The IA UK All Companies, UK Smaller Companies and Global sectors are the peer groups witnessing the widest spread in 10-year returns from the top and bottom of their performance tables, while funds in the Global Equity Income and international smaller companies peer groups have much closer results.
As we discussed in a previous article, investors are frequently told that asset allocation is the major driver of their returns but academics and investment professionals argue that fund selection can be just as important and should not be ignored.
Simon Evan-Cook, senior investment manager for multi-asset funds at Premier, told us: “Both are very important, but I do get the sense that many underestimate just how important fund selection can be.”
To demonstrate just how fund selection can influence long-term returns, we looked through every equity sector in the Investment Association universe to see the difference between the highest and lowest returning funds over the 10 years to 17 August 2015.
Source: FE Analytics
The IA UK All Companies sector is the one with the widest spread: Franklin UK Mid Cap is up 330.04 per cent while Halifax Special Situations has gained just 22.32 per cent – a difference of 307.72 percentage points.
The average fund in this sector has made 95.61 per cent over this time frame.
Of course, this sector is quite a mixed bag of funds with varying styles and approaches, covering large-cap, mid-cap, multi-cap, value, special situation and income orientated portfolios, among others.
Mid-cap funds frequently top the peer group’s performance tables so it’s no surprise to see Franklin UK Mid Cap so far ahead of the worst performing portfolio and sector average.
The next three funds – MFM Slater Growth, Old Mutual UK Mid Cap and Threadneedle UK Mid 250 – all seek opportunities further down the cap spectrum.
However, the first higher returning multi-cap fund is Majedie UK Focus, which has a 10-year total return of 222.02 per cent. This is just under 200 percentage points more than Halifax Special Situations.
Performance of funds and sector over 10yrs
Source: FE Analytics
As mentioned in yesterday’s article, there’s also a wide spread in the returns made in the IA UK Smaller Companies sector. Old Mutual UK Smaller Companies Focus is up 296.37 per cent while MFM Techinvest Special Situations has risen only 28.45 per cent; the difference is 267.92 percentage points.
The Techinvest fund has performed particularly poorly compared with even the second worse returning fund: Henderson UK & Irish Smaller Companies, which is up 84.11 per cent. But the difference between this and the Old Mutual offering is still 212.26 percentage points.
When it comes to the IA Global sector, it’s a similar story to IA UK All Companies as there is such a variety of funds within it. An added factor is the difficulty that global funds seem to have outperforming the market.
Over the past decade the average fund in the sector has made 87.02 per cent, which is disheartening when compared with the 105.58 per cent gain in the MSCI AC World index.
Indeed, the highest returning fund in the space is a specialist tracker – L&G Global Health & Pharmaceutical Index, which is up 208.41 per cent. This is 225.56 percentage points higher than the 17.15 per cent loss that hit investors in the Schroder ISF Global Energy fund.
However, most global investors will be interested in broader portfolios rather than those focusing on certain sectors.
When we look at these funds, there’s a 149.22 percentage point difference between the 192.10 per cent return made by Veritas Global Focus and the 42.88 per cent from Sanlam Global Best Ideas.
Performance of funds and sector over 10yrs
Source: FE Analytics
In IA China/Greater China, Fidelity China Focus has made 221.32 percentage points more than HSBC Chinese Equity’s 76.08 per cent gain after making its investors 297.40 per cent over the past 10 years.
When it comes to the IA UK Equity Income sector – another favourite of investors – there’s a 184.86 percentage point difference between the 222.54 per cent made by Unicorn UK Income, which focuses on small-caps, and the 37.68 per cent gain of the Henderson UK Strategic Income fund of investment trusts.
Equity peer groups where there have been more than 150 percentage points between the best and worst returning funds include the Investment Association’s Asia Pacific ex Japan, Europe ex UK, North America, Japan and Global Emerging Markets sectors.
At the other end of the spectrum, the IA Global Equity Income sector has a 77.27 percentage point spread between the best and worst performing funds. Standard Life Investments Global Equity Income has made 123.68 per cent in the past decade while Liontrust Global Income is up 46.41 per cent.
It is worth keeping in mind, however, that the Liontrust fund has only been in the IA Global Equity Income fund since July 2013, having previously been a member of the UK equity income peer group before its mandate was expanded.
Performance of funds and sector over 10yrs
Source: FE Analytics
It must also be noted that only four funds in the sector have a long enough track record. This is also true of the next two sectors where fund selection was seemingly less important: IA North American Smaller Companies and IA Japanese Smaller Companies.
