2011.
This was partly due to decisions to be out of mining and financials, however, so there is no guarantee such sector bets will be successful in the future.
Equity income funds traditionally have a decent record on the downside, and these portfolios might be a decent bet for capital protection.
The same issue arises with the small cap portfolios, however: many of the most successful funds on both an absolute and risk-adjusted basis have a small or multi-cap focus, and these might not be the best for a traditional market correction.
Our data shows that the Invesco Perpetual High Income fund does better than all IMA Smaller Companies and IMA UK All Companies funds over the past five years in terms of both maximum drawdown and volatility.
Although the fund now sits in the IMA UK All Companies sector it was until the past month in the IMA UK Equity Income sector, and still chases a yield.
There are a number of equity income funds with a better record on the downside, however.
Source: FE Analytics
Francis Brooke’s £1.6bn Trojan Income fund has the lowest maximum drawdown of 10.07 per cent out of all three sectors and is the least volatile IMA UK Equity Income fund.
Fidelity Enhanced Income and SJP UK High Income have the next lowest maximum drawdowns and are the only other two to beat Liontrust UK Smaller Companies.
Fidelity Moneybiulder Dividend, Invesco Perpetual Income, Church House Balanced Value & Income and Invesco Perpetual UK Strategic Income are all also in the toip 10 of the three sectors combined.
