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The only three funds that delivered top-quartile returns over three years

03 November 2022

The number of funds delivering consistent returns over three years has dropped to a new record low for the third quarter in a row, Columbia Threadneedle Investments study finds.

By Matteo Anelli,

Reporter, Trustnet

Only three out of the 1,174 funds in all Investment Association sectors have achieved top-quartile returns over three years to the end of September 2022. At just 0.3%, it is the lowest figure since the Columbia Threadneedle Investments Multi-Manager FundWatch survey started in 2008.

The first and second quarters of 2022 had already disappointed, with only five and four funds having fared in the top quartile of their sectors then, but the third quarter of the year set the bar even lower.

The three funds hitting the mark were each from different IA sectors, Waverton Global Strategic Bond (IA Mixed Bond), Wellington Climate Strategy (IA Global) and Liontrust UK Micro Cap (IA UK Smaller Companies).

“These top funds differ to those achieving top-quartile returns in the previous quarters, showing that there is no trend of note and that the dominance of one style of investing, such as growth or value, reflects a narrow market,” read the report.

In order to see a marginal uptick in each of the past three 12-month periods, we need to look at the above-median returns instead, a looser criterium which highlighted 60 funds out of 1,174 – an improvement from the 58 of the previous quarter.

These funds belonged to 11 out of the 12 main Investment Association sectors, the major absentee being IA UK Equity Income. The most consistent sector on this measure was IA Sterling Strategic Bond with 12.2%, followed by IA UK Smaller Companies at 10.6%.

Percentage growth of main UK sectors from 30/6/22 to 30/9/22
Source: Columbia Threadneedle, Lipper

The overall picture for the UK emerging from the study is bleak, as shown in the graph above.

Against the backdrop of recent market volatility and subsequent sell-off, all UK equity and fixed-income sectors fell in the third quarter of 2022, outperformed by US bonds as well as funds linked to global equities and emerging markets.

Within emerging markets, the IA India/Indian Subcontinent gained 17%, due to capital continuing to flow into this high-growth area, while the IA Latin America and North American Smaller Companies sectors were next best, rising 13.8% and 7.8%, respectively, driven by the rise in the dollar. IA Global Equity also grew, with an increase of 2.3%.

This is no surprise to Kelly Prior, investment manager in the multi-manager team at Columbia Threadneedle, given the volatility of the past few months, concerns over financial market stability and the UK Government announcing fiscal policy measures triggering a severe negative reaction in financial markets.

“The intervention of the Bank of England saved worse blushes, but there is definitely work to do to get back some faith in UK assets from here, with sterling being the most visible and liquid reflection of this,” she said.

“It has been an exceptionally unusual year with quantitative easing coming to an end and the arrival of inflation, alongside the change in rhetoric from the world central banks from accommodative to tightening.

“There is likely to be more volatility going forward and, much like the recent past, consistency versus the average is likely to remain low. This is a rolling three-year statistic and we are currently in the eye of the storm of change.”

Prior’s recipe to navigate these post-quantitative easing times includes avoiding picking assets on the basis of the style of investing.

“This climate will require a greater focus on returns on capital and efficiency that should see good companies and management prosper, with so-called zombie companies finally faltering. Picking active managers and understanding how they do this, rather than just using funds as a factor play, such as growth, value and small-cap, is going to be crucial to reap rewards from here,” she said.

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