The Daily Telegraph - Saturday - Money
Worrier or optimist – the best funds for you
Some funds suit risk-takers, others are better for the more cautious among us. Jonathan Jones identifies the best for either type of investor
The past five years have been particularly challenging for investors who favour British stocks. First came the Brexit vote, now coronavirus has wreaked havoc on the London market. However, between some sharp market falls have been some strong rebounds.
High-adrenalin, risk-taking investors and those of a more nervous disposition could still have made excellent returns, as long as they were in the right funds. To help, Telegraph Money has uncovered the best high and low-risk British funds of the past five years.
To do this, we looked at three metrics. First, we took a fund’s performance over the past five years. We then found its five-year “maximum drawdown” – the biggest peak-totrough fall on a monthly basis.
Finally, we took the “downside capture ratio”, which measures how well a fund has performed when the FTSE All-Share index of British stocks has fallen. A score of 50 means the fund has fallen by half the amount of the index. In this scenario, if the market has lost 10pc the fund will have lost 5pc. A score of more than 100 means it has lost more than the market and you would have been better off in a tracker fund.
The top low-risk British fund over the past five years has been the Royal London Sustainable Leaders Trust.
The £2bn ethical fund has made investors 63pc over that time, four times more than the FTSE All-Share’s 15pc return. The fund’s biggest fall of 16pc came earlier this year but was some way off the market’s 25pc drop over the same period. The fund aims to invest in companies that benefit society, such as Rentokil, the pest control firm.
Its ethical stance has stood the fund in good stead this year as it has avoided some of the worst-affected sectors, such as oil. Over the past five years, when the market has fallen by 10pc the portfolio has typically made a loss of 6.6pc.
For cautious investors in search of income, Evenlode Income has been a top option. The £3.8bn fund has made 59pc over the past five years, the 15thhighest return of the 347 British funds with a long enough track record. In the first three months of this year the fund made a loss of 19pc, less than the market and rival funds.
The fund invests in well-run firms that can grow their earnings regardless of the direction of the economy and that have a competitive advantage over rivals. Among its top 10 holdings are
Unilever, the consumer brands owner, and Diageo, the drinks firm.
Jason Hollands of Tilney, a fund shop, said the fund also had more money in overseas stocks than peers, which had “undoubtedly helped performance during a period when the pound has weakened”.
Some funds that invest in smaller companies have been surprisingly lowrisk over the past five years. The £39m Octopus UK Micro Cap Growth fund has made a stellar return of 72pc but has a low maximum drawdown (21pc) and has fallen by half as much as the market during months in which shares have fallen.
It is not just low-risk funds that have produced strong returns for investors, however. L&G Growth Trust has fallen by 5 percentage points more than the market during poor months for shares and in its worst period lost investors
To risk or not?
Common wisdom says young investors should take a high-risk approach as they are unlikely to need access to the money for years.
However, a major investing platform has taken a novel approach. Barclays, which launched its Plan & Invest “robo” service last week, will recommend a lower-risk portfolio if a user admits to being a firsttime investor – even if the customer has a 10-year time frame, has no debts and wants to take a lot of risk.
The proportion invested in stocks then rises over the next few years as investors become more comfortable.
Peter Brooks of Barclays said: “We ask about an investor’s knowledge and experience and, when appropriate, reduce the risk of our recommended portfolios by holding less in shares and more in cash and bonds.” He added that the key for first-time investors was to stay invested throughout the early years, which was just as important as how much risk they took.
However, not everyone agrees. Anthony Morrow of OpenMoney, another robo-adviser, said: “Taking a blanket approach and severely limiting the number of stocks that novice investors can include in their plan fails to take into account the customer’s personal circumstances, goals and attitude to risk and could potentially reduce their investment returns over the long term.”
Matt Conradi of Netwealth, a financial advice firm, warned that Barclays’ approach wouldn’t help investors to build up their experience.
He said: “After two years, if an investor is full of confidence it is because markets have gone up, so they are no better equipped if markets go down.” 33pc. Despite this, it has made 46pc over five years, three times more than the FTSE All-Share index.
The £218m fund holds only 25 stocks, so investors get the full benefit of those that rise but also the full impact if they fall. The fund invests in larger companies such as Asos, the clothing brand.
Merian UK Mid Cap is another that has done well. Up by 36pc over the past five years, more than twice as much as the market, the £2.8bn fund buys stocks in the FTSE 250 index of medium-sized companies. Ben Yearsley of Shore Financial Planning, a wealth manager, said the fund was “excellent” but warned it would drop “sharply” when the market fell. Among its top holdings are Wizz Air and Trainline, the travel firms.
Jupiter UK Smaller Companies has been one of the better high-risk funds in its sector. The £240m fund has made investors 62pc over the past half-decade, despite a fall of 35pc during its worst period. When the market falls by 10pc the portfolio has typically lost 8pc, making it one of the more risky among its peers. Well-known names such as On the Beach are coupled with some less recognisable stocks, such as Loopup, a video conferencing firm.
‘It’s an excellent fund but it will drop sharply when the market does’