City Financial Absolute Equity, Premier Defensive Growth and SVS Church House Tenax Absolute Return Strategies are among absolute return funds that have beaten the consumer price index (CPI) during the most financial quarters over the last five years, according to research from FE Trustnet.
This comes a week after the Office for National Statistic’s announcement that CPI had reached 3 per cent in September, its highest level since April 2012.
As equity markets continue to climb higher and bond markets remain volatile, investors are now faced with further concerns that inflation could eat into the valuation of their cash.
Given Brexit-related uncertainty and the Bank of England’s likely tapering of loose monetary policy, where can investors turn to protect their capital on the downside?
We decided to round up all the multi-asset funds across the IA Mixed Investment, IA Flexible and IA Targeted Absolute Return sectors which are benchmarked purely against either the GBP Libor interest rate or CPI, without targeting excess returns on top. Essentially, we looked at the funds simply aiming not to lose investors’ money.
Across the aforementioned sectors, a total of 23 funds fit the bill which also have at least five-year track records. Of these, 18 funds have beaten the CPI in total return terms over this time frame.
From here, we measured how the funds fared over each financial quarter during these five years to the end of Q3 2017 and tallied up how many periods they have beaten inflation.
Two funds have managed to beat CPI during 15 of the last 20 financial quarters. One of these is the £232m City Financial Absolute Equity fund, which has been headed up by FE Alpha Manager David Crawford since 2008.
Benchmarked against Libor GBP 3 Month, the targeted absolute return fund aims to provide a positive return over rolling three-year periods. Crawford adopts a long/short strategy to portfolio construction and selects each equity on a bottom-up basis – the team conducts approximately 300 meetings each year.
Over five years, it has returned 121.29 per cent compared to its benchmark’s return of 2.51 per cent.
While the fund has achieved 15 quarters of positive returns over this time frame, the graph below shows that in the few quarters it has made losses, they have been significant. For instance, its biggest quarterly loss was during Q2 last year when it fell by 18.85 per cent and its biggest gain of 18.51 per cent came in Q3 2015.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
This means that, in terms of its risk metrics, it has a five-year annualised volatility of 12.37 per cent and a maximum drawdown – which measures the most money lost if bought and sold at the worst times – of 22.97 per cent.
The second fund beating the CPI during 15 of the last 20 quarters is UBS Targeted Return, which resides in the IA Flexible Investment sector and is benchmarked against the UK retail price index (RPI).
The £36m fund is headed up by Andreas Koester and aims to beat its benchmark over a full market cycle. It invests across a wide range of assets including equities, bank loans, bonds, hedge funds, commodities and infrastructure. Its greatest quarterly loss over five years came during Q3 2015 when it fell by 6.72 per cent while its strongest return was in Q1 2015 at 4.84 per cent.
In total return terms, it has beaten its benchmark over this time frame by 23.25 percentage points with gains of 35.26 per cent. Again, though, the fund is not exactly a ‘steady Eddie’ as it has an annualised volatility of 7.5 per cent and a maximum drawdown of 11.52 per cent.
At the opposite end of the spectrum, the only fund on our list to boast a lower five-year maximum drawdown than the CPI itself at just 1.04 per cent is the four FE Crown-rated Premier Defensive Growth fund.
Managed by Paul Smith since 2010, it is also one of five funds on the list to have beaten the CPI during 14 out of 20 of the last financial quarters. In stark contrast to City Financial’s offering, its biggest quarterly loss was in Q1 2016 when it fell 31 basis points and its biggest return was in Q4 2012 at 1.84 per cent.
Ben Willis, who is head of research at Whitechurch Securities, recently chose the fund as his first pick to hold in case of another ‘Black Monday’ scenario.
“It is exactly the boring, risk averse and diversified fund you would want to protect capital if there is a big shake out in risk assets, as it would protect capital and significantly limit losses,” he said.
Over five years, Premier Defensive Growth has returned 14.84 per cent compared to its Libor GBP 3 Month benchmark’s return of 2.51 per cent. It has an annualised volatility over this time frame of 1.39 per cent.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Out of the four remaining funds to have beaten the CPI during 14 out of the last 20 quarters, the vehicle with the second-lowest maximum drawdown at 2.19 per cent is SVS Church House Tenax Absolute Return Strategies.
The five crown-rated fund has been headed up by James Mahon and FE Alpha Manager Jeremy Wharton since 2007. The managers aim to achieve positive returns over rolling 12-month periods with low levels of volatility.
The fund is able to invest across a wide range of assets and currently has significant exposure to fixed interest, floating rate notes and Treasury bills. It has single-figure positions in infrastructure, equities, real estate and convertibles.
Over five years, the £143m fund has returned 25.35 per cent compared to its Libor GBP 3 Month’s benchmark of 2.51 per cent and it has achieved this with an annualised volatility of 2.66 per cent.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
In terms of its quarterly performance, its largest gain over this time frame was in Q3 2016 at 3.97 per cent while its biggest loss was in Q2 2015 at 1.27 per cent.
The other three funds to have beaten inflation during 14 of the last 20 financial quarters were BlackRock European Absolute Alpha, Schroder Dynamic Multi Asset and Sanlam P-Solve Inflation Plus.
In contrast, Henderson Credit Alpha, Aberdeen Target Return Bond and Standard Life Investments Absolute Return Global Bond Strategies are among some of the few funds to have underperformed the CPI over five years in total return terms. They have also failed to outperform the CPI during at least 12 of the last 20 financial quarters.