Investors in lower volatility global strategies have had a better chance of outperforming the MSCI World index over the past decade than their more volatile peers, according to the latest study from FE Trustnet.
As part of an ongoing series looking into volatility and performance, in this article we have considered the funds in the top and bottom quintile (20 per cent) of the 132-strong IA Global sector for volatility over the past 10 years to the end of July.
Of the 31 funds in the bottom quintile for volatility, only four have made top quintile returns. Conversely, 11 of the 31 top quintile funds for volatility have also made top quintile returns.
Taking the low volatility-strategies first, there is a clear pattern with three healthcare and pharmaceutical specialists topping the group.
Schroder Global Healthcare, L&G Global Health & Pharmaceuticals Index Trust and Fidelity Global Health Care all make the list below.
The MSCI World Health Care index (up 304.86 per cent) has outpaced the broader MSCI World benchmark (190.93 per cent) over the past 10 years by 111.93 percentage points.
It has done so with slightly less volatility (13.08 per cent) than the broader index (13.38 per cent) over the period.
Managed by John Bowler, Schroder Global Healthcare is the top-performing healthcare fund, returning 315.97 per cent to investors. It has done so with 13.16 per cent volatility.
Table of top quintile funds for performance and volatility over 10yrs
Source: FE Analytics
Four FE Crown-rated Pictet Security is another sector-specific portfolio at the top of the table, having returned 313.258 per cent with volatility of 13.37 per cent.
The fund invests in companies that contribute to safeguarding the integrity, health and freedom of individuals, companies and governments.
The fund, run by Yves Kramer and Frederic Dupraz, is currently 50 per cent weighted to security service firms, 26.3 per cent in physical security and 22.7 per cent in cybersecurity.
Morgan Stanley Global Brands leads the low-volatility group however, having returned 322.4 per cent over the last decade – the third best in the sector. It has done so with volatility of 12.23 per cent.
The five FE Crown-rated fund run by FE Alpha Manager William Lock and a host of deputy managers invests in high quality companies with one or more of the following factors: dominant market positions, underpinned by powerful, hard to replicate intangible assets that can generate high, unlevered returns on operating capital, and strong free cash flows.
The quality growth strategies however have been en vogue for much of the past year, as discussed when considering the IA UK All Companies sector in a similar study earlier this week.
As such, investors have placed a premium on lower-volatility stocks with dependable earnings growth and a reasonable dividend.
While the quality and growth styles dominate, with Seilern Stryx World Growth, Fidelity Global Consumer Industries and Sanlam Global High Quality among the top low-volatility strategies, value-orientated Investec Global Special Situations also cracks the list.
The value style has been largely out of favour over the period in question, with the MSCI The World Growth index outperforming the MSCI World Value benchmark by 57.9 percentage points.
Managed by Alessandro Dicorrado and Steve Woolley since 2016, it had previously been under the charge of Alastair Mundy and Mark Wynne-Jones for the remainder of the last decade.
The pair have continued to use a contrarian approach: investing in companies seen as undervalued where market sentiment is believed to be generally weak.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Currently the fund is 29.7 per cent weighted to the industrials sector, with 26.4 per cent held in financials and 10.5 per cent in tech stocks.
Turning to the more risk-on side of the list, two smaller companies strategies have made top quintile returns while sitting in the highest quintile for volatility.
This intuitively makes sense, as the small-cap end of the market is often more illiquid and has the potential for rapid growth, although the risks of a company going bust is also higher.
GS Global Small Cap Core Equity Portfolio is the slightly better performer over the past 10 years, having returned 271.5 per cent. However, it has been the riskier of the two portfolios, experiencing 16.26 per cent volatility.
The smaller companies fund is overweight to the US and Europe while underweight in the UK, Japan and Asia, with its top 10 holdings dominated by healthcare and technology stocks (seven out of 10).
Invesco Perpetual Global Smaller Companies is the other fund on the list. Managed by Nick Mustoe since 2010, the £827m portfolio has returned 248.17 per cent with volatility of 15.47 per cent.
Unlike the Goldman Sachs portfolio, the fund is most highly weighted to industrials and financials (22.09 and 17.37 per cent respectively).
Table of top quintile funds for performance and volatility over 10yrs
Source: FE Analytics
For those investors unconcerned about volatility however, the best performing fund in the IA Global sector over the past decade has been the Baillie Gifford Global Discovery.
It has returned 452.98 per cent over the past decade – 128.1 percentage points ahead of the next-best Janus Henderson Global Equity portfolio. Although it has been among the most volatile at 17.69 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Baillie Gifford is a growth investing house known for top performing investment trusts such as Monks and Scottish Mortgage.
The £637m Baillie Gifford Global Discovery fund is managed by FE Alpha Manager Douglas Brodie who invests in growth companies with an emphasis on stocks operating in industries with potential for structural change and innovation.
As analysts at FE Invest noted: “Baillie Gifford has a well-established, growth-oriented investment process that is replicated across many of its equity strategies.
“The team’s consistency and focus on the long term is a valuable trait when investing in smaller companies, which can be vulnerable to short periods of speculation and large price swings.”