In the second article in our mini-series, Kyle Caldwell names the US, Europe and Japan funds that have beaten most of their rivals over the past five years, and held up well during market downturns.
For fund investors looking for market-beating returns over the long term, the trade-off is often a higher dose of risk.
However, a small number of funds have achieved outperformance over the past five years while limiting downside risk. In the first article in a new mini-series, we looked at UK and global funds that had achieved this, while in this piece we examine regional developed market funds focused on North America, Europe and Japan.
To measure downside protection, we looked at each fund’s “maximum drawdown” over the past five years. This measure calculates the most that an investor would have lost if they bought and sold at the worst possible times during the period, which included the Covid-19 market sell-off in the first quarter of 2020.
In terms of the four regional sectors we considered, Japan has the lowest maximum drawdown percentage. However, the average fund in this sector has also produced the lowest five-year returns (to end of June 2023) at 17.7%.
The best performer, which is no surprise due to the strong performance of mega-cap technology companies, is North America, in which the average fund is up 66.4%.
|Sector||Five-year maximum drawdown (%)||Five-year total return (%)|
|Europe excluding UK||-24.4||33.4|
|Europe including UK||-25.3||33.2|
Source: FE Fundinfo. Data to end of June 2023. Past performance is not a guide to future performance.
To find funds that achieved top returns while limiting downside risk, we screened for the top 10% in terms of total returns over the past five years.
We then looked at maximum drawdown over the same period, and retained the funds that were among the top 10% of the sector with the lowest percentage falls.
Finally, we stripped out any funds not available to interactive investor customers.
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US fund winners
Plenty has been written over the years about the US market being a tough nut for fund managers to crack in terms of delivering outperformance above and beyond the S&P 500 index. Over 10 years, just 5% to 10% of active funds outperformed.
The S&P 500 is the world’s most widely researched and followed index, which makes it difficult for fund managers to gain an edge.
There are other factors at play, including the fact that the mega-cap tech companies have a huge influence on how the index performs. For example, in 2023, the biggest seven companies are responsible for most of the S&P 500’s year-to-date returns. Fund managers typically own these companies, but overall tend to hold less than the S&P 500 index due to portfolio concentration rules, which ensure that active funds are sufficiently diversified.
Another reason why most active funds underperform is due to the higher fees they charge, which are a drag on performance and compound over time.
However, some active funds do outperform. Over five years, the S&P 500 index has (in sterling terms) returned 70%. Several active funds have bettered this return, with Brown Advisory US Sustainable Growth, Comgest Growth America, and AXA Framlington American Growth, leading the way with returns of 109.5%, 104.4%, and 98.9%.
When searching for top performers that have also been among the best 10% of funds for protecting capital, only two remain: Comgest Growth America and FTGF Clearbridge US Equity Sustainable Leaders. Both invest in high-quality growth companies.
Among the funds featuring in the top 10% for drawdown, it is interesting to see a couple of exchange-traded funds topping the table on this metric, namely the iShares S&P 500 Consumer Staples ETF (LSE:IUCS), and the Xtrackers MSCI USA Consumer Staples ETF (LSE:XSCS). The respective maximum drawdown figures were -14%, and -14.2%.
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The five-year performance for the trio is in line with the 70% generated by the S&P 500. Therefore, investors have received returns in line with the market, but with better downside protection.
All three follow a basket of consumer staples stocks. Such companies are viewed as “defensive” since they can keep growing profits even when the economy is in a difficult position. Examples include tobacco stocks Philip Morris International (NYSE:PM) and British American Tobacco, drinks groups Diageo and Coca-Cola, and household goods firms such as Unilever (LSE:ULVR) and Procter & Gamble.
European star performers
As we recently reported, European-focused funds and investment trusts are in a sweet spot of performance at the moment, with luxury goods companies a key driver. Such companies have benefited from both the re-opening of China’s economy and the resilience of spending power among wealthy consumers during the cost-of-living crisis.
The good news is that investors may not have missed the boat, as valuations remain cheap compared to history and other regions, such as the US.
Of the two European sectors – Europe excluding UK (which contains 147 funds) and Europe including UK (103 funds) – four funds achieved the mix of strong returns, while avoiding big dips. They are: Fidelity European, CT European, CT Pan European Focus, and SSGA SPDR MSCI Europe Healthcare ETF. The latter two are in the Europe including UK fund sector.
Japan’s top performers that limit losses
Heading into 2023, some professional investors were bullish on Japan, due to the cheap valuations on offer. This conviction has paid off, with Japan's main index – the Nikkei – recently hitting a 31-year high.
Schroders, the fund manager, points out that Japan’s strong performance this year (up 27.2% year-to-date) has eroded its cheapness. On three of the main valuations measures, forward price-to-earnings, trailing price-to-earnings, and price-to-book, its stock market is now more expensive than its 15-year median.
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However, while valuations have become richer, various commentators are bullish on the region’s prospects.
Among them is Alliance Trust (LSE:ATST), which yesterday announced the appointment of Japanese stock picker Dalton for its multi-manager global equity portfolio.
Craig Baker, who oversees Alliance Trust, said: “Following extensive corporate governance reforms, we believe the Japanese corporate sector is on the cusp of a long-term revival, but it is a unique market which requires specialist, active manager skills to navigate and tap its potential.”
For those sizing up Japan funds, two that have achieved top returns and scored strongly in terms of limiting losses over the past five years are Fidelity Japan and Janus Henderson Japan Opportunities.
The eight funds achieving outperformance while limiting downside risk
|Fund||Five-year maximum drawdown (%)||Five-year total return (%)|
|Comgest Growth America||-19.8||104.4|
|FTGF Clearbridge US Equity Sustainable Leaders||-20.4||85.2|
|CT Pan European Focus||-21.8||66.1|
|SSGA SPDR MSCI Europe Healthcare ETF||-17.4||58.7|
Janus Henderson Japan Opportunities
Source: FE fundinfo. Data to end of June 2023. Past performance is not a guide to future performance.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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