UK and global funds topping the charts, while limiting the big dips

In the first of a new mini-series, Kyle Caldwell highlights funds that have beaten most of their rivals over the past five years, and held up well during market downturns. 

For fund investors, it is important to look under the bonnet to ascertain the risk level a strategy is undertaking in an attempt to outperform the wider stock market and peers.

Bear in mind that every investment has an element of risk and there are no guarantees that a return will be achieved. In addition, the lower the risk, typically the lower the return.

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However, some funds deliver on both fronts – offering table-topping returns while limiting downside risk. In the first article of a new mini-series, we name the UK and global funds that achieved this over the past five years, according to data sourced from FE fundinfo. In the coming weeks, we will examine regional funds, bond funds and multi-asset funds.

The criteria

To measure downside protection, we looked at the 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 this period, which included the Covid-19 market sell-off  in the first quarter of 2020.

As the below table shows, in terms of global and UK funds, it is the former that on average had the lower maximum drawdown percentage. This is to be expected given that global funds have greater flexibility to be more diversified, since such funds can invest in various countries.

Moreover, when stock market turbulence was triggered by Covid-19 more than three years ago, UK stock market indices fell notably more than global indices.  

Source: FE Fundinfo. Data to 15 June 2023. Past performance is not a guide to future performance.

Global and UK all company fund sectors

Both these sectors can leave investors feeling overwhelmed, given that there are 543 global funds and 247 funds in the UK all companies sector. In addition, there’s a variety of strategies, so investors risk not comparing apples with apples.

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.  

When applying all those filters a total of seven global funds and four funds in the UK all companies sector remained.

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One trend that stands out is the presence of funds focusing on high-quality growth stocks, including Trojan Global Equity, Morgan Stanley Global Brands Equity Income and Lindsell Train UK Equity.

The Trojan fund describes its approach as seeking “high-quality businesses that have the resilience to survive adversity and the adaptability to thrive in a changing world. Businesses that can grow at sustainably high returns over time provide longevity and compounding power to your returns”. Its top three holdings are: Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and Visa (NYSE:V).

Troy Asset Management, which runs the Trojan funds, focuses on keeping losses to a minimum when stock markets fall suddenly and sharply.  

Morgan Stanley Global Brands holds a collection of high-quality companies with dominant market positions and underpinned by intangible assets. Its top three holdings are Microsoft, Philip Morris International (NYSE:PM) and Reckitt Benckiser (LSE:RKT).

And last but not least is LF Lindsell Train UK Equity, which is managed by Nick Train and appears on interactive investor’s Super 60 investment ideas list, invests in high-quality stocks with durable, cash-generative franchises that can prosper through multiple business cycles. Its top three holdings are Experian (LSE:EXPN), RELX (LSE:REL) and London Stock Exchange Group (LSE:LSEG).

This fund is concentrated – typically holding 20 to 35 stocks – yet it has managed to protect on the downside. While it may seem counterintuitive that holding fewer shares can mean lower risk, the fund manager will know the small number of holdings in more detail than a fund with more than 100 holdings.

Source: FE Fundinfo. Data to 15 June 2023. Past performance is not a guide to future performance.

Income funds delivering on both fronts

The two income fund sectors house a smaller number of funds, 81 and 54 for UK equity income and global equity income.

With this in mind, the criteria was relaxed to screen for the top 20% of fund performers for those two sectors. Then the maximum drawdown filter was applied, keeping only the funds that had protected on the downside through being in the bottom 20% of the sector in terms of lowest declines on that measure.

Overall, two global equity income and six UK equity income funds made the grade.

In a continuation of the high-quality growth stock trend both Morgan Stanley Global Brands Equity Income and Baillie Gifford Global Income Growth feature. 

Morgan Stanley Global Brands Equity Income, which appears on interactive investor’s Super 60 investment ideas list, targets quality firms, defined as those with high un-leveraged returns on capital, high gross margins, predictable cash flow, modest balance-sheet leverage, and capital-light business models.

Meanwhile, Baillie Gifford Global Income Growth describes its approach as “investing in companies which have durable competitive advantages and attractive growth opportunities”.

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In contrast, UK equity income funds typically fall more into the value style of investing. There are a number of reasons for this, one being that companies that pay dividends tend to be established businesses in economically sensitive sectors.

Another reason is that many UK equity income funds aim to have a yield that’s higher than the FTSE All-Share index. To achieve this, fund managers need to have some exposure to high yielding shares, which tend to be value stocks.

Although, there are exceptions. One is Janus Henderson UK Responsible Income, which is part of interactive investor’s ACE 40 investment ideas list. The fund has a slight growth bias, due to its approach of investing in sustainable stocks with defensible competitive positions. It is currently yielding 4.5%, a premium to the 3.7% on offer from the FTSE All-Share index.

As ever, it is important to bear in mind that past performance may not be repeated, and the same is true of the maximum drawdown metric.

Funds with a high maximum drawdown percentage figure are not necessarily something that should put investors off, particularly if the fund is an adventurous strategy.  

As John Monaghan, research director at Square Mile, says: “When looking at maximum drawdown, it is important to put this in context with what the fund manager is trying to deliver and the investment approach that is being undertaken.”  

Source: FE Fundinfo. Data to 15 June 2023. Past performance is not a guide to future performance.