With the market enjoying one of its the longest stretches of economic expansion on record, a growing number of funds have never weathered a recession. For investors bracing themselves for a potential downturn, the issue of how these funds will fare during hard times remains a concern.
While it must of course be remembered that past performance is no guide to future returns, managing through a recession can give managers valuable experience for the next recession.
Trevor Greetham, head of multi-asset at Royal London Asset Management, said increasingly investors are looking for managers with long-term track records.
“If you get a 10-year track record, people are very impressed. But a 10-year track record, is still not long enough for you to be a fund manager during a recession,” he said.
“The reason for this: it’s been 10 years now since the last recession ended, if only you have a 10-year track record, you’ve only managed funds in good times.”
Greetham estimates that only about one in ten managers have managed funds for over ten years.
Recessions are brutal, said the portfolio manager. “The market is all over the place, volatility is high. The market goes up a lot during recessions and then down even more. So, you swirl around,” he said. “It’s a real test of character and of process to manage your fund during a recession.”
As such, FE Trustnet set out to find some of the top-rated large funds that have never seen an economic recession, finding just nine names launched since 30 June 2009 – the end of the last UK and US recession – with assets of at least £1bn, five FE Crowns, and managed by an FE Alpha Manager.
Source: FE Analytics
As the above table shows, some of the industry’s best-known and most popular names are among those that have yet to face a recession.
The largest name on the list is the Fundsmith Equity fund, which launched in November 2010 and has since grown to £19.2bn. The fund is overseen by industry veteran Terry Smith and has developed a strong track record of outperformance.
Since launch, the strategy has made a total return of 376.27 per cent, compared with a 175 per cent gain for the MSCI World benchmark and a 127.27 per cent return for the average IA Global peer.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Another well-known name – and global equity fund – is Lindsell Train Global Equity managed by Michael Lindsell and Nick Train, along with colleague James Bullock.
Since launch in March 2011, the fund has grown to £8.7bn in size using a similar ‘quality growth’ approach as Terry Smith, making a total return of 332.98 per cent.
Indeed, there were several global equity strategies among our shortlist which also included Morgan Stanley Global Opportunity and Morgan Stanley Global Quality.
There were two names from the UK equity space too, with TB Evenlode Income and Keith Ashworth Lord’s CFP SDL UK Buffettology representing the IA UK Equity Income and IA UK All Companies sectors, respectively.
The GAM Star Credit Opportunities EUR and GAM Star Credit Opportunities USD from the global bonds sector and Hermes Asia ex Japan Equity from the IA Asia Pacific Excluding Japan sector rounded out our list of funds.
Yet, it remains to be seen how these funds – or any without a long-term track record – might hold up in a very different operating environment from the bull market conditions that have prevailed for the past 10 years.
As such, now might be a good time to take a closer look at your portfolio and ask some hard questions, and Greetham suggests three things investors should do.
The first thing is to take a look at what they’re invested in and ask the question: “’How would this behave in a recession?’ And, ‘Will I be able to sell it? Will I be able to get my money out?’” 
Because sometimes in a recession, funds’ gates can close shut, or you may only be able to sell at very low price because nobody wants to buy.
“The sort of things I’d be nervous about, and I’ve been saying this for a while, are the more exotic, very high yield investments,” he explained. “Things like aircraft leasing, peer-to-peer lending, or anything with a lot of leverage in.”
When the market is on a more positive mood, Greetham said, it’s a good opportunity to get rid of some of those things.
The second thing investors should do, according to the Royal London fund manager, is to look for funds with an active strategy that can cope with recessions.
“This means active tactical asset allocation, so you can move away from equity markets and towards government bonds,” he said, adding that a process with a track record including a recession would be best.
The third thing, Greetham (pictured) said, in some circumstances, it’s worth having a way of controlling volatility. “Because when volatility is high, you can experience bigger losses,” he explained.
“Those are the sort of things you can do if you’re getting concerned about a recession,” he said. “It’s worth remembering that after 10 years of economic expansion, we probably haven’t got another 10 of it left,” adding that he’s not forecasting one imminently.
However, he said while we’re definitely at that stage of the cycle when people should be thinking about a possible recession, “there are things that could happen allowing the US to grow another few years before a recession”.