Investors have a higher chance of finding funds that have been in the top quartile for both total return and annualised volatility in the global equity sectors rather than the UK equity sectors, research by FE Trustnet suggests.
Achieving high returns with low volatility is one of the holy grails of investing. But a look into all the Investment Association peer groups suggests that this is rarely seen in practice, with FE Analytics showing that there are some sectors where not a single fund has combined top-quartile returns and top-quartile volatility over the past decade.
We reviewed the quartile rankings for total return and annualised volatility of all the open-ended funds with a 10-year track record, then found out which sectors had the highest and lowest concentration of top-quartile performers.
The IA Specialist, IA Targeted Absolute Return, IA Volatility Managed, IA Unclassified and IA Protected sectors were excluded as quartile comparisons are not deemed to be appropriate for these peer groups.
Risk/reward of Investment Association sectors over 10yrs
Source: FE Analytics
Of the 1,303 funds that qualified for inclusion in this study, just 99 – or 7.6 per cent of the eligible Investment Association universe – had top-quartile numbers for both 10-year total returns and annualised volatility.
As the following table will show, it’s the IA Global Equity Income sector that sits in first place after 22.2 per cent of its members combined high returns with low volatility.
It’s worth keeping in mind that this is a quite a small sector with just nine members holding a 10-year track record. The two funds that have managed to make top-quartile returns and volatility are Newton Global Income and Sarasin Global Higher Dividend.
The table also shows that the following two top sectors are so small that having just one fund making the grade is enough to put them at the top of the rankings. From IA Japanese Smaller Companies, Henderson Horizon Japanese Smaller Companies made the shortlist while from IA North American Smaller Companies it's Threadneedle American Smaller Companies.
Some larger peer groups do appear at the top of the table, however.
Source: FE Analytics
The IA Global Emerging Markets sector has four funds, or 11.8 per cent of its eligible members, that made it into the rankings. These are Aberdeen Emerging Markets Equity, Aberdeen Global Emerging Markets Equity, Aberdeen Global Emerging Markets Smaller Companies and Invesco Perpetual Global Emerging Markets.
However, the first large peer to appear on the list is IA Global, which has 146 members with a 10-year track record. Of these, 15 – or 10.3 per cent – sit in the top quartile for total returns and annualised volatility over the past decade. This may surprise some as IA Global is one of the peer groups often highlighted as being a poor hunting ground for active managers.
A closer look at the funds within the sector shows that many of these low-volatility outperformers tend to be sector specialists with the likes of Schroder Global Healthcare, First State Global Listed Infrastructure and Pictet Security being among them.
One generalist IA Global fund combining top-quartile returns and volatility is Trojan Global Equity. Like all of the funds run by Troy Asset Management, capital preservation is at the heart of its process and the portfolio is built around companies with high returns on invested capital, competitive advantages, strong balance sheets, a management team that acts in shareholders’ best interests and a share price that does not reflect future cash flows.
Veritas Global Focus, BNY Mellon Long Term Global Equity and Russell Investments II World Equity are other global equity funds with a place on this study’s shortlist that do not focus their portfolios on a single sector.
The table also shows that the UK equity sectors have fewer than average funds in the top quartile for both returns and volatility over the last decade. The IA UK All Companies and IA UK Smaller Companies are just behind the average, however, with 7.5 per cent of their members making the cut; IA UK Equity Income is further down the table with 5.5 per cent.
Indeed, Artemis Income, Premier Monthly Income and Trojan Income are the only three IA UK Equity Income members combining high returns and low volatility.
Performance of funds vs sector over 10yrs
Source: FE Analytics
In the IA UK All Companies sector, names such as CF Lindsell Train UK Equity, Jupiter UK Special Situations, Majedie UK Equity, Liontrust Special Situations and Investec UK Special Situations can be found on the shortlist. Some 15 are on there in total.
Liontrust UK Smaller Companies, Marlborough Special Situations and Schroder Institutional UK Smaller Companies are the only IA UK Smaller Companies funds to feature.
Our research also shows that the IA Asia Pacific Including Japan, IA Money Market, IA Personal Pensions, IA Short Term Money Market, IA UK Gilts and IA UK Index Linked Gilts have no funds that are in their top quartile for both 10-year total returns and annualised volatility.