The funds that defended investors best during the financial crisis are still ahead of risker portfolios that lost more at the time but went on to rally harder over the bull run that followed, Trustnet research shows. 
The global financial crisis of 2008 hit markets hard, leaving investors with scars that remain to this day. The MSCI World index dropped 35.55 per cent during the extended sell-off, while the FTSE All Share was down 44.13 per cent – not far off the losses sustained by the emerging markets index.
Of course, funds were not immune from the bear market and the average fund in the Investment Association universe shed 31.15 per cent during the crisis. In this article, we look at how those that protected their investors best during this time have fared since.
To do this, we ranked every Investment Association fund into quartiles for their maximum drawdown during the financial crisis (excluding the money market sectors and those where quartile rankings are not appropriate) then found the average total return between the start of 2008 and November 2019 for each of those quartiles.
Source: FE Analytics
The table above shows the average maximum drawdown in each sector as well as the drawdowns split up into quartiles. For example, the average IA Global member had a 33.42 per cent maximum drawdown, but the top quarter of the sector lost just 23.31 per cent on average compared with 43.75 per cent from the worst.
Some fund sectors have a wide spread of losses. In IA Flexible Investment, there is a 22.51 percentage point gap between the quartile with the lowest maximum drawdown and the highest, in IA Global there’s a 20.44 percentage point difference and in IA European Smaller Companies it’s 18.86 percentage points.
But how do the total returns of the funds that protected investors’ money best during the financial crisis look after a decade-long bull market? We took the four maximum drawdown quartiles and worked out the average return for each between 1 January 2008 and 30 November 2019.
Source: FE Analytics
The table above reflects how losing less money in the financial crisis meant that funds are still at the top of the performance tables more than 10 years later, despite many of their riskier peers making higher returns during the bull market that followed.
FE fundinfo data shows the average fund with a top-quartile maximum drawdown during the crisis made a total return of 155.24 per cent over the time frame covered by this research, compared with a gain of just 110.74 per cent from those in the worst quartile.
Taking the IA Global sector as an example, the average fund included in this research made a 160.03 per cent total return between 1 January 2008 and 30 November 2019. However, those in the top quartile for maximum drawdown have returned an average of 214.47 per cent while those in the bottom quartile made 110.68 per cent.
If we look at the 20 top performers from this peer group, 13 of them achieved a top-quartile maximum drawdown during the crisis, while two were in the second quartile. None were bottom-quartile.
Examples of funds that were top quartile for both total returns and maximum drawdown include Wellington Global Health Care Equity, Morgan Stanley Global Brands, Seilern World Growth, Pictet Security, BNY Mellon Long Term Global Equity, Veritas Global Focus and Trojan Global Equity.
In the IA UK All Companies sector, the biggest in the Investment Association universe, there’s 35.41 percentage point gap in average total returns between funds in the first and fourth quartiles for maximum drawdown.
In this peer group, the highest returning fund over the total period in question was not in the top quartile for maximum drawdowns during the crisis but it was in the second. Slater Growth was 37.66 per cent but made a total return of 376.71 per cent between 1 January 2008 and 30 November 2019.
IA UK All Companies that were top quartile for both total returns and maximum drawdown include Liontrust Special Situations, LF Lindsell Train UK Equity, Royal London UK Mid-Cap Growth, Unicorn Outstanding British Companies and Marlborough UK Multi-Cap Growth.
This trend for funds that protecting capital best going on to outperform holds true in 24 of the 31 Investment Association sectors that we looked at in this research. However, this means that in seven of the peer groups, funds with the highest drawdowns went on to outperform, on average.
This was notable in the IA Technology & Telecommunications sector, where the average return of a fund in the bottom quartile for maximum drawdown was 39.33 percentage points higher than one in the top quartile.
Fidelity Global Technology, for example, has a 33.05 per cent maximum drawdown but has returned 453.52 per cent. Aberdeen Standard SICAV I Technology Equity, on the other hand, lost just 27.16 per cent but is up ‘only’ 286.4 per cent for the total period under consideration.