The 7 funds for consistent returns

I'm fundamentally opposed to buying and holding funds for the long term as you can make more money by regularly reviewing them.

However, I understand that there are times when you might not want to or can't switch your funds as often as you might want. For example you may have a pension scheme which offers a limited choice of funds or restricts the number of switches you can perform. Or it may be that you like to have a core stable selection of funds in your portfolio around which you more actively invest to boost returns.

Interestingly this week I was asked by a journalist for some funds that might be worth buying and holding. You may recall I wrote a piece earlier in the year titled Funds to ‘buy & forget’ in 2015 & the Perfect Portfolio. In that piece of research I focussed on funds that had performed well yet managed to ride the recent market sell-offs.

But what about if we look at a longer time frame and focus more on outperformance rather than capital preservation? In other words, are there any funds out there that seem to consistently outperform their peers? But on top of that are there any that are also good momentum plays right now as identified by our 80-20 Investor algorithm?

Long term outperformance screen

It's a fact that 90% of fund managers fail to beat the market over the long term which has been shown by numerous pieces of research. Yet there are a few that have. However, judging overperformance or underperformance based on an arbitrary timeframe can give a skewed result.

So instead I decided to analyse the performance of every unit trust out there (over 2,000 of them) versus each other over multiple time frames to produce a shortlist. I then looked at the data and only shortlisted those funds that outperformed the average of their peer group (sector) over the following time periods

• 1 year
• 3 years
• 5 years
• 10 years (to include data pre-financial crisis)

Then to include an element of consistency the funds also had to show a similar level of outperformance in each of the last 5 years.

I also wanted to make sure that they were genuinely beating the market rather than simply doing better than their dud peers. So I also added a few screens which give an indication of fund manager skill. This would limit the likelihood that a fund manager had simply managed any outperformance by taking excessive risks in a rising market. These additional screens were namely:

Alpha

Alpha is a figure which measures a manager’s apparent skill at picking winning investments versus their benchmark. Alpha is the excess return versus the return of a fund’s benchmark (i.e the market). So a fund with a positive alpha indicates that the fund manager has outperformed through skill. While a negative alpha figure would indicate underperformance.

Sharpe ratio

The sharpe ratio is not a widely known statistic yet it indicates how much extra return a fund manager has achieved for the increased risk they have taken. There is nothing wrong with fund managers taking calculated investment risks if they result in additional returns for investors. So the higher a fund’s sharpe ratio the better.

Maximum Drawdown

Finally I analysed how the funds had performed over the last 3 years and what the maximum fall during the period was for each fund. I then only included those with the lowest drawdowns versus their peers. 80-20 Investor tables include the drawdown figure (Max Fall) as it is useful but not published widely.

80-20 Investor algorithm screen

The above screening left less than 40 funds (out of 2,200 funds) which have shown a consistency of return over the medium to long term (in various market conditions), yet doing so without taking unnecessary risk.

Yet where this becomes interesting is when we run the above funds through the 80-20 Investor algorithm to identify those funds that also have momentum. That produces a shortlist of just 7 funds across a range of sectors. All these funds have either currently in or have recently appeared in 80-20 Best of the Best portfolio or the Best Funds by Sector tables.

So a bit like today's solar eclipse, when two things (a track record of consistency of returns and momentum) line up, as they have for these funds, it certainly makes for interesting investing.

The result

Name	1 year return	3 year return	Max Fall	Annual Charge	Sector
First State - Asia Pacific Leaders	29.33	37.26	-12.08	1.55	Asia Pacific Excluding Japan
GLG - Continental Europe	10.3	54.8	-14.41	1.77	Europe Excluding UK
M&G - Japan	22.35	46.03	-14.11	1.71	Japan
Baillie Gifford - Japanese	17.13	56.67	-10.95	1.53	Japan
Old Mutual - North American Equity	26.71	76.77	-4.56	1.75	North America
Invesco Perpetual - High Yield	2.57	35.99	-2.97	1.44	Sterling High Yield
Jupiter - UK Growth	9.31	71.12	-8.91	1.79	UK All Companies

all performance figures are net of charges

 

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