The FTSE 100 has not been far from the headlines in recent weeks after it broke through to a new record high after signs of progress in Greece’s bailout negotiations with the European Union. A number of commentators have since said they expect the index to rise even further, noting that it doesn’t look overly expensive when compared to its own history.
FE Trustnet recently took a look at the funds which have performed best in the 15 years since the FTSE’s previous record high. Marlborough Special Situations led the pack, followed by Aberforth UK Small Companies, Investec UK Smaller Companies and Schroder Recovery.
While some investors ultimately focus on returns and pay little attention to other metrics, others are more concerned with risk-adjusted performance. In this article, we will therefore look at the funds that stack up best from this point of view.
Source: FE Analytics
FE Analytics shows the portfolio with the highest Sharpe ratio between 30 December 1999 and now is also FE Alpha Manager Giles Hargreave’s Marlborough Special Situations fund, which has an annualised score of 0.58.
The Sharpe ratio is a commonly used measure of risk-adjusted performance and aims to show whether returns are due to good investment decisions or taking excess risk. For this study, we have based calculations on a risk-free rate of 3.5 per cent, which FE Analytics deems to be appropriate.
Marlborough Special Situations is a highly respected fund, with the FE Research team describing it as “one of the strongest UK funds in terms of performance and quality of investment team”.
Since 30 December 1999, the fund has returned 612.21 per cent against a return of just 190.12 per cent from the average fund in the IA UK Smaller Companies sector.
Performance of fund vs sector since 30 Dec 1999
Source: FE Analytics
As well as having the highest Sharpe ratio, it has the highest Sortino ratio – which indicates a lower probability of a large loss – and the second best Treynor ratio – which is a risk-adjusted measure of return based on systematic risk.
The next two funds on the list are Invesco Perpetual Income and Invesco Perpetual High Income, which have respective Sharpe ratios of 0.56 and 0.54. Both are currently headed by FE Alpha Manager Mark Barnett although the bulk of their track records were built up under fellow FE Alpha Manager Neil Woodford.
Woodford’s CF Woodford Equity Income fund is not included in the figures as it only launched in June 2014. However, over his career the manager has built a reputation as a solid long-term investor with a preference for defensive sectors such as pharmaceuticals and tobacco.
CF Woodford Equity Income is managed to the same process which made the manager’s name and currently has overweight 34 per cent in healthcare stocks, including AstraZeneca, GlaxoSmithKline and Roche. Since launching the fund, Woodford has put a greater emphasis on investment at the bottom end of the market-cap scale, reflecting his passion for smaller, innovative companies.
However, Barnett has also performed well on a risk-adjusted return basis. His five FE Crown-rated Invesco Perpetual UK Strategic Income fund, which he took over in January 2006 is ranked 13 out of the 184 funds in the Investment Association’s three UK equity sectors, boasting a Sharpe ratio of 0.41.
Performance of funds vs sector and index since 30 Dec 1999
Source: FE Analytics
Two smaller companies products – the team-managed Aberforth UK Small Companies and Ken Hsia’s Investec UK Smaller Companies funds – are in fourth and fifth places with respective Sharpe ratios of 0.48 and 0.47.Both are in the top fifth best funds for Sortino and Treynor ratios since December 1999 also.
Next up is the five FE Crown-rated Fidelity Special Situations fund, with a Sharpe ratio of 0.47. The £2,7bn fund has had three managers since the FTSE 100’s previous peak – Anthony Bolton, Sanjeev Shah and Alex Wright.
Around half of the portfolio’s track record since December 1999 was built under Bolton, with Shah running the portfolio from January 2008 to December 2014. However, Wright has shown himself capable of securing good risk-adjusted returns of his own, as his Fidelity UK Smaller Companies has the highest Sharpe ratio in its sector since launch in February 2008.
The fund is contrarian in approach, looking for companies on all parts of the market-cap spectrum that are unloved but have the potential to turn around. Despite this, it has had one of the lowest maximum drawdowns in the UK All Companies sector, although it is one of the more volatile members of the peer group.
Other notable funds uncovered by the filter include Andrew Green’s GAM UK Diversified, which has a 0.46 Sharpe ratio and is in seventh place. FE Alpha Manager Green is one of the longest serving managers in the industry and has headed this value-based strategy since 1990.
The fund has an excellent long-term track record but, as the graph below shows, it can fall harder than the market in difficult conditions. The fund is currently second quartile over three and five years but third quartile over one year.
Performance of fund vs sector and index since 30 Dec 1999
Source: FE Analytics
Meanwhile, Schroder Recovery – which is helmed by the FE Alpha Manager duo of Kevin Murphy and Nick Kirrage – is in ninth place with a Sharpe ratio of 0.44. The managers have been on the fund since July 2006 and since then have returned 146.34 per cent, making the portfolio the 13th highest returning out of 207 funds.
While the fund has some of the best risk-adjusted returns of its peer group, it must be noted that a recovery approach can be more volatile. Square Mile said: “Investors should enter a fund such as this with their eyes open and be prepared to weather the bad times as much as the managers who are running the fund.”
In a coming article, FE Trustnet will look at which investment trusts have stood out for risk-adjusted returns over the past 15 or so years.