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 less than 30 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 means that the funds had to either currently be in or have recently appeared in the 80-20 Best of the Best Selection or the Best Funds by Sector tables. That produced a shortlist of just 7 funds across a range of sectors. The list includes property, bonds, UK equities, Asian and even Chinese equities as well as two funds I currently hold in my own £50,000 portfolio. It's not often that long-term consistency and momentum overlap.
The result
| Name | Sector | ISIN Code | 1 month return | 3 month return | 6 month return | Max weekly fall in last 6 months | Ongiong charge |
| Janus Henderson China Opportunities | China/Greater China | GB0031860934 | 7.83 | 1.25 | 3.01 | -8.67 | 1.71 |
| Fidelity Asia | Asia Pacific Excluding Japan | GB00B6Y7NF43 | 4.72 | 3.17 | 1.38 | -4.75 | 0.97 |
| F&C Property Growth and Income | Property | GB00BQWJ8687 | 2.28 | 3.76 | 4.06 | -3.03 | 1.06 |
| Royal London Corporate Bond | Sterling Corporate Bond | GB00B87FJ401 | -0.22 | 0 | -0.52 | -1.54 | 0.52 |
| Schroder High Yield Opportunities | Sterling High Yield | GB00B83RDY83 | -0.48 | 0.27 | 1.01 | -1.27 | 0.72 |
| Man GLG UK Income | UK Equity Income | GB00B0117B11 | 4.94 | 9.03 | 9.7 | -4.54 | 1.65 |
| Slater Recovery | UK All Companies | GB0031554248 | 2.96 | 9.09 | 8.43 | -5.34 | 1.6 |
all performance figures are net of charges
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Funds invest in shares, bonds, and other financial instruments and are by their nature speculative and can be volatile. You should never invest more than you can safely afford to lose. The value of your investment can go down as well as up so you may get back less than you originally invested.
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