The global financial crisis, which culminated in the Lehman crash of September 2008, led to unprecedented falls in equity markets across the world.
Even the most experienced fund managers failed to see such a severe correction coming, with many losing even more than their benchmark during the sell-off.
While their track records will remain forever tarnished, director of SG Wealth Management Neil Shillito (pictured) says investors should not make too much of performance over this period, and points out that many of the managers who experienced steep falls have since recovered very strongly. "I wouldn’t pay attention to the returns seen in 2008," he said. "We all know what happened – the tide went out and all the boats went with it."
"If you look at the managers who saw the very worst losses, they rebounded very strongly in 2009 and 2010. This shows it was more about market sentiment rather than their skill as managers."
"If you want to get a feel of whether a manager has lost the plot, you need to look at them over a longer period, over different market conditions."
He also points out that certain managers have learnt from their mistakes over the period, thus making them better investors.
"I went and saw James Thomson at Rathbones speak at the back end of last year, and he spoke very vocally about the mistakes he made in 2008, and the lessons he’s learnt from it," he said.
"This is a very good trait in a manager."
Here, we highlight five funds that had a particularly poor 2008, but that have since recovered strongly.
Rathbone Global Opportunities
As Shillito points out, FE Alpha Manager Thomson’s four crown-rated fund had a torrid time in 2008, losing twice as much as its benchmark.
Our data shows it lost 39.39 per cent over the 12-month period, compared with 24.32 per cent from its IMA Global sector average, and 18.18 per cent from the FTSE World index.
"I always think about the Warren Buffett expression, when he said: 'You never know who’s swimming naked until the tide goes out,'" Thomson told FE Trustnet in an interview last year. "I think it was pretty clear in 2008 that I was swimming naked so I needed to evolve as a fund manager and I actually think that 2008 was one of the most instructive years for me to change my style."
While the fund’s poor run has certainly tarnished Thomson’s year-on-year returns, the manager’s long-term record remains very strong thanks to his recovery since 2008.
Rathbone Global Opps is a top-decile performer in its sector since Thomson took over as lead manager in July 2005, with returns of 114.19 per cent.
Performance of fund vs sector and index since July 2005
Source: FE Analytics
The fund is top quartile over three years, and is now beating its sector and benchmark over five – albeit marginally.
The fund managed to outperform in 2011 – the only down-year since 2008. Thomson lost 4.67 per cent over the period, compared with 9.27 per cent from the IMA Global sector average.
Thomson says he puts more of an emphasis on stocks that are less economically sensitive these days, which he believes should protect the fund from unpredictable shocks.
The FE Research team agrees.
"During the financial crisis the fund was too dependent on broader economic conditions and it experienced heavy losses when much of the world entered recession," said the team.
"As a consequence of this, Thomson decided to adopt a more conservative approach, investing 20 per cent of his portfolio in stocks that are less economically sensitive."
"Since then the fund has been more balanced, which helped drive its solid performance during the turmoil of 2011."
"The manager appears to have learnt from his mistakes and is now quick to identify and drop a position to avoid further losses when it isn’t working."
"He also keeps clear of areas where he has been unsuccessful in the past and sticks to where he has proved he can make money."
The £228m fund requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.57 per cent.
Rathbone Income
"Carl Stick’s fund is another that had a poor 2008 but has come back strongly," said Shillito. "A manager doesn’t suddenly become bad because they have a bad year."
The £538m Rathbone Income fund lost more than 34.49 per cent in 2008, compared with 29.93 per cent from the All Share.
The poor performance over this period led to huge outflows; FE data shows that the fund had £1.3bn AUM at its biggest point.
Stick attributes the poor performance to an over-reliance on indebted companies, and says the fund "grew too big too quickly", which made it difficult for him to change his portfolio.
Like Thomson, the manager says he now pays more attention to a company’s ability to protect against the downside, which helps him to take a much longer-term view.
So far, this has worked well. Rathbone Income has outperformed its IMA UK Equity Income sector average every calendar year since 2008.
The strong performance means it is now ahead of its sector over one, three, five and 10 years, and since Stick took it over in January 2000.
Performance of fund vs sector and index since Jan 2000
Source: FE Analytics
Stick’s fund requires a minimum investment of £1,000 and has an OCF of 1.57 per cent.
CF JM Finn Global Opportunities
FE Alpha Manager Anthony Eaton’s CF JM Finn Global Opps fund was one of the worst-performing portfolios in the IMA Global sector in 2008, losing a massive 47.48 per cent.
Rather than "learning from his mistakes", the FE Research team points out that Eaton’s poor performance is very much in keeping with his style, because his focus on emerging markets and small caps means he should only be judged in the long-term.
"Eaton identifies sectors in which demand from emerging economies has surged, but where supply is constrained," the team said.
"He seeks to achieve his objective by investing in a large number of global stocks – 200 at present – with the vast majority in small, experimental holdings. He increases his exposure to the ones that do well until they make up the core of the portfolio."
"Its performance was poor in 2008 as investors focused their attention on the safest securities and it also disappointed in 2011 as the emerging market theme did not work out as expected. These losses, however, were recovered by the fund in 2012."
"Despite the fund’s aggressive approach and meagre risk management, its simplicity is appealing as it means investors have a clear understanding of what the manager is trying to achieve, both in terms of investment and returns."
Performance of fund vs sector since launch
Source: FE Analytics
CF JM Finn Global Opportunities has returned 161.8 per cent since its launch in January 2004, almost doubling the returns of its IMA Global sector average, which is also its benchmark.
The five crown-rated fund requires a minimum investment of £1,000 and has an OCF of 1.83 per cent.
Standard Life UK Equity Unconstrained
This fund is very much in the mould of CF JM Finn Global Opps, but with a pure UK-style instead.
Manager Ed Legget invests predominantly in cyclical companies, which tend to get hit hardest during market sell-offs.
He is also overweight small and mid caps relative to his sector and benchmark.
Top-10 positions include FTSE 250 companies International Personal Finance and Howden Joinery Group.
This goes some way in explaining why the fund was a bottom-quartile performer in the UK Equity Income sector in both 2008 and 2011, with losses of 41.05 and 20.47 per cent, respectively.
Year-on-year performance of fund vs sector and benchmark 2008-2013
| Name | 2013 (%) | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) |
|---|---|---|---|---|---|---|
| Stan Life Inv - UK Equity Unconstrained | 16.67 | 44.14 | -20.47 | 38.50 | 99.17 | -41.05 |
| IMA UK Equity Income | 11.44 | 14.01 | -2.9 | 14.58 | 22.88 | -28.54 |
| FTSE All Share | 10.92 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 |
Source: FE Analytics
However, Legget’s stellar returns in up markets have more than made up for his underperformance during down markets; our data shows that it is a top decile performer in its sector since its launch in October 2005, with returns of 229 per cent.
The average UK Equity Income fund is up just 51.93 per cent over the period.
The £586m fund requires a minimum investment of £1,000 and has an OCF of 1.9 per cent.
Royal London Sterling Extra Yield Bond
As its name suggests, Royal London Sterling Extra Yield Bond focuses on high yielding companies that tend to be at the higher-risk end of the fixed income market.
An aggressive positioning led the fund to very poor performance in 2008 – it lost more than 33 per cent, compared with just 13.54 per cent from its IMA Sterling Strategic Bond sector average.
However, Royal London stuck with manager Eric Holt, who has delivered the goods since then from both a total return and income perspective.
The £792m fund, which is currently yielding 6.82 per cent, is a top-quartile performer in its sector over one and three years, and second quartile over five, with returns of 42.77 per cent.
It has five FE Crowns – the maximum number it can get. Holt has headed up the fund since April 2003.
Around half of the portfolio is invested in sub BB rated paper, which is defined as "non-investment grade". A further 33.6 per cent is in "unrated" bonds.
Holt has 80 per cent of the fund's assets invested in the UK, with the rest split between the US and Europe.
Financials is its biggest sector position at present. Options in Investec Bank, Yorkshire Building Society and Phoenix Life are all top-10 holdings.
Royal London Sterling Extra Yield requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.39 per cent.