Only 12 UK active funds outperformed in each of last five years but Nick Wood, head of fund research at Quilter Cheviot, argues judging performance by calendar year
As investment styles have rotated in the last 12 months, so too some of the best performing funds have suffered from weaker periods of performance.
Research by Quilter Cheviot has found that for UK All Companies funds, there were only 12 active funds out of 212 that outperformed over each of the last five calendar years to the end of October 2021. A further 46 outperformed four out of the five years.
It is a similar story for North American funds where the data shows just three funds were ahead for each of the last five years, and another 19 were ahead for four out of five years.
However, Nick Wood, head of fund research at Quilter Cheviot, believes that in most cases investors are putting too much emphasis on calendar year returns and not looking at the longer-term picture.
While styles have come in and out of favour, 57% of UK All Companies active funds (121) were ahead over a five-year period, while in North America that figure jumped to 49 funds.
“Investors are certainly paying close attention to short-term performance, with successful funds being reviewed after weak recent periods,” Wood said. “But this really opens up the question of whether we need the funds we invest in to be persistently successful over every calendar year, for example, or if there should be a certain amount of leeway.
“This year has been an interesting one for many reasons, not least because we have seen a certain amount of style rotation. For value managers, the end of last year and early this year was much more favourable after an extended period where growth investing was the only game in town. That has inevitably meant that some of the best performing funds have so far had a weaker year.
“However, data shows that over the longer-term the majority of active funds in the UK remain ahead of the market. Much of the rhetoric around short term underperformance is wholly unhelpful. It encourages the very worst of fund investing, namely buying high and selling low, the propensity of all of us to think that the outperforming manager today is the one to be adding to, whilst the underperformer should be considered for exit.”
Indeed, Wood also found that of the top 15 best performers in 2020 in the US, eight funds found themselves in the bottom 15 in 2021. However, six of those eight remained well ahead of the market over five years. Wood believes investors should read two things into that statistic.
“The first point to note is that most of this swing in performance is likely the impact of style in both a positive and negative way, and the first reaction should not be to sell, unless of course you think their style is now permanently out of favour. Secondly, balance in any portfolio is key, albeit you may wish to actively tilt that.
“The passive industry might point to their investment vehicles as a way of ensuring consistency, but I’d argue that investors shouldn’t shy away from periods of underperformance. If a fund manager’s stock picking skills are sufficiently strong then a mild style headwind should be no impediment to long term outperformance.
“Long-term investors will inevitably suffer weaker periods, but most who are invested should have a time frame able to cope with this. Trying to constantly select the ‘best’ or most fashionable fund year by year is a losing game. As ever, aligning one’s own investment time horizon with that of the manager is where investors will win.”
