In a recent FE Trustnet poll, almost three-quarters of respondents said they would rather invest in a fund that outperformed in falling markets than rising ones.
Here is a selection of cautiously positioned funds that have a proven track record in down markets:
CF Miton Strategic Portfolio
FE Alpha Manager Martin Gray’s CF Miton Strategic Portfolio is something of a master in downside protection, achieving top-decile performance in its IMA Flexible Investment sector in the significant down markets of 2002, 2008 and 2011.
Year-on-year performance of fund vs sector
| Name | 2011 returns (%) | 2008 returns (%) | 2002 returns (%) |
| CF - Miton Strategic Portfolio | -0.59 | 14.66 | 0.28 |
| IMA Flexible Investment | -8.73 | -26.11 | -20.89 |
Source: FE Analytics
Even if the fund was in the Mixed Investment 40-85% Shares sector – which has an 85 per cent limit on equity exposure – it would still be a top decile performer over all three one-year periods.
In the two worst years for markets – 2002 and 2008, when the average IMA Flexible Investment fund tanked by more than 20 per cent – Gray’s Strategic Portfolio managed to deliver positive returns.
In spite of its underperformance in every year between 2003 and 2007, as well as in 2009 and 2010, its stellar record in the down periods has resulted in the fund outperforming its sector over the last decade.
Performance of fund vs sector over 10-yrs
Source: FE Analytics
The £245m fund tends to be less volatile than Gray’s Special Situations Portfolio, which has outperformed its counterpart, with more volatility, over the past 10 years. Both are unfettered funds of funds.
Gray is currently cautious on the outlook for risk assets, with only 26.2 per cent in the equity market. He believes the western world will be in for a low growth, deflationary environment for some time to come, and says quantitative easing is an unsustainable solution.
He holds most of his assets in fixed interest and cash, but also has a significant weighting to commodities and property.
The fund has a minimum investment of £1,000 and a total expense ratio (TER) of 2.13 per cent.
CF Ruffer Total Return
FE Alpha Manager Steve Russell is one of the few multi-asset managers who is as negative as Gray. He also believes growth will be difficult to come by, but unlike his rival, Russell thinks inflation will creep higher and higher and could hit "high single digits" within the next 10 years.
As a result, the manager’s CF Ruffer Total Return portfolio has a high weighting to defensive assets like index-linked government bonds and gold, as well as Japanese equities, which he believes will perform well in a high-inflation environment.
Like Gray, Russell also has a proven record in down markets: CF Ruffer Total Return was a top-decile performer in its IMA Mixed Investment 20-60% Shares sector in 2002 and 2008 and managed top quartile performance in 2012.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Its record during the Lehman Brothers crash was particularly impressive. While the average fund in the sector delivered a loss of 15.84 per cent, CF Ruffer Total Return made a positive return of more than 20 per cent.
This is one of the main reasons why it is number-one in IMA Mixed Investment 20-60% Shares over five and 10 years, with returns of 53.96 and 146.38 per cent respectively.
The £2.5bn portfolio has a minimum investment of £1,000 and a TER of 1.54 per cent.
Insight Absolute Insight
This £353m portfolio is the only fund in the entire IMA Absolute Return sector that managed to deliver positive returns in 2008, 2009, 2010 and 2011.
It has returned 28.4 per cent since its launch in February 2007, beating its IMA Absolute Return sector and Libor GBP 3m benchmark by around 14 per cent.
FE Alpha Manager Reza Vishkai spreads his assets across five portfolios – Insight Absolute UK Equity Market, Insight Absolute Currency, Insight Absolute Credit, Insight Absolute Emerging Market Debt and Insight Absolute Return Equity.
His team changes its weighting to these portfolios based on their outlook, but Vishkai generally has 20 to 25 per cent in the first four portfolios, and 5 to 10 per cent in Insight Absolute Return Equity.
Insight Absolute Insight has an FE risk score of only 14 – among the lowest of any non-money market portfolio in the IMA universe. It has a minimum investment of £5,000 and a TER of 1.26 per cent, excluding performance fee.
JOHCM UK Opportunities
For investors who are optimistic about the outlook for equities but still wish to hedge their bets, a fund such as FE Alpha Manager John Wood’s JOHCM UK Opportunities portfolio may be of interest.
The growth-focused fund invests exclusively in equities and even has a slight mid cap overweight; however, it has consistently protected better against the downside than its peers, while also keeping up with them in rising markets.
According to FE data, it returned 4.28 per cent last year compared with a loss of 7.04 per cent from the average UK All Companies fund. In 2008 it was even more effective, losing 18.96 per cent – 13 percentage points less than its peer group.
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
In cumulative terms, the fund is a top-decile performer in its IMA UK All Companies sector over three and five years, with returns of 40.76 and 31.63 per cent respectively.
The JOHCM team points to its focus on quality companies as the principal reason for its success.
Unlike many UK growth funds, Wood and co-manager Ben Leyland can utilise significant cash positions if they are particularly cautious.
At present their cash weighting is just over 13 per cent, which was as high as 15 per cent earlier this year.
The £964m portfolio has a minimum investment of £1,000 and a TER of 1.29 per cent. It should be noted, however, that it charges a performance fee of 15 per cent a year on everything it returns in excess of the All Share.
Any underperformance is carried over, meaning the fund has to make up its losses before charging a fee.
Invesco Perpetual Higher Income
The compounding effect of dividends on total returns is significant even over a one-year period, and helps to prop up an investment portfolio in times of crisis.
The average UK Equity Income fund lost 4.14 percentage points less than the average UK All Companies fund in 2011, and 3.42 percentage points less in 2008.
The largest and highest profile of these is Neil Woodford’s £12bn Invesco Perpetual High Income portfolio, which was the best performer in its sector last year, with returns of 8.99 per cent. It was also a top-five performer in 2008 with losses of 19.42 per cent, and top quartile in 2002 with losses of 12 per cent.
The High Income fund is the best UK Equity Income product of the last decade, with returns of 177.83 per cent, compared with 113.58 per cent from its peer group.
Woodford has a bias towards quality mega cap stocks that pay a dividend. He is particularly positive on tobacco and pharmaceuticals – both non-discretionary sectors, which are not heavily reliant on consumer demand.
AstraZeneca, GlaxoSmithKline, Reynolds American and British American Tobacco are the manager’s four biggest stocks, which have a combined weighting of 28.58 per cent.
The fund has a minimum investment of £500 and a TER of 1.69 per cent.