Investors in higher-risk UK funds have not necessarily been rewarded for taking on the extra risk, according to the latest study by FE Trustnet.
In this series, we have looked at the best and worst Investment Association (IA) sectors and investment trusts in the Association of Investment Companies (AIC) sectors.
Here, we break down the IA sectors by region to determine which funds have been the best for investors on a risk-adjusted basis: starting with UK.
Despite being the second-best performer in the sector, LF Lindsell Train UK Equity has the best risk-return profile of any in the IA UK All Companies sector.
The five FE Crown-rated fund, managed by FE Alpha Manager Nick Train has returned 332.66 per cent with volatility of 12.73 per cent. This gives it a Sharpe ratio – which measures risk-adjusted returns – of 1, the highest in the sector.
Top performing Slater Growth, headed up by FE Alpha Manager Mark Slater, has returned 411.8 per cent – 109.14 percentage points ahead of Train’s fund – but has done so with volatility of 15.3 per cent, giving it a Sharpe ratio of 0.9, the fourth-highest in the sector.
The second-best fund on a risk-adjusted basis is the five FE Crown-rated Liontrust Special Situations, which has been the fourth-best performer.
Run by FE Alpha Managers Julian Fosh and Anthony Cross, the fund has made a 329.87 per cent return with volatility of 12.27 per cent for a Sharpe ratio of 0.96.
Risk-adjusted performance of funds in IA UK All Companies sector over 10yrs
Source: FE Analytics
Despite producing the fifth-best performance in the sector, Standard Life Investments UK Equity Unconstrained – the most volatile fund in the sector – has a Sharpe ratio of 0.43, the 47th best in the 197-fund strong sector.
Outside of these funds there is a clear focus on those looking further down the market capitalisation, with Old Mutual UK Mid Cap, Barclays UK Lower Cap, Royal London UK Mid-Cap Growth and Franklin UK Mid Cap all in the top 10 for performance over the last decade.
The fund with the lowest volatility in the sector is FE Alpha Manager Mark Barnett’s £4.4bn Invesco Perpetual Income, at 10.22 per cent.
The fund has returned 121.84 per cent – squeaking ahead of the FTSE All Share benchmark’s 118.77 per cent gain. This combination gives it a Sharpe ratio of 0.43 – the same as the most volatile Standard Life Investments UK Equity Unconstrained.
Turning to the funds with the lowest rating for risk-adjusted returns, Halifax Special Situations ‘tops’ the list having returned 49.6 per cent over the past 10 years. With volatility of 14.87 per cent, this equates to a Sharpe ratio of 0.00.
Turning to the IA UK Equity Income sector, the top performing fund has also been the best on a risk-adjusted basis.
Unicorn UK Income has returned 305.77 per cent with volatility of 13.98 per cent for a Sharpe ratio of 0.81
The £582m fund is managed by FE Alpha Manager Fraser Mackersie alongside Simon Moon, who took over in 2014 following the death of former manager John McClure.
The second-best performing MI Chelverton UK Equity Income fund is also the second-best on a risk-adjusted basis.
The fund is headed up by David Horner and David Taylor and like the Unicorn fund has a small-cap bias compared to its peers. It has returned 284.68 per cent with volatility of 15.01 per cent giving it a Sharpe ratio of 0.69.
Risk-adjusted performance of funds in IA UK All Companies sector over 10yrs
Source: FE Analytics
Third, however, is the fund that experienced the least volatility in the sector – rather than necessarily the next-best performer.
Trojan Income is headed up by FE Alpha Manager Francis Brooke and unlike those above is much more large-cap oriented.
Over the last decade it has returned 163.51 per cent, a top-quartile performance, but with volatility of just 9.55 per cent. The £2.8bn fund therefore has a Sharpe ratio of 0.66.
It is the only fund in the top five for Sharpe ratio in the sector with top quartile volatility, with top performers JOHCM UK Equity Income and Royal London UK Equity Income rounding out the list.
At the other end of the list, the fund with the lowest volatility – Standard Life Investments UK Equity Income Unconstrained (18.02 per cent) – does not have the worst Sharpe ratio (0.3).
Indeed, with returns of 172.15 per cent – the sixth-highest in the sector – the fund is in the third quartile on a risk-adjusted basis.
At the bottom of the IA UK Equity Income sector for risk-adjusted returns as measured by the Sharpe ratio is Castlefield B.E.S.T Sustainable Income with a score of 0.1.
The worst-performing fund in the sector is closely followed by Scottish Widows UK Equity Income – the second-worst – with a score of 0.12.
When it comes to smaller companies, the pattern of risk-adjusted returns is all over the place, as the below chart shows.
In theory there should be a nice line from bottom-left to top-right, indicating that the lower risk funds have made smaller returns while the opposite is true for high-risk portfolios.
The word ‘scatter’, however, is far more appropriate, with little in the way of a discernible pattern.
Every fund has outperformed the FTSE All Share index over the last decade, but the best on a risk-adjusted basis is the five FE Crown-rated Liontrust UK Smaller Companies fund, again run by Fosh and Cross.
The £978m fund, also co-managed by Victoria Stevens and Matthew Tonge, has experienced the lowest volatility of 11.46 per cent, while making the third-highest return of 468.8 per cent.
Risk-adjusted performance of funds in IA UK Smaller Companies sector over 10yrs
Source: FE Analytics
The best performer has been FE Alpha Manager Alex Wright and co-manager Jonathan Winton’s Fidelity UK Smaller Companies fund.
It has returned 513.43 per cent, although has a higher-than-average volatility, meaning it is the third-best performer on a risk-adjusted basis.
Marlborough UK Micro Cap, run by FE Alpha Manager Giles Hargreave and Guy Feld, splits the two, having made the fourth-highest returns with top quartile volatility.
At the other end of the sector, Janus Henderson UK & Irish Smaller Companies and Franklin UK Smaller Companies – the two worst performers in the sector – also have the worst Sharpe ratios.