The funds for consistent returns – Update September 2018

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.

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 21 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 month return	6 month return	Max weekly fall in the last 6 months	Ongoing charge
Fidelity Asia	Asia Pacific Excluding Japan	GB00B6Y7NF43	-2.82	-4.94	-0.98	-8.71	0.94
Janus Henderson China Opportunities	China/Greater China	GB0031860934	-1.64	-9.34	-4.83	-15.01	1.71
BlackRock European Dynamic	Europe Excluding UK	GB00B5W2QB11	-1.29	2.5	11.29	-3.54	0.92
Courtiers Total Return Growth	Flexible Investment	GB00B1P2K855	-0.58	1.99	10.56	-2.41
Unicorn Mastertrust	Flexible Investment	GB0031269367	-0.26	-0.03	6.39	-1.6	1.58
Baillie Gifford International	Global	GB0005941272	-0.76	1.67	10.58	-3.51	0.61
Fidelity Global Focus	Global	GB00B3RDH349	-2.08	0.13	12.1	-2.57	0.93
Fidelity Global Special Situations	Global	GB00B8HT7153	-0.05	5.55	11.82	-2.6	0.92
Baillie Gifford Emerging Markets Growth	Global Emerging Markets	GB0006020647	-0.53	1.1	-3.06	-6.86	0.79
Fidelity Multi Asset Income	Mixed Investment 0-35% Shares	GB00BGFBMY77	-0.85	1.51	3.56	-1.31	1.14
BlackRock Armed Forces Common Investment	Mixed Investment 40-85% Shares	GB0031781080	-0.55	1.76	7.49	-2.75	0
L&G UK Property	Property	GB00BK35DV33	0.36	1.84	3.92	-0.2	0.75
Liontrust Sustainable Future Corporate Bond	Sterling Corporate Bond	GB0030029069	-0.68	0	0.25	-0.99	0.65
Royal London Corporate Bond	Sterling Corporate Bond	GB00B87FJ401	-0.96	-0.44	0.22	-1.03	0.53
Baillie Gifford Strategic Bond	Sterling Strategic Bond	GB0005947741	-0.22	0.15	1.1	-0.74	0.52
Fidelity Extra Income	Sterling Strategic Bond	GB00B469P257	-0.41	0.18	0.56	-0.68	0.77
L&G Growth Trust	UK All Companies	GB00B28PVN01	-2.78	-3	12.31	-5.38	0.78
Lazard UK Omega	UK All Companies	GB00B8HKDX21	-1	-1.24	7.95	-6.26	0.8
Liontrust Special Situations	UK All Companies	GB00B57H4F11	-0.05	2.09	13.74	-2.08	0.87
MFM Bowland	UK All Companies	GB0008265307	1.78	3.27	12.64	-1.88	0.84
TB TB Amati UK Smaller Companies	UK Smaller Companies	GB00B2NG4R39	-0.47	-0.26	13.52	-3.12	0.98

In this update of the most 'consistent funds' research I have published all of the funds that passed the 'consistency test' (i.e all 21 of them). Previously in the original research piece I only published those funds that also passed the momentum screen. Of those original funds (which there were 7) three also make it into the latest 'consistent' list above, namely Royal London Corporate Bond, Fidelity Asia and Janus Henderson China Opportunities

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, none of them do but that is subject to change whenever the BOTB and BFBS tables are updated.

 

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