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“Inconsistent” funds dominate long-term performance tables

Some of the best-performing funds in cumulative terms over the last decade have fallen behind their peers in three of the 10 calendar years.

Joshua Ausden

By Joshua Ausden, News Editor, FE Trustnet
Thursday March 07, 2013

The best-performing funds over the last decade have seldom beaten their benchmark year-in-year out, according to FE Trustnet research.

While the vast majority of investors strive for consistency, our data shows that some of the very best performers in cumulative terms underperformed in three of the 10 calendar years – and in some cases by even more.

The trend is perhaps most pertinent in the mixed-asset sectors – particularly IMA Flexible Investment.

One of the standout performers over the last decade has been FE Alpha Manager Alex Grispos’ CF Ruffer Equity & General fund, which has returned 205.96 per cent.

In spite of its strong cumulative performance, it has been bottom quartile in its sector in five of the last 10 calendar years.

Performance of funds vs sector over 10yrs


Source: FE Analytics

FE Alpha Manager Martin Gray’s CF Miton Special Situations Portfolio, which has returned even more than the Ruffer fund, has been a bottom-quartile performer over four of the last 10 years.

It is also apparent among pure equity funds. In the IMA UK Equity Income sector, for example, Invesco Perpetual Income and Invesco Perpetual High Income have been bottom-quartile performers in three of the last 10 calendar years, but have still managed to achieve top-decile returns over the cumulative period – 250.38 and 253.64 per cent, respectively.

Neil Woodford’s funds had a very poor 2009, 2010 and 2012, yet even over a five-year period, they are top quartile.

Year-on-year performance of fund vs sector

Name 5yr returns (%) 2012 returns (%) 2011 returns (%) 2010 returns (%) 2009 returns (%) 2008 returns (%)
Invesco Perp - High Income 45.19 7.67 8.99 10.94 9.81 -19.42
IMA UK Equity Income
33.7 14.01 -2.9 14.58 22.88 -28.54

Source: FE Analytics

The funds mentioned above all have a defensive bias and owe much of their performance to strong relative returns in the down markets of 2008 and 2011.

However, more aggressive funds have also been able to achieve top returns without being consistent. Fidelity Special Sits is a top-decile performer in IMA UK All Companies – a sector that comprises nearly 300 funds – over the last decade, even though it has fallen short of its peer group in four of the last 10 calendar years.

Richard Buxton’s Schroder UK Alpha Plus portfolio is another example – it was bottom quartile in 2004, 2008 and 2011, but has still managed top-decile returns of 271.45 per cent over 10 years.

Performance of funds vs sector over 10yrs


Source: FE Analytics

The study comes in light of comments from David Coombs, who heads up three multi-asset funds at Rathbones, including the Multi Asset Strategic Growth Portfolio.

He says judging a fund on one- or even three-year numbers is useless, and he urges investors to take a more long-term approach.

"If you look at the best performers in the long-term, their returns are very lumpy," he said. "The lesson here? Don’t look at short-term performance."

"If you chase returns and dip in and out of different funds, you won’t get anywhere – you’ll end up missing out on a big upswing or a fund that protects well against the downside."

Coombs says it is understandable why investors hold consistency in such high regard, but has learnt to look at the bigger picture in recent years.

"Ten years ago I would have said it’s all about consistency, but looking back now, I’d say I was a bit naïve," he continued.

"I was running institutional funds back then, when you can’t afford to fall behind [your benchmark], even for a year."

"You’ve got to be patient when you’re holding a fund. Everyone these days just chases top-quartile performance over three years or whatever, but it’s not about that."

"You need to find a manager who is very clear in what they do and sticks to their guns."

Coombs (pictured) says investors are too quick to sell an underperforming fund.

ALT_TAG "The average holding period in my funds these days is very low," he added. "I haven’t sold out of anything entirely since inception in 2011 because of performance."

The manager believes sometimes investors would be better off looking for a fund that has underperformed – as long as they have belief in what the manager is doing and understand why he/she has underperformed.

He commented: "I’ve bought Royce Smaller Companies recently, which is a fourth-quartile performer in that last year or so – something the management knows too well."

"The fund’s style has been out of sync with the market, but now valuations in its area are very appealing."

"It seems to be that fund management is one of the only areas where people sell out of something very cheap, and buy something very expensive, because they’re chasing returns that have already happened."

This article is for professional investors only. You will be redirected to the News & Research homepage in seconds. If you are having problems getting to the page, please click here
Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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