The funds that could help you avoid sleepless nights

There’s plenty of news to keep investors' brains buzzing right now. The ongoing message from an investment perspective is to ignore the noise and not panic. But there are some funds designed to provide exactly the sort of reassurance and wealth preservation some people will be looking for, not just during a crisis, but against any market backdrop.

The goal of all active funds is to generate above-benchmark returns for investors, but the path to doing so is vast and partly determined by how much risk is taken.

Why someone would buy a fund that might not make the most table topping total returns possible comes down to an investors’ comfort level and tolerance for risk.

AJ Bell’s own managed funds reflect the range of investor profiles depending on their needs and preferences, going from Cautious, which weigh more towards lower risk assets such as bonds, to Adventurous with an appropriate mix of higher risk assets like equities.

Where can these funds be found?

The universe of funds pursuing a slow, steady march to positive returns year-on-year without necessarily shooting the lights out will often be found in the multi-asset, or absolute return realm.

This is not to say that they exclusively live in these parts of the market. In theory, they can come from any sector.

One way to assess which funds are actually saving you from some sleepless nights is a measure called maximum drawdown.

By way of an explanation, if you picture a wave in the ocean, maximum drawdown is the space between the very top of the crest (0%) to the lowest point at the bottom (at worst -100%).

It’s slightly different to volatility because that measures the general speed and frequency of price fluctuations, whereas maximum drawdown is a worst-case scenario measure.

A fund which has done a decent job of preserving the value of its investments will have as short a gap as possible between the peak and trough, with anything below -10% generally seen as a ‘good’ score. For context, the average fund had a maximum drawdown of -16.9% over the past decade, AJ Bell’s research found.

Focusing on that metric alone and over the past 10-years several funds have navigated Brexit, Donald Trump 1.0 and 2.0, Covid, the 2022-energy shock and the AI revolution without seeing a drawdown of 10% or more.

One of the most well-known names within this space is the £5.2 billion Trojan fund, a constituent of the AJ Bell Favourite Funds list.

A multi-asset fund, Trojan has a mix of defensive assets, such as inflation-linked government bonds and gold and return generative allocations like stocks, including Unilever and Diageo.

Since 2016, it’s seen a -4.79% maximum drawdown, well below the average during that time.

In explaining the funds place on the list of favourites, the AJ Bell Investments team note that the “boutique nature of the company creates an environment of pragmatism and patience enabling them to withstand outside noise”, adding that it benefitted from being led by manager Sebastian Lyon for the past 20-years.

Other well-known funds of this ilk are the £2.1 billion Ruffer Absolute Return (-9.7%) and the £1.5 billion Ruffer Total Return fund (-9.09%), both of which seek to achieve positive returns in all market conditions over any 12-month period, after all costs and charges have been taken.

In a similar style to Trojan, Ruffer will invest in anything and everything, drawing on all options available to help deliver a steadier line of returns.

It's worth noting that on an absolute returns basis all these funds lagged their peers over three and five years, albeit all still with positive returns. While the Trojan fund made 30.3% over five years, the average IA Flexible Investment portfolio returned 31.2%. Over three years Trojan made 18.4% versus 31.8%.

Ruffer’s Total Return fund made 10.6% over five years while the IA Mixed Investment 20-60% Shares averaged 21.2%. Over three years this was 5.3% for the Ruffer funds and 24.8% for the sector.

The metric of maximum drawdown is not a measure of the best total return, but rather, which funds gave investors returns with the least stomach-churning moments.

Why certain types of funds naturally fit the bill

While the Trojan and Ruffer funds hold a variety of assets, some names are capable of achieving a smoother ride thanks to their focus on just a single type of investment.

Short dated bond funds are an example of this, and according to AJ Bell’s research, this sector had generally ticked along with relatively steady performance over the past decade.

These types of bonds are typically more defensive than equities and are less sensitive to changes in interest rates than their longer-dated peers, something which has been a big theme in markets since the pandemic.

Dimensional Global Short Dated Bond, Royal London Short Term Fixed Income and Royal London Short Duration Gilts all delivered materially lower than average maximum drawn levels.

Money market and cash funds will often feature highly in maximum drawdown studies since their underlying assets typically don’t rise or fall much in value.

Absolute return funds

Absolute return funds are a stalwart of this metric but have their own set of characteristics.

They aim to produce positive returns regardless of overall market direction, using techniques such as short selling or derivatives, and unlike traditional funds that compare themselves to a benchmark (relative return), these funds focus on absolute gains, often relying as alternative investments.

This makes it tough to compare one to the other, hence maximum drawdown is a handy way to test whether they’re actually doing what they say on the tin.

The Aviva Inv Multi Strategy Target Return, Vontobel TwentyFour Absolute Return Credit and Janus Henderson Absolute Return fund are some of the prominent names here.