Around one-quarter of UK equity funds have beaten the FTSE 100 index over the past 10 years while delivering lower annualised volatility, according to FE Trustnet research. 
While many UK equity funds take the FTSE All Share as their benchmark, reflecting the fact that this index covers a wider spread of the UK stock market, investors pay close attention to the blue-chip FTSE 100 and routinely use it as a gauge of general market conditions.
Over the 10 years to the end of March 2018, the FTSE 100 made an 80.21 per cent total return despite the significant fall seen during the global financial crisis. These gains came with annualised volatility of 13.84 per cent.
Performance of sectors vs index over 10yrs
Source: FE Analytics
Both the average fund in the IA UK All Companies and IA UK Equity Income sectors have managed to beat the large-cap index with respective gains of 94.75 per cent and 93.98 per cent. Over the same period, the IA UK All Companies sector’s annualised volatility was 14.17 per cent while it stood at 12.68 per cent in the equity income peer group.
But many of the UK equity funds making the highest gains over the past decade have been more volatile than the FTSE 100 – as would be expected, given a focus outside of the large-cap space.
The best 10-year return, for example, comes from Slater Growth which is up 351.65 per cent, with annualised volatility of 15.51 per cent. Other top performers that have been more volatile than large-caps include Old Mutual UK Mid Cap, Royal London UK Mid-Cap Growth and Standard Life Investments UK Equity Unconstrained.
That said, our analysis of the IA UK All Companies and IA UK Equity Income sectors found that 23.8 per cent of members with a long enough track record – or 62 funds out of 260 – have beaten the FTSE 100 while being less volatile.
The chart below shows the top 25 of these funds, ranked by total return. IA UK All Companies funds dominate this list; only six of the 25 reside in the IA UK Equity Income sector.
As can be seen LF Lindsell Train UK Equity is in first place after making 279.49 per cent over the period in question; its annualised volatility has been 2.9 per cent lower than the FTSE 100’s.
Managed by FE Alpha Manager Nick Train, the £4.8bn fund focuses on companies that will survive over the long term by maintaining their competitive advantages, such as Unilever, Diageo and London Stock Exchange. It is a very concentrated portfolio, which in theory runs the risk of higher volatility but does not seem to have been the case here.
The FE Invest team, which has the fund on its Approved List, said: “Achieving this impressive performance track-record with the low portfolio turnover highlights his stock picking skills. We like the consistency of his strategy, which will not vary depending on the economic conditions.”
Source: FE Analytics
The £3.3bn Liontrust Special Situations fund, which is run by the FE Alpha Manager duo of Anthony Cross and Julian Fosh, is ranked in second place after making 271.83 per cent with annualised volatility of 12.61 per cent.
It is managed using Liontrust’s Economic Advantage process, which seeks out companies with a durable competitive advantage that allows them to defy industry competition and sustain a higher than average level of profitability for longer than expected. Top holdings include Compass Group, GlaxoSmithKline and BP.
Unicorn Outstanding British Companies came in third; it has made 207.13 per cent over the past 10 years with annualised volatility of 12.79 per cent. The fund, which is headed up by Chris Hutchinson, buys stocks that can demonstrate an established record of growth in earnings and dividends and have predictable revenues, earnings and cash flows.
What might be surprising is that the fund concentrates on companies found on the Alternative Investment Market, which is a higher risk area of the UK stock market. However, the fund’s volatility over the past decade has been 7.6 per cent lower than that seen in the FTSE 100.
The following table looks at this research from the perspective of volatility rather than total return. The below funds have outperformed the FTSE 100 with lower volatility and have been ranked by volatility.
When looked at from this list, equity income funds come off much stronger. Some 17 of the 25 funds are currently in the IA UK Equity Income sector, while another three funds used to reside in the peer group.
Troy Asset Management’s £2.9bn Trojan Income fund – which is run by FE Alpha Manager Francis Brooke with Hugo Ure and Mark Wharrier as deputies – tops the list. It has beaten the FTSE 100 by more than 55 percentage points over the past 10 years, but with less than three-quarters of its volatility.
Brooke concentrates on capital preservation and brings stability to the portfolio by investing in businesses that have healthy financial statements and can generate strong cash flows regardless of economic conditions. Unilever, Royal Dutch Shell and Lloyds are its three biggest holdings.
Source: FE Analytics
Trojan Income is a member of the FE Invest Approved List. “Brooke says that the fund is a bit boring, which is not a problem if it means steady returns and low volatility. He does not look for tremendous performance in market rallies, but is more concerned about preserving investors’ capital in real terms, adjusted for inflation – a foundation of Troy’s investment process,” FE Invest analysts said.
The next three funds on the list – Invesco Perpetual Income, Invesco Perpetual High Income and Invesco Perpetual UK Strategic Income – are former members of the IA UK Equity Income sector.
All are helmed by FE Alpha Manager Mark Barnett, although Invesco Perpetual Income and Invesco Perpetual High Income were run by UK equity veteran Neil Woodford for a significant chunk of the past 10 years. The portfolios are managed with a valuation-aware approach that tends to concentrate more on total return than income generation.