Liontrust Special Situations, Newton UK Opportunities and Invesco Perpetual UK Strategic Income are among some of the lowest beta, best-performing funds in the IA UK All Companies sector during each year over the last decade, research from FE Trustnet shows.
This follows bearish sentiment from some investment professionals regarding the UK economic backdrop and how this could impact markets.
In an article published on Monday, for instance, AJ Bell’s Russ Mould warned that the ability for UK companies to maintain earnings cover for dividends is thinning.
Meanwhile, Neptune’s chief investment officer James Dowey said yesterday that ongoing Brexit negotiations, “wobbly” house prices and stagnating business investment could spell bad news for the UK over the medium term.
Even Old Mutual chief executive Richard Buxton – who is well-known for his bullish outlook – recently warned that a UK market correction could be on the cards.
While these views are of course only one side of the coin, we decided to take a look at the UK equity funds that have been the least impacted by volatility from the FTSE All Share index and have achieved a greater number of monthly positive returns per annum over the last decade. Of course, this is caveated by the fact that past performance is no guide to future returns.
To do so, we calculated the average beta – which estimates a fund’s volatility in comparison to its benchmark – of funds in the IA UK All Companies sector during each year over the past decade. For reference, the FTSE All Share’s beta is presumed to be 1, so any ratio under this number would suggest it is less sensitive to benchmark movements.
We coupled this with the average r-squared correlation between the fund and the index during each year of the past decade, too – this ratio is used as part of the formula to calculate alpha and beta readings.
While beta measurements are statistical estimates, an r-squared measure indicates how closely correlated a fund is to a benchmark and can be treated as a percentage. The stronger the r-squared correlation is between the fund and the benchmark, the more reliable its beta metric becomes.
The final measurement we calculated was the average number of positive monthly gains during each year over the last decade.
After removing the funds that achieved both a lower average number of positive periods and an average beta of more than 1, we calculated the overall average beta, r-squared and positive periods of the remaining funds.
We ran these averages twice to ‘double distil’ the data and were left with a total of nine funds, which are shown in the below table.
Source: FE Analytics
Out of these, the fund with the lowest average beta relative to the FTSE All Share index is Invesco Perpetual UK Strategic Income at 0.74.
The £760m fund has been headed up by FE Alpha Manager Mark Barnett since 2006 and, over the last decade, it has outperformed its average peer and benchmark (which is it not benchmarked against) by 37.56 and 39.23 percentage points respectively with a total return of 114.62 per cent.
Over this time frame, it has a top-quartile annualised volatility, Sharpe ratio (which measures risk-adjusted returns) and maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) relative to its sector average. While the index has achieved an average 6.9 months of positive returns during each year over the last decade, Invesco Perpetual UK Strategic Income has achieved an average 7.5 months per annum of positive returns.
It has an average r-squared ratio of 0.83 over the last decade.
Next up for its average beta of 0.77 is Slater Growth, which had four FE Crowns and has been headed up by FE Alpha Manager Mark Slater since its launch in 2005.
The fund has a much lower r-squared ratio than the aforementioned Invesco Perpetual vehicle at 0.54, which suggests that the fund holds a much smaller percentage of companies found within the FTSE All Share index.
Slater adopts a bottom-up process to stock selection and tends to find a majority of his opportunities further down the cap spectrum.
Over 10 years, the £468m fund has comfortably tripled the performance of its sector average and the FTSE All Share which, again, it is not benchmarked against. When it comes to its risk metrics, the fund is in the third quartile for its annualised volatility and maximum drawdown, which suggests it may not be best-suited to the more cautious investor.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
That said, those with an appetite for risk would have been rewarded over the last 10 years, as it has a top-quartile Sharpe ratio and has achieved an average of eight positive months per year over the last decade. Slater’s Recovery fund is next on the list with similar average beta and r-squared ratios as well as an average 7.6 positive months per year over the last decade.
The fund with the highest average number of positive months per annum over 10 years to have made it onto the list though is Hargreave Hale’s MFM Bowland fund, which has five FE Crowns. However, the fund - which has an average 10-year beta generation of 0.79 and an r-squared ratio of 0.55 - is just £15m in size and is unavailable on most investment platforms.
In joint-second place alongside Slater Growth for its average positive monthly returns is Liontrust Special Situations, which is headed up by FE Alpha Manager duo Anthony Cross and Julian Fosh.
The five crown-rated fund utilises Fosh and Cross’s Economic Advantage process, which focuses on finding companies with intellectual capital, significant recurring business and strong distribution channels.
Over 10 years, the fund has tripled the returns of its average peer and benchmark with gains of 231.19 per cent and has done so with a top-quartile annualised volatility, maximum drawdown and Sharpe ratio.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
It has an average annual r-squared ratio over 10 years of 0.83 and an average beta of 0.83.
Out of all funds in the IA UK All Companies sector, only four funds managed to keep their beta ratio below 1 during each year over the last decade. The only vehicle to have made it onto our ‘double distilled’ list while keeping their beta below 1 each year is Unicorn Outstanding British Companies.
The £51m fund is headed up by FE Alpha Manager Chris Hutchinson and aims to achieve the highest predictable annual compounding rate of return over at least five years. It is able to invest in both fully-listed and AIM stocks so, as such, has a relatively low average r-squared ratio of 0.73 over the last decade.
Over 10 years, the fund has returned 192.23 per cent with a top-quartile annualised volatility, Sharpe ratio and maximum drawdown. It has an average 10-year beta generation of 0.8 and has achieved an average of 7.8 months of positive returns per year over this time frame.
The other three funds with consistently low annual beta readings, whose averages over the time frame was too slightly too large to make it onto our list, were Investec UK Special Situations, Schroder MM UK Growth and Jupiter UK Special Situations.
The other funds to have achieved a place on our double distilled list are Unicorn UK Growth, GAM UK Diversified and Newton UK Opportunities.