Earlier today, FE Trustnet carried comments from Luca Paolini, chief strategist at Pictet, who explained that a portfolio split 50/50 between bonds and equities was likely to make less than 1 per cent per annum over the next five years after the effects of inflation.
If such projections are right, even investors with a low risk appetite will need to have significant weightings to shares to get a decent return on their investments.
With that in mind, how well funds perform in poor periods becomes particularly relevant.
It is possible to use the downside risk figure to isolate the volatility a fund shows to the downside when it is losing money.
This is a measure that is probably more relevant to the typical investor, who is concerned about how much money they may lose rather than how much the fund’s price fluctuates.
Our data shows that in the IMA Global sector, some funds perform much better on this measure than on the volatility measure, which may be of interest to particularly cautious investors who care about capital preservation.
Jupiter Merlin Worldwide, headed up by John Chatfeild-Roberts (pictured) and his team, has a better track record against its peers on the downside than on the upside, according to our figures.
Although it is a fund of funds, it is almost exclusively invested in equities. The £859m fund is 17th in terms of downside protection and 20th in terms of volatility over the past five years.
Its downside risk is 30.39 per cent lower than the average fund in the sector over this time, while its volatility is just 25.92 per cent lower.
The figures back up the reputation the Merlin range has for being relatively cautious.
Over the five years in question, the fund has returned just 34.08 per cent, which compares favourably to the 27.7 per cent that the average global fund lost over the same period.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Investec Global Special Situations is another to excel on the downside.
According to our figures it is the 40th least-volatile fund, but the 23rd best when it comes to downside volatility.
This seems to have paid off well for the fund in recent years: it has managed to make 49.98 per cent over five years, beating the average global fund and the MSCI AC World Index, which has made 37.67 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Alastair Mundy’s £22m portfolio is dwarfed by his £827m UK Special Situations fund, and has had mixed performance in recent years.
While it is top-quartile over five years, over three years it slips into the fourth quartile, its returns of 22.68 per cent down on the 31.95 per cent sector average.
McInroy & Wood Smaller Companies has been more consistent in its returns. The £42m boutique fund, which has five FE Crowns, is a top-quartile performer over three, five and 10 years.
Over five years it has returned 76.2 per cent, the fifth-best returns in the sector.
The fund’s returns have been boosted by investing in smaller companies, which also tend to have a higher volatility than larger companies.
The fund is 56th in terms of volatility over the period in question, but just 35th in terms of downside risk, which suggests the managers have managed to cope well with the volatility of the asset class and protect investors well on the downside.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Another fund that stands out in terms of downside protection is BNY Mellon Long Term Global Equity, which is only 48th in terms of volatility but 28th in terms of downside risk.
The £259m fund, which has four FE Crowns, has the 11th-best returns in the sector over the past five years, of 52.98 per cent. In the same time its FTSE All World benchmark has grown by 42.24 per cent.
In the more bullish markets of the last three years it has held up reasonably well, making second-quartile returns of 35.5 per cent, marginally lower than the FTSE All World index’s returns of 30.96 per cent.
Downside risk and volatility of selected global funds
| Name | Downside Risk | Rank | Volatility | Rank | Return | Rank |
|---|---|---|---|---|---|---|
| Jupiter Merlin Worldwide | 16.83 | 17 | 15.72 | 20 | 6.06 | 54 |
| Investec Global Special Situations | 17.96 | 23 | 16.9 | 40 | 8.36 | 17 |
| BNY Mellon Long Term Global Equity | 18.44 | 28 | 17.38 | 48 | 8.94 | 12 |
| McInroy & Wood - Smaller Companies |
19.36 | 35 | 18.08 | 56 | 12 | 5 |
| Premier - Global Alpha Growth | 20.02 | 50 | 18.64 | 65 | 4.01 | 109 |
| WDB Oriel - Global | 20.88 | 63 | 19.18 | 71 | 7.55 | 25 |
| Aberdeen - World Equity | 20.8 | 60 | 19.37 | 75 | 6.79 | 37 |
Source: FE Analytics
The last five years includes the market sell-off of 2008, as well as the rebound since then. It is noticeable that most of the funds on this list look better over five years than over three.
For the more cautious investor, this may be the best period to consider, as it includes some of the worst conditions the equity markets are likely to see.
