Liontrust Special Situations, Troy Trojan and Lindsell Train UK Equity are among some of the UK equity funds to have exceeded investors’ downside protection and annualised return expectations over the last decade, according to research from FE Trustnet.
This follows Schroder’s latest Global Investor Study, which surveyed 22,100 investors from 30 different countries.
It found that UK investors expect average annual returns of 8.7 per cent over the next five years which, while below the global average expectation of 10.2 per cent, is significantly higher than the Schroders Economics Group’s forecast 5.4 per cent annual return for UK equities over the next seven years (not accounting for inflation).
James Rainbow, co-head of Schroders UK intermediary business, said investors’ return expectations are “very optimistic” given the current backdrop.
“The UK stock market has seen a remarkable rally in recent years, which has probably buoyed confidence,” he said. “But much of the strong performance is due to the extreme actions taken by central banks to stimulate the economy.
“The broader picture is that we’re in an age of low rates and low growth. It’s therefore wise to expect lower returns.”
Investors’ return expectations may also seem at odds with their appetite for risk, according to the study. It found that 59 per cent do not want to take on as much risk in their investment now as they did last year, while 48 per cent are holding more money in cash than they had before.
As such, we decided to take a look at the UK equity funds with 10-year track records (and have therefore experienced an entire market cycle) which have achieved an average annualised return of at least 8.7 per cent over this time frame to the end of October.
From these, we also filtered out the funds which have a lower 10-year maximum drawdown (which measures the most money lost if bought and sold at the worst possible times), annualised volatility and downside risk (which predicts susceptibility to lose money during falling markets) than the FTSE All Share index over this time frame.
From an initial list of 249 funds with decade-long track records, only 16 – or 6.4 per cent – have exceeded current investor expectations over the last decade and are shown in the table below. Of course, this comes accompanied with the caveat that past performance is no guide to future returns.
Source: FE Analytics
As shown in the above table, the fund achieving the highest average annualised return to the end of October at 14.4 per cent over the last decade is Liontrust Special Situations.
The five FE Crown-rated fund also has a maximum drawdown of 35.26 per cent compared to the FTSE All Share’s drawdown of 41.09 per cent, an annualised volatility of 13.09 compared to the FTSE All Share’s 14.06 per cent volatility and a downside risk of 13.6 compared to the All Share’s downside risk of 15.39 per cent.
FE Alpha Manager duo Anthony Cross and Julian Fosh adopt their Economic Advantage approach when positioning the fund, which focuses on finding companies with difficult-to-replicate characteristics. For instance, they favour traits such as intellectual property, strong distribution channels or significant recurring business. Examples of its largest individual holdings include Royal Dutch Shell, BP and Diageo.
Over the last decade in total return terms, the £3bn fund has comfortably tripled the returns of both its average peer and its FTSE All Share benchmark with gains of 227.76 per cent.
Next up with an average annual total return 14.3 per cent over the last decade to the end of October is FE Alpha Manager Nick Train’s Lindsell Train UK Equity fund.
The five crown-rated vehicle, which is £4.2bn in size, has a markedly concentrated portfolio of stocks which the manager deems to be of high quality with strong branding power. For instance, its largest holding Unilever currently accounts for 9.7 per cent of the overall portfolio, while next-largest holdings Diageo and RELX account for 9.6 and 9.3 per cent respectively.
In terms of its risk metrics over 10 years to the end of last month, it has an annualised volatility of 13.97 per cent, a maximum drawdown of 34.08 per cent and a downside risk ratio of 14.52.
It has also achieved a total return of 224.63 per cent over the last decade, compared to its average peer and benchmark’s respective returns of 75.2 and 70.99 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
In third place on our list is Unicorn Outstanding British Companies with an average annual return of 12.9 per cent over the last decade to the end of October. Over the same time frame, it has an annualised volatility of 13.26 per cent, a maximum drawdown of 28.4 per cent and a downside risk ratio of 14.47.
The fund, which is just £51m in size, has been headed up by FE Alpha Manager Chris Hutchinson since the end of 2006.
It has a concentrated portfolio of 31 stocks which the manager deems to have steady revenues, earnings and cash flows in a bid to achieve predictable long-term total returns.
He tends to invest further down the market cap spectrum, with the likes of intellectual property translator RWS Holding, life science e-commerce company Abcam and engineering firm Renishaw accounting for some of its largest individual holdings.
In terms of its total return over 10 years, the fund has outperformed its average peer and benchmark by 114.64 and 118.85 percentage points respectively with a total return 189.84 per cent.
When it comes to the funds on the list which have best protected investors’ capital on the downside, the runaway winner is FE Alpha Manager Francis Brooke’s five crown-rated Trojan Income fund.
Over the last 10 years to the end of October, it has a maximum drawdown of 22.55 per cent, an annualised volatility of 10.17 per cent and a downside risk ratio of 10.08. Its average annual return over this time frame is 8.9 per cent.
Brooke aims to provide an above-average level of income with some capital growth over the long term. He favours high-quality defensives and counts Unilever, Royal Dutch Shell and Lloyds as some of his largest individual weightings.
Had an investor placed £10,000 into the fund a decade ago, they would have received £4,611.85 in income alone. In total return terms, it has seen gains of 123.03 per cent compared to its benchmark and its average peer in the IA UK Equity Income sector’s respective returns of 73.59 and 70.99 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Other funds on the list to have protected investors on the downside particularly well include Majedie UK Equity and Invesco Perpetual UK Strategic Income.