The funds for consistent returns – Update August 2019

I'm fundamentally opposed to buying and holding actively managed funds for the long-term as you are more likely to 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.

You will probably already be familiar with my Perfect ISA Portfolio which focussed on the perfect asset mix for consistent returns. However a few years ago I carried out a piece of research identifying funds for consistent returns. In other words, are there any funds out there that seem to consistently outperform their peers which aren't just focused on capital preservation? But taking this one step further are there any such funds which are also good momentum plays, as identified by our 80-20 Investor algorithm? So I've gone back and refreshed the research and below I describe how I did just that.

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 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 15 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.

These funds are shown below:

Name	Sector	ISIN Code	1 month return %	3 months return %	6 month return %	Max weekly fall in last 6 months	Ongoing charge
Baillie Gifford Japanese Smaller Companies	Japanese Smaller Companies	GB0006014921	-2	2.67	10.25	-2.64	0.63
Baillie Gifford Strategic Bond	Sterling Strategic Bond	GB0005947741	0.8	4.15	7.67	0	0.52
Barclays UK Opportunities	UK All Companies	GB00B52G0229	-0.78	1.75	9.39	-2.48	1.18
BlackRock Corporate Bond	Sterling Corporate Bond	GB00B4QC3311	0.97	4.01	6.85	0	0.57
BMO Responsible UK Equity	UK All Companies	GB0030833981	-3.05	-1.15	5.56	-1.89	1.68
BNY Mellon Multi-Asset Diversified Return Sterling	Targeted Absolute Return	GB00B1GJ9N38	-0.52	1.14	3.41	-1.9	1.66
Fidelity Extra Income	Sterling Strategic Bond	GB00B469P257	0.53	3.3	7.19	-0.1	0.77
HSBC American Index	North America	GB0000469741	0.88	7.57	15.74	-1.92	0.16
L&G UK Property	UK Direct Property	GB00BK35DV33	-0.14	0.32	1.08	0	0.75
Liontrust Sustainable Future UK Growth	UK All Companies	GB0030028764	-4.78	-0.81	10.07	-0.14	0.91
MFM Bowland TR in GB	UK All Companies	GB0008265307	-2.4	-0.78	6.33	-0.22	0.82
Morgan Stanley Sterling Corporate Bond	Sterling Corporate Bond	GB0004757497	0.96	4.13	7.18	0	0.37
Royal London Corporate Bond	Sterling Corporate Bond	GB00B87FJ401	0.83	4.28	7.5	0	0.56
Sarasin GlobalSar Strategic	Mixed Investment 20-60% Shares	GB00B8DPZ138	-0.22	3.94	7.01	-0.28	1.08
VT Greystone Balanced Managed	Mixed Investment 40-85% Shares	GB00B82VQ206	-0.1	3.71	8.22	-0.45	1.78

 

In this update of the most 'consistent funds' research, I have highlighted in green those funds that retained their place in the list from the previous update. As such the Fidelity Extra Income fund is deliberately coloured green and blue as it satisfies both conditions.

To see if the above funds have momentum you can simply check whether they appear in the latest 80-20 Best of the Best Selection or the Best Funds by Sector tables. Right now, one of the funds does appear in the BFBS tables which I have highlighted in blue.

 

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