Fund managers have nowhere to hide in the new investing regime, as almost every style has made good returns over the past five years. It means that, for individual investors, selecting the right funds has never been more important.
Yet it is a habit that has been unnecessary for much of our recent history, when asset allocation (geography and style), as well as portfolio construction (how much should be allocated to each), was arguably more important than selecting the right way to play these larger themes.
In the era following the 2008 financial crisis, investors only needed to invest in growth or quality managers. From the start of 2010 to the start of 2020, momentum and quality indices vastly outperformed value.
But in this new era of investing since 2020, returns are much closer, with some experts suggesting investors should worry more about fund selection than investment style.
This view was echoed in a recent conversation with Rob Burdett, multi-manager at Nedgroup, who said future medium-term performance will “come down to stock selection” and is “less about style, or the sector being the overriding driver”.
The figures back this assertion up. Looking at the performance of different investment styles across the MSCI AC World index over the past five years, there has only been a 10- percentage- point swing between the best and worst performers.
While value investing shone in 2021 and 2022 when interest rates rose, in 2023 and 2024 momentum and growth strategies took a short-lived lead thanks to the AI boom.
Even quality investing – oft maligned over the past half-decade as high-profile fund managers such as Terry Smith and Nick Train have struggled – has performed strongly.
In fact, momentum has been the worst strategy over the medium term, up 60.5%. Despite many pointing to value as the dominant style during this period, it sits second from bottom, at 62.4%. Quality stands at the top of the heap, with a 70.6% return, while the growth index has made 63.2%.
Performance of indices over 5yrs
Source: FE Analytics
Burdett said investors “can have a value manager for five years, a growth manager for five years and a specialist manager, and if [they’ve] done a reasonable job of [fund] selection, there's a good chance all of them could outperform”.
As such, for the first time “in a while”, this proves the value of a good multi-manager, said Burdett, with professionals adept at picking top funds more important than ever.
While certain styles will work more than others in the short term, looking further out the top performers may be more diverse than in the previous decade.
Whether investors want to do it themselves or trust a professional, the message remains the same: getting the selection right is likely to be more crucial than it has been for a long time.
And for fund managers, there will be no excuses that their style is out of favour, not if they can’t keep pace with their stylistically similar peers.