Making money from UK equity markets is all about investing in companies with strong balance sheets, good quality management, increasing sales and growing profits, right?
This is usually the case, and by outsourcing the research - both quantitative and qualitative – and trading, investors have seen huge returns from the most successful fund managers.
Those such as FE Alpha Manager Mark Slater have been the most prosperous over the past decade in the UK equity space, who in his MFM Slater Growth fund, has more than tripled the 90 per cent gain of the FTSE All Share thanks to his stock picking and a focus on the lower end of the index.
However, this 10 year period includes two bear markets between 2007 and 2009 and in 2011, when many funds including Slater’s fell hard thanks to the onset of the global financial crisis in the former case and the European sovereign debt crisis in the latter.
Between 25 October 2007 and 4 March 2009 the FTSE All Share lost 42.28 per cent. Between 3 March and 5 October 2011 it lost 15.35 per cent.
Not every equity fund falls during the periods where the broader market goes down a lot. Long/short funds where managers have the ability to ‘short’ the market - this means that if certain stocks go down, they make a profit and if they go up, they make a loss – can hold up while others fall. They can also hedge falls in ‘long’ stocks and thereby reduce their risk.
In this article we take a look at the long/short funds that have fared the best during the two big bear markets of the past decade - where most equity funds where losing money fast. Below is a ‘short list’ of the best performers.
Source: FE Analytics
The only long/short portfolio to make money in both of the crisis periods, the two biggest drawdown phases for the UK stock market, is the Thesis Cartesian UK Absolute Alpha fund managed by Andrew Kelly since 2006. Jeremy Hall has been co-managed since 2011.
The fund sits in the IA Absolute Return sector, however while it made a positive return while other equity funds were losing money in these periods it went on to lose money over the course of 2009 and 2012 as markets recovered their losses. In the case of 2011 this was just 2.87 per cent but the fund lost a whopping 30 per cent over the course of 2009 despite its first quarter gains.
Since, Hall has managed the fund it is up 72.49 per cent against the FTSE All Share’s gain of 60.47 per cent. It has beaten the index as well as doubled the sector average returned, with much lower volatility than the index.
Performance of fund, sector and index since 2006
Source: FE Analytics
The £200m Blackrock UK Absolute Alpha also made a positive return during the financial crisis of 3.67 per cent but its manager Nick Osborne only took over in January 2008. The fund lost 7.16 per cent in 2011’s downward period, more than half the fall of the index.
FE Alpha Manager Ian Stewart’s £9bn Newton Real Return fund, which he has managed since 2004 fell 0.63 per cent during the financial crisis and 6.11 per cent during the 2011 period. The fund is not a straightforward long/short fund, also holding fixed interest and other securities such as gold.
However, it does often make use of shorting although it tends to go short a whole index rather than individual stocks.
The fund has been the better performer of the two over eight years, having beaten the FTSE All Share index, and with a much smoother ride.
Performance of funds, sector and index over 8yrs
Source: FE Analytics
Newton Real Return is one of the most highly-rated absolute return funds within the industry as a result of its track record and, given it is one of the oldest in space, it has dealt with a variety of differing market conditions – unlike many of its peers.
As a result, it is the one of only two funds in the sector to carry a ‘AA’ rating from Square Mile.
“Iain Stewart is a veteran investor who has worked at Newton for over 25 years, managing both multi asset and global equity mandates,” Square Mile said.
“He has the able support of the experienced Newton Real Return team. The key attractions of this fund are the established Newton Global Thematic approach that is at the core of the process, combined with the experience of Mr Stewart.”
“We think this is an appealing option for investors seeking a fund that is focused on capital preservation and delivering positive absolute returns over the long-term.”
During the 2011 market falls, more long/short funds were in existence within the IA Absolute Return sector as demand for these types of vehicles had ramped up in previous years.
The performer in the down months of 2011 – returning 11.12 per cent - was the £33m CF Eclectica Absolute Macro fund, managed by Hugh Hendry who most recently has also found success in his short book thanks to betting against oil services firms.
The Old Mutual Global Equity Absolute Return and the Argonaut FP Argonaut Absolute Return, Kames UK Equity Absolute Return and City Financial Absolute Equity funds also made a positive return during this period.
City Financial’s David Crawford has had a number of successful shorts over recent years, such as ASOS and Quindell last year, and told FE Trustnet early this year that he is finding even more opportunities to add to his short book.
“We would say, because the market is pretty bullish, there is more opportunity on the short side as some companies aren’t as good as the market thinks they are,” Crawford said.
Another long/short portfolio, the £700m Henderson UK Absolute Return fund was only launched into the IA universe in 2009 but the strategy has been run as a hedge fund in since 2005.
FE Alpha Manager Ben Wallace effectively used his short book in 2008 to make more than 30 per although in 2011 the fund fell 3.56 per cent during the market falls.
As far as our data goes back, which is when it appeared into the IA Targeted Absolute Return sector back in 2009, it has outperformed its sector but made 20 percentage points less than the FTSE All Share, however it has done so with substantially less volatility and maximum drawdown.
Performance of fund, sector and index since 2009
Source: FE Analytics
The fund appears on the FE Select 100 list of recommended funds. The FE Research team said: “We think this is an appealing option for investors seeking a fund that is focused on capital preservation and delivering positive absolute returns over the long-term.”
“In 2008 the predecessor fund made 30% as the UK equity market fell by a similar amount, thanks to its ability to bet on share price falls [“go short”]. The managers say they weren’t betting on a market collapse, but were “short” because of the poor state of individual companies.”
“Since the crisis it has been harder to meet the fund’s targets as share prices move because of central bank policy rather than company strength. However, it protected well in 2011 and so far in 2014 when markets were weak.”