All 10 of the best performing IMA UK All Companies funds over five years have been more volatile than both their sector average and the FTSE All Share.
Standard Life Investments UK Equity Unconstrained is the stand out performer since March 2009, achieving returns in excess of 400 per cent. Not only has Ed Legget’s fund been the best performer over this period but it also had the highest volatility.
Legget’s fund was one of a number to benefit from its exposure to small and mid-caps, which are typically more volatile than their large cap counterparts.
Performance of funds vs sector over five years
Source: FE Analytics
The £1bn Standard Life fund has been managed by Leggett since 2008. He targets stocks whose cash flow potential is underappreciated by the wider market. Since he tends to look at unloved areas, his fund suffers more than most in market sell-offs, which explains why his fund has been so volatile over the period.
Conversely, the fund with the lowest volatility – JOHCM UK Opportunities – has underperformed its IMA UK All Companies sector average. FE Alpha Manager John Wood is highly rated, performing particularly well in 2008, but the fast rising market of recent years hasn’t suited his defensive style.
Though higher risk investors have been rewarded over the past five years, FE analyst Charles Younes believes the next five years could be very different.
“Over the last three and five years fund managers that have taken the most risk have been rewarded, demonstrated by the most volatile funds also being the best performers over this period,” he said.
“This is explained by a liquidity driven market in which investors have been encouraged to put their money into equities as central banks increased the money supply.”
“However, investors should not only be looking at returns and volatility, but also at downside risks. The max drawdown for Standard Life Investments UK Equity Unconstrained indicates it did a poor job in protecting investor capital on an absolute and relative basis, for example.”
Other top performing funds in the sector include MFM Slater Growth and R&M UK Equity Long Term, both top quartile performers over one, three and five years.
According to data from FE Analytics over five years the former returned 335.78 per cent and the latter returned 282.67 per cent, compared to a sector average of 129.83 per cent.
Mark Slater, the manager of MFM Slater Growth told FE Trustnet last week that cyclical or recovery stocks had led the market in 2012 and early 2013, since the May/June sell-off investors preferred buying companies already delivering earnings growth.
Liontrust UK Growth was another fund that underperformed recently despite low volatility. According to data from FE Analytic, the fund £242m returned 6.88 per cent over one year, compared to a sector average of 12.63 per cent.
However over five years it performed better than its sector average returning 138.83, compared to 129.83 per cent.
The fund is co-managed by FE Alpha Managers Anthony Cross and Julian Fosh and has a defensive style with an emphasis on quality bias and downside protection.
Performance of funds vs sector over five years
Source: FE Analytics
Looking forward into 2014, Younes says investors will have to be more selective when it comes to picking funds.
“A risk-taking approach should not be sufficient to generate outperformance in the sector because central banks are likely to reduce liquidity,” he said. “This could mean that small and mid cap companies suffer.”
Several fund managers have recently advised investors to be very wary of using five-year performance figures alone to judge funds.
“If I were someone buying a SIPP now, I would be saying I don’t care what they have done over the last three years. I want to see how they have done over 10 years or how did he or sit cope in 2008? I think the industry is being a bit lazy on this,” said FE Alpha Manager John Pattullo, who is head of fixed interest at Henderson.
“Then to claim that that five-year period is repeatable is complete nonsense,” he added.
As a point of reference, while the IMA UK All Companies sector has returned 132.44 per cent over five years, it has delivered just 57.18 per cent when looking over six years – the latter being a period that includes the 2008 Lehman crash.