The funds for consistent returns – Update August 2023

The fund management industry promotes the idea of buying and holding actively managed funds for the long-term. Yet you are more likely to make more money by regularly reviewing your portfolio. In reality the reason why fund managers want you to stay invested with them is that it allows them to make more money from you via fund management charges.

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 that 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 invest more actively in order to try to boost returns.

A number of years ago I carried out a piece of research aiming to identify funds for consistent returns. It focused on identifying unit trust funds that have consistently outperformed their peers over time, which aren't just focused on capital preservation. So I've gone back and refreshed the research as I do periodically.

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 time frame can give a skewed result.

So instead I decided to analyse the performance of every unit trust out there (over 1,200 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

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 just 9 funds (out of over 1,200 unit trusts) which have shown a consistency of return over the medium to long-term (in various market conditions), yet doing so without taking unnecessary risk. The funds are shown below. Remember consistency, doesn't mean that the fund doesn't lose money in a market slump, but that it has shown a consistent level of outperformance versus its peers over time.

In this update of the most 'consistent funds' research, I have highlighted in blue those funds that retained their place in the list from the previous update in February 2023. Interestingly there are three funds (highlighted in bold) within the list that also appear in either the current BFBS or BOTB lists, one of which also appears in my current £50k portfolio (namely BNY Mellon Multi-Asset Balanced).

Name	Sector	ISIN Code	1 month return %	3 month return %	6 month return %	Max weekly fall in the last 6 months	Ongoing charge
Aviva Inv Global Equity Income	Global Equity Income	GB0030441918	0.68	2.31	8.3	-3.11	1.12
Aviva Inv International Index Tracking	Global	GB0004459912	2.43	5.4	5.9	-5.51	0.45
Fidelity Index World	Global	GB00BJS8SJ34	2.68	5.7	6.36	-5.84	0.12
BNY Mellon Multi-Asset Balanced	Mixed Investment 40-85% Shares	GB00B8K9JZ06	0.93	0.89	2.92	-2.87	0.84
Fidelity Japan	Japan	GB00B882N041	3.13	6.34	6.6	-3.43	0.79
Fidelity Index US	North America	GB00BJS8SH10	2.85	7.64	8.74	-5.73	0.06
HSBC American Index	North America	GB0000469741	2.43	6.86	8.84	-5.25	0.16
iShares North American Equity Index (UK)	North America	GB00B7QK1Y37	2.49	6.71	7.82	-6.07	0.08
Stewart Investors Asia Pacific Sustainability	Specialist	GB00B0TY6V50	-0.14	1.89	-2.02	-6.88	0.93

 

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