According to FE Analytics, it is more volatile than both the IMA Absolute Return and IMA UK Equity Income sector – two areas of the market FE Trustnet has already highlighted in the series.
However, the increased level of risk gives rise to greater opportunities for capital growth and, with sentiment slowly improving, the popularity of the sector is expected to increase.
A number of IMA UK All Companies funds have been able to protect investors' capital without sacrificing the potential for capital returns.
Twenty-three out of 256 funds in the sector have managed to produce top-quartile performance over five years with regard to annualised volatility, maximum drawdown, downside risk and Sharpe ratio.
In terms of volatility, the top-five performers in the sector are JOHCM UK Opportunities, Skandia UK Strategic Best Ideas, Liontrust Special Situations, Unicorn Outstanding British Companies and Newton UK Opportunities.
However, the JOHCM, Liontrust and Unicorn funds, which are all headed up by FE Alpha Managers, are the only funds that consistently top the lists for the other measures of capital protection. The three funds also boast top-quartile performance over five years.
Funds' capital-protection performance over 5-yrs
| Fund | Max Drawdown | Annualised Volatility | Downside Risk | Sharpe Ratio |
|---|---|---|---|---|
| JOHCM UK Opportunities | -28.26 | 14.06 | 15.40 | 0.08 |
| Liontrust Special Situations | -35.26 | 16.21 | 17.98 | 0.46 |
| Unicorn Outstanding British Companies | -28.78 | 16.73 | 17.90 | 0.38 |
Source: FE Analytics
The five crown-rated £993.4m JOHCM UK Opportunities fund is the fourth most stable in the sector over five years, with an annualised volatility of 14.06 per cent.
FE Alpha Manager John Wood’s fund also has downside risk of 17.35 per cent, making it the fifth-best performer in that respect.
At the opposite end of the spectrum, Standard Life UK Equity Unconstrained has the largest downside risk in the sector, with 34.33 per cent.
JOCHM UK Opps’ Sharpe ratio is not as strong as other funds in the list; however it has returned 27.29 per cent over five years, while the sector has made just 6.56 per cent.
The Sharpe ratio calculates the level of a fund’s return over and above the level of a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund’s standard deviation.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
The five crown-rated Liontrust Special Situations fund has the highest Sharpe ratio in the sector.
FE Alpha Managers Anthony Cross and Julian Fosh’s fund is the sixth-least volatile portfolio in the sector over five years but has also returned the second-highest amount.
Over five years, it has made 73.82 per cent while the sector has returned 6.56 per cent.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
The £550m fund has a downside risk of 17.3 per cent, putting it fourth in the IMA UK All Companies sector.
Liontrust Special Situations is also a top-quartile performer over five years in terms of maximum drawdown, ranking 12th overall in the sector.
FE Alpha Manager John McClure’s five crown-rated, £11.4m Unicorn Outstanding British Companies fund has the best maximum drawdown figures out of the three funds highlighted, at -31.63 per cent.
A fund’s maximum drawdown shows how much an investor who bought and sold at the worst possible moments would have lost.
The Unicorn fund is the seventh-least volatile fund in the sector and has a max drawdown risk score of 17.38 per cent; the sixth-best figure in the sector.
In a recent FE Trustnet article, McClure said that many investors see his Outstanding British Companies fund as a boring choice because of the companies it invests in, despite the fact it has beaten the majority of the funds in the sector over three and five years.
Unicorn Outstanding British Companies has returned 62.66 per cent over five years, beating the sector by 56.10 percentage points.
It has the third-highest Sharpe ratio.
The three funds highlighted all require a minimum investment of between £1,000 and £2,500 and have a total expense ratio of between 1.29 per cent and 1.92 per cent.