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Whenever we look at fund performance, it’s all too easy to become drawn to the portfolios boasting the highest returns. After all, we all like to see our investments rising in value. But what about when markets fall?
No-one likes losing money, so it’s equally important, in our view, to include funds in your portfolio that can add a level of diversification and protection.
We took a look at the calendar-year returns that our Elite Rated funds have achieved over the last decade to the end of 2017, to see how they have fared. Some of the results are as you would expect, but some may come as a surprise…
Of the 149 Elite Rated funds, 91 have a 10-year track record. An impressive 49 funds (or 48%) have lost money in just two calendar years or less, over the last decade. As a point of reference, the FTSE 100 suffered three loss-making years over this time frame – during the great financial crisis of 2008 when it fell 28.33%, in 2011 amid the European debt crisis when it ended the year down 2.18%, and in 2015 (the year the Chinese stock market bubble popped) when it fell 1.32%.
The former, which is managed by Richard Woolnough, demonstrates the true merits of diversification. Richard invests across a huge range of fixed income assets at any one time, but blends these based on where we are in the economic cycle. Even in 2008, when both bonds and equities were badly hit, his fund still managed to achieve a positive return of 3.23%.
The latter, which is managed by Daniel Mahony and Gareth Powell, has performed well because the team is unafraid to hold high levels of cash during turbulent times, and had a 30% cash weighting in 2008. it also held 20% cash in 2011, and 20% cash in 2015 due to concerns over China. It is one of the best performers on our list, having returned 330.31% over the last decade.
A further 22 Elite Rated funds only lost money during one calendar year out of the last 10. One of these is M&G Corporate Bond, which is also one of the least volatile on our list over the time frame in question. Also managed by Richard Woolnough, this fund focuses mostly on sterling-denominated, high-quality debt from mega-cap companies.
Another interesting example is Polar Capital Global Insurance. Even during tough economic times, insurance is usually one of the few things that people will continue to pay for. This therefore makes the fund a good defensive option, as well as a great diversifier.
Closer to home, BlackRock UK Absolute Alpha has also only lost money during one of the last 10 calendar years, and has the second-lowest volatility out of all the funds on our list. For managers Nick Osborne and Michael Ridge, the aim of the game is not to lose money an on absolute basis, as opposed to simply beat a benchmark. Nick and Michael will hold short positions as well as long positions (which essentially means betting against a stock). This they have more options available to them to make money when markets are falling.
For those looking for emerging market exposure, Claudia Calich’s M&G Emerging Markets Bond fund has also only lost money during one calendar year of the last decade. In fact, the fund actually made 30.23% in 2008 – the best return during this year on our list – which suggests that it performs differently to many other funds.
The one year it lost money was 2013, in the throes of the Taper Tantrum. This was when the US central bank started to reverse its quantitative easing programme, which it had implemented through buying bonds. Many investors worried that emerging markets would be negatively impacted by higher bond yields in the US.
Out of the 91 funds on the list, SVS Church House Tenax Absolute Return Strategies has the lowest monthly volatility** at 3.64%. it is managed by James Mahon and Jeremy Wharton, who invest across a wide range of lowly-correlated asset classes. They base their decisions on broader themes such as political risk, interest rate and inflation outlooks, and will balance the asset class weightings accordingly.
Schroder MM Diversity, which is managed by Marcus Brookes and Robin McDonald, is also one of the top contenders for its monthly volatility** of 5.44%. The managers buy into other funds in a bid to achieve steady returns over a whole market cycle, and aren’t afraid to position themselves very defensively if they believe a nasty shock is on the cards.
Robin told the FundCalibre team: “Warren Buffett famously said ‘you only find out who is swimming naked when the tide goes out’. We always wear our trunks.”
There are also funds on our list which have taken on a little more risk to maximise returns. The best example is the Baillie Gifford Shin Nippon investment trust, which has returned 483.61% over the last decade.
It is headed up by Praveen Kumar, who hunts for innovative and high-growth companies which are often small in size. Small-caps tend to be more volatile than their larger peers and, as such, it’s perhaps unsurprising that this fund has been been one of the racier – and highest returning – funds on our list over the last decade.
Other more volatile, yet top-performing Elite Rated funds to have made it onto our list include TR Property Investment Trust which is up 226.63%, F&C Global Smaller Companies at 297.17% and AXA Framlington Global Technology at 322.51%.
To sum up, while past performance is of course no guide to future returns, we feel it really is important to get under the bonnet of how a fund performs both during falling markets and when markets are rising. This should give investors a real fighting chance during the turbulent times.
*All figures based on study ran in FE Analytics, 1 January 2008 to 31 December 2017, total return in sterling terms. Correct as of Friday 12 May 2018.
**Volatility is the fluctuation in the price of an investment. In our data, the average monthly price fluctuation per year was calculated. We did this over 10 years to the end of 2017. The average from each of these 10 years was then taken, which left us with our final volatility percentage. In other words, our figures show the average monthly volatility of the funds, over each year, over the course of the last decade to the end of 2017.
Technically speaking, we looked at the annualised volatility data, over monthly return periods, over the last decade to the end of last year.