Another tail-wind for the UK market is the strength of sterling. The currency surprised with its strength this year and the strength of the pound is expected to continue into 2014, which means that investments abroad will have to work harder to make the same returns.
With this in mind, FE Trustnet highlights the funds in the IMA UK All Companies, IMA UK Equity Income and IMA UK Smaller Companies sectors which have performed well on a risk-adjusted return basis in 2013 – could these be the funds to bet on next year?
IMA UK Equity Income
The top funds in terms of risk-adjusted return in the IMA UK Equity Income sector over the last year were also some of the top performers.
The CF Miton UK Multi Cap Income fund produced the best sharpe ratio last year, followed by FE Alpha Manager John McClure’s five crown rated Unicorn UK Income portfolio and the Marlborough Multi Cap Income fund, managed by Siddarth Chand Lall and FE Alpha Manager Giles Hargreave.
The Miton and Unicorn funds also had the lowest max drawdown in the sector, meaning that even if you sold at the worst possible point and bought at the highest, your potential loss would be limited.
The Marlborough Multi Cap Income fund was the fifth best fund in the sector in terms of max drawdown.
Other standout funds in the sector include the five crown rated PFS Chelverton UK Equity Income and Royal London UK Equity Income funds.
Source: FE Analytics
However, one year is a short timeframe to judge volatility, as market conditions can lend themselves to outperformance for a particular style of investing.
The Unicorn UK Income, PFS Chelverton UK Equity Income and Royal London UK equity Income have held up over the medium term, comprising three of the four best-performing funds in the sector over the last three years.
The Unicorn fund is the top-performing fund over that time, with returns of 142.72 per cent. The sector made just 58.52 per cent over that period. The Chelverton fund is second.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The Elite Webb Capital Smaller Companies Income & Growth, CF Miton UK Multi Cap Income and MFM Slater Income funds do not yet have three year track records.
Over three years Mark Barnett’s Invesco Perpetual UK Strategic Income fund is the third-best in terms of sharpe, while Neil Woodford’s two Invesco income funds Barnett will be taking over in April are fifth and sixth. Quems Monthly Income is fourth.
IMA UK All Companies
It’s a similar story for the IMA UK All Companies sector, with those funds that have tended to outperform over the medium term also outperforming this year, and with less risk.
Again, FE Alpha Manager John McClure led the charge with his five crown rated Unicorn Free Spirit fund. The fund had a Sharpe ratio of 4.84 per cent over the last 12 months and was the third-best performing portfolio.
The fund also holds up over three years, with top-quartile returns of 114.48 per cent, beating the sector by more than 50 percentage points.
Other funds in the sector which fared well were the R&M UK Equity Long Term Recovery fund, which was also the best-performing fund in the sector over 12 months, and the Premier ConBrio Sanford Deland UK Buffettology fund.
Source: FE Analytics
Each of the funds in the top-10 list have proven their mettle over the medium term as well. Every fund which has outperformed on a total return and risk-adjusted basis in 2013 has also delivered top-quartile, sector-beating returns over three years, the best-performing being the Barclays UK Lower Cap fund.
The Premier ConBrio Sanford Deland UK Buffettology fund does not yet have a three year track record.
Liontrust Special Situations and Lindsell Train UK Equity both have a top 10 sharpe ratio over three years but not over one, according to our data.
IMA UK Smaller Companies
UK Smaller Companies funds proved no exception to the rule, according to FE Trustnet research, with the top-performing risk-adjusted funds over the last year trumping the returns of the sector.
Source: FE Analytics
The only fund that made the top-10 but didn’t outshine the underlying sector average was the Liontrust UK Smaller Companies fund.
However, the five crown rated fund, run by FE Alpha Manager duo Anthony Cross and Julian Fosh, did hold up over the medium term, outperforming the sector over three years.
The top fund in the IMA UK Smaller Companies sector in terms of risk-adjusted returns over the last year was the four crown rated Unicorn UK Smaller Companies fund, another of McClure’s portfolios.
The tiny £22.5m fund made 56.65 per cent in 2013, making it the second best performing portfolio in the sector this year, behind the R&M UK Equity Smaller Companies fund.
The closed Fidelity UK Smaller Companies fund, run by FE Alpha Manager Alex Wright, was the sixth on the list term terms of risk-adjusted return this year and is fourth over three years.
The five crown rated fund has made 171.37 per cent over three years, beating the IMA UK Smaller Companies sector by more than 70 percentage points.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The CF Miton UK Smaller Companies fund does not yet have a three year track record.
Liontrust UK Smaller Companies is in the top quartile for Sharpe ratio over three years but not in 2013, as is the Octopus UK Micro Cap Growth fund.