Funds focusing on small, mid or multi-cap UK equities have generally been the best performing portfolios in the seven years since the collapse of the Lehman Brothers bank wreaked havoc on market confidence and ushered in the 2008 financial crisis.
Lehman Brothers fell on 15 September 2008, following a week-long plunge in its share price, after it revealed vast write-downs on toxic mortgages amounting to immense losses for its balance sheet.
There was no intervention from the US government or other financial institutions and with its assets totalling more than $600bn the bank became the biggest write-down in corporate history and remains so today. A global meltdown that became known as the ‘Great Financial Crisis’ followed.
Performance of indices in September 2008
Source: FE Analytics
As most readers will remember, the next six months produced the biggest bear market for global equities in a generation, and of course the funds that invest in them, with long-lasting repercussions apparent for the next six years.
The seven years of the market cycle since have seen many ups and downs, so it is important to remember that markets have had plenty of other worries including the 2011 sovereign debt crisis, 2013 taper tantrum and the China-induced sell-off of this year.
Looking at the performance of the Investment Association universe of more than 3,000 funds, we can see the likes of Fidelity UK Smaller Companies, MFM Slater Growth and Marlborough UK Micro Cap Growth have been the three best portfolios since 15 September 2008.
Best performing funds since the collapse of Lehman Brothers
Source: FE Analytics
According to FE Analytics, the three have returned 314 per cent, 283 per cent and 244 per cent respectively. By comparison the FTSE All Share gained 62.6 per cent including dividends.
Performance of funds and index since 15 September 2008
Source: FE Analytics
Alex Wright’s £314m Fidelity UK Smaller Companies fund was the only portfolio to more than quadruple investors’ cash for anyone buying it on the eve of Lehman’s collapse.
Wright has headed the £282m Fidelity UK Smaller Companies since February 2008. His value/contrarian approach and his mandate to also use short positions in his portfolio means buying out-of-favour companies where he sees a catalyst for positive change as well as betting against ones where he cannot.
This can sometimes take several years to play out but he has beaten the sector and index in each full calendar year since taking charge of the portfolio.
Mark Slater has headed the MFM Slater Growth fund since 2005 while Giles Hargreave has headed the Marlborough UK Micro Cap Growth since 2004.
Both managers also have a ‘buy and hold’ style although Slater is more biased towards mid cap stocks while Hargreaves, as you can guess, goes for some of the smallest listed stocks in the UK market.
Somebody investing back in September 2008 would have been disappointed with their first six months of performance from these funds, as they were rocked by the turmoil that was hitting financial markets.
But FE Alpha Manager Leigh Himsworth recently told FE Trustnet that a lesson since the financial crisis that investors are best staying calm and doing very little over the longer term.
“The volatility we have seen in recent weeks can lead investors to panic. The problem with panic is that it often leads to taking the wrong decision,” Himsworth (pictured) said.
“It’s wise to sit back during times of volatility and think about the implications of the underlying causes of the movements in markets, but also to look for opportunities. It’s right to remember that there are also lots of positives out there.”
“The market’s returns over the last six years have been very healthy for investors and the outlook is still attractive – the UK economy is still very good, wage inflation is coming back to the market, the oil price has fallen, which is great for the UK consumer, and food prices continue to fall as well.”
The next best performing fund over this seven-year period is the only non-UK focused fund: the £318m Legg Mason Japan Equity fund. Japan has been a very mixed environment for investors over the past seven years.
The fund has been managed by Hideo Shiozumi, who has more recently sought to benefit from the economic and structural changes that Japanese prime minister Shinzo Abe is implementing, since 1996.
The fund has tended to massively outperformed during bull runs but has fallen a lot further than its peers during times of weakness and considerably underperformed against the IA Japan sector and the TOPIX in index in the down markets seen in Japan in 2006, 2007, 2008 and 2009.
The fund invests across the Japanese market, though it does have a bias to the lower parts of the market cap spectrum and has seen particularly strength in the period of Abenomics began with election of Abe in 2013.
Performance of fund vs sector and index since 2013
Source: FE Analytics
It has seen top quartile returns in 2011 and 2012 while since 2013 – when Abenomics began – it has been the best performing portfolio in the sector with a near 100 per cent return, beating the sector and index threefold.
Some of the other top performing open-ended funds over the period include Unicorn UK Income fund, which was mostly headed by John McClure over this period, R&M UK Equity Smaller Companies, Liontrust UK Smaller Companies, Schroder UK Dynamic Smaller Companies, Investec UK Smaller Companies and Standard Life Investments UK Equity Unconstrained, which have all delivered over 200 per cent to investors.
However, with the exception of Liontrust UK Smaller Companies – managed by Anthony Cross since 1998 and Julian Fosh since 2008 – they have all seen their long-term managers depart in the past year or so.