Investing in funds can be a journey of “highs and lows” says AJ Bell, suggesting that the three year track record role for performance may not be the best indicator of success.
While a three year period has become an unofficial benchmark for assessing fund performance, the investment platform said it is important to recognise that fund managers are unlikely to outperform an index or peer group consistently.
Dan Coatsworth, investment analyst at AJ Bell, said: “When a fund experiences a period of under performance it can prompt investors to wonder whether it offers up a buying opportunity with the hope of a rebound or a signal to exit.
“Previous research has shown that funds managers let go after three years of under performance often delivered positive returns after that point. This suggests that a temporary downturn may not always indicate the end of a fund’s run of good performance.”
AJ Bell used Temple Bar Investment Trust as an example. The trust faced a difficult period from 2018 to 2021 but rebounded strongly securing a top quarter position among its peers. Similarly, Jupiter UK Income has also returned to strength.
According to Coatsworth, investors should look at several other factors when deciding whether to stick with or invest in an underperforming fund. These include a consistent investment philosophy and process. If a firm manager deviates from their established approach it may signal potential for future under performance, he said.
Equally, a switch of fund manager can also impact a fund’s trajectory. While a fresh perspective could enhance performance, Coatsworth noted that the departure of a seasoned manager may mean a substantial shift in strategy.
AJ Bell listed three funds and trusts looking for a bounceback. These include Slater Growth, which has underperformed its peer group by a wide margin, down 27% compared with a 5% gain for the IA UK All Companies index, over the past three years; and Montanaro UK Smaller Companies which has struggled since August 2021 as the small-cap value investment style outperformed small-cap growth amid the sharp rise in interest rates.
It has also been a challenging three years for RIT Capital Partners, following a difficult period for NAV performance in 2022, concerns over the valuations of unquoted investments and a headwind from cost disclosures.
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