According to FE Analytics, the FTSE All Share has now returned 143.31 per cent over five years, but the index’s five-year returns this time last year (incorporating the crash) were just 37.45 per cent.
Performance of index over 5yrs
Source: FE Analytics
This means that many higher risk equity and bond funds now have much more appealing five-year track records than they did last year, which could mislead investors looking for those with good long-term numbers.
Barnard and Pattullo, who manage the Henderson Strategic Bond fund, say that investors need to look over a longer time frame and a full market cycle when picking a fund.
“If I were someone buying a SIPP now, I would be saying I don’t care what they have done over the last three years. I want to see how they have done over 10 years or how did he or she cope in 2008? I think the industry is being a bit lazy on this, to be honest,” Pattullo said.
“And then to claim that that five-year period is repeatable is complete nonsense,” he added.
“I think people have got to be honest and realistic to their clients. It is quite funny when people say how their five-year track record has been fantastic as each quarter keeps dropping out of the figures.”
Seven-year performance figures show a full market cycle, including the market peak and collapse in 2008.
According to FE Analytics, a number of funds that are top quartile performers in their respective sectors over seven years have actually underperformed over five.
In the highly popular IMA UK Equity Income sector, Invesco Perpetual High Income, Invesco Perpetual Income and Trojan Income all fall into this category.
Source: FE Analytics
All three funds have a very small weighting to mid and small caps and instead have maintained a high exposure to large, often defensive, UK companies.
Our data shows that the three portfolios were among the sector’s best performers in 2007, 2008 and the falling market of 2011.
However, their five-year returns have all been affected by their performance in 2009, as they didn’t bounce back as strongly as the sector.
FE Alpha Manager John Wood’s JOHCM UK Opportunities fund is another that is a casualty of the current five-year numbers.
Wood is value-driven and if he thinks the market is looking expensive, he has no qualms about holding a lot of cash. He currently has 19 per cent in the asset class.
The fund is a top-quartile performer in the highly competitive IMA UK All Companies sector over seven years with returns of 71.04 per cent, beating the average fund by more than 20 percentage points. That was helped by its top quartile returns in both 2007 and 2008.
However, over five years it has returned 117.99 per cent against the sector’s returns of 147.44 per cent.
Patullo and Barnard’s Henderson Strategic Bond fund also has a much better relative seven-year track record. While the fund has still beaten the IMA Sterling Strategic Bond sector over five years, with returns of 80.49 per cent, it sits in the second quartile over that time.
Over seven years, it sits in the top quartile with returns of 45.65 per cent.
Performance of fund vs sector over 7yrs
Source: FE Analytics
There are, of course, a number of funds that have massively benefited from the risk-on environment.
In the UK All Companies sector, the likes of MFM Slater Recovery, PFS Brompton UK Recovery and Saracen Growth are all among the sector's top performers over five years, but have underperformed over seven.
MFM Slater Recovery, which is run by FE Alpha Manager Mark Slater, is a top-quartile performer over five years with returns of 185 per cent, beating the sector by 35 percentage points. However, it has underperformed by 5 percentage points over seven years.
The fund took full advantage of the market recovery, and was the eighth best performer in the sector in 2009 and the fourth best in 2010. Nevertheless, it underperformed against the sector in 2007, 2008, 2011, 2012 and 2013.
It also lost money in all of those years except 2013, when it returned 24.73 per cent.
It is a similar story with AXA Framlington UK Monthly Income, Rathbone Income and GLG UK Income in the IMA UK Equity Income sector.
For example, George Luckraft’s AXA Framlington UK Monthly Income fund is the 14th best performer in the sector over five years, with returns of 155.92 per cent, 12.61 percentage points more than its FTSE All Share benchmark.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, the figures look very different over seven years. Over that time, the AXA Framlington fund is the second-worst performer in the sector with returns of just 0.97 per cent and has underperformed its benchmark by 47.17 percentage points.
Performance of fund vs sector and index over 7yrs
Source: FE Analytics
The major reason for that difference in relative performance is the fund’s returns in the turbulent years of 2007 and 2008. Between March 2007 and March 2009, for example, it lost a staggering 60 per cent.
Mike Deverell, investment manager at Equilibrium and member of the AFI panel, says that it is now more important than ever to look more closely at a fund’s track record before deciding to buy.
“What I would say is to look at discrete annual performance as a good start or over the full period of the fund. You want to see how the fund has behaved in either rising or falling markets and look at the consistency of its outperformance,” Deverell said.
“Arguably, the case for holding funds that have outperformed over seven years, but possibly not over five years, is greater now than it has been in the past. That is because the likes of Neil Woodford or Trojan have had periods when they have outperformed in rising markets, but they have made up the real difference when markets have fallen.”
“If you were to avoid a fund because its five-year figures have been disappointing, then you are completely missing the point,” he added.
