It was five years ago yesterday that worldwide central banks co-ordinated an emergency interest rate cut, which left savers cursing the paltry rates they then got on their cash deposits.
Our research shows that those who took the plunge and put their money to work in higher risk investments have been largely rewarded: just 27 of the 2,147 UK funds* with a long enough track record have failed to beat cash over the period.
Cash, which FE as a group measures using the UK Treasury Bill Tender 3m index, has returned a measly 2.65 per cent since 8 October 2013. Given that equity, bond, property and pretty much every other index has managed to deliver at least double-digit returns since then, this is hardly a difficult benchmark for funds to outperform.
However, a sizeable number have still failed to do so, including a couple of very familiar names.
Funds that have underperformed cash over 5yrs
| Name | 5yr (%) |
|---|---|
| UK Treasury BILL TENDER 3M | 2.65 |
| Polar Capital - UK Absolute Return | 2.58 |
| Old Mutual - Property | 2.14 |
| Threadneedle - UK Property | 2 |
| Neptune - Exempt Fixed Income | 1.79 |
| Henderson Inst - Emerging Market Debt Absolute Return | 1.69 |
| BlackRock - Global Funds New Energy | 1.21 |
| Elite - Hasley Diversifier | 0.63 |
| BlackRock - UK Absolute Alpha | 0.08 |
| M&G - Property Portfolio | -0.81 |
| Cazenove - MultiStrat Prop Charities | -1.07 |
| Thesis - TM Cartesian UK Absolute Alpha | -2.54 |
| Aviva Inv - Property Trust | -4.96 |
| Aviva Inv - Asia Pacific Property | -6.06 |
| SF - Webb Capital Smaller Companies Growth | -8.33 |
| Aviva Inv - European Property | -8.62 |
| Hermes - Property | -9.08 |
| Local Authorities - Property | -10.25 |
| CF Ruffer - Baker Steel Gold | -12.61 |
| Marlborough - ETF Commodity | -16.05 |
| ING - Real Estate Lionbrook Property | -17.76 |
| Guinness - Alternative Energy | -18.17 |
| SWIP - Absolute Return Macro | -20.05 |
| Aviva Inv - Property Investment | -22.33 |
| UBS - Triton Property | -22.78 |
| SVM - Global Opportunities | -22.78 |
| Manek - Growth | -34.16 |
| Rockspring - Hanover Property |
-34.58 |
Source: FE Analytics
The 27 funds have combined assets under management (AUM) of just under £9bn – not a small amount of money.
The largest of these is the £2.2bn M&G Property Portfolio, which has failed to recover from its very poor run in 2008 and 2009, when it lost in excess of 20 per cent. It is a theme that runs through the list: of the 27 funds that have underperformed cash over five years, 12 have a focus on the property sector.
The worst performer of these is the £435m Rockspring Hanover Property portfolio, which is down a massive 34.58 per cent since October 2008.
Performance of funds and sector over 5yrs
Source: FE Analytics
One other multi-billion pound fund to have lost out to cash over five years is the £1.4bn Aviva Inv Property Trust.
Two other themes run through the list: commodities and absolute return.
It has been well documented that natural resources have had a terrible time of late, but no four funds have dealt with this worse in recent years than Guinness Alternative Energy, Marlborough ETF Commodity, CF Ruffer Baker Steel Gold and BlackRock Global Funds New Energy. The first three have posted losses over five years, while the BlackRock portfolio has made just 1.21 per cent.
The Ruffer fund was up more than 230 per cent at one point over the period, such has been its fall from grace.
Performance of funds over 5yrs
Source: FE Analytics
Of all the funds on the list, arguably the highest profile is the £329m BlackRock UK Absolute Alpha portfolio. Previously run by Mark Lyttleton, the fund has had its own spectacular fall from grace in recent years.
Once the go-to product for investors who bought into the absolute return concept, the fund has lost money over one and three years, and made just 0.08 per cent over five years.
Other absolute return funds that have implicitly failed to achieve their objective include SWIP Absolute Return Macro, Henderson Inst Emerging Markets Debt and Polar Capital UK Absolute Return, which have all failed to beat cash since October 2008.
Perennial underperformer Manek Growth was the second-worst performing fund on the list, with losses of 34.16 per cent, and there was also a place for Colin McLean’s SVM Global Opportunities fund, and the SF Webb Capital Smaller Companies fund, which was the best performer in its IMA UK Smaller Companies sector in 2009.
In spite of these very few exceptions, the experts who have continually advised savers to accept a higher degree of risk in order to beat the corrosive impact of inflation have been largely justified.
Tim Cockerill (pictured), investment director at Rowan Dartington, believes that this advice is as relevant now as it was five years ago, even though there are many who believe interest rates will soon be raised.
"When interest rates were cut to emergency levels, no one would have dreamed they would stay as low as 0.5 per cent to this day," he explained.
"The problem was that at that time five years ago, everything was falling – even fixed interest. Understandably, a lot of people stayed in cash for fear of losing it, but the general consensus now is that interest rates are low – and will stay low."
"Even if rates were raised from 0.5 to 2 per cent, which is a big jump in percentage terms, you’re still making a real loss after inflation. Moreover, if interest rates are raised, then that would imply that the economy is stronger, and when that happens you get more inflation. Investors need to realise that the days of getting 5 or 6 per cent real rates are over."
Head of European retail at BlackRock Alex Hoctor-Duncan agrees, believing that investors will have to continue to take on risk if they want to achieve a real return after inflation.
"Record low interest rates and inflation are a persistent fly in the ointment for British savers who are treating cash as a safety blanket because of market uncertainty," he said.
"Even with a relatively low inflation rate, cash savers have seen their wealth decrease."
"There are three reasons why investors stay in cash: they like the income, they like the idea of their money being protected and they worry about volatility. Investors also like the capital preservation cash offers. But there is inherent risk. Returns are low, so investors run the risk of seeing their purchasing power ravaged by inflation over the long term."
"Investors looking to grow their wealth in the long-term need to look beyond cash and re-assess their attitudes towards risk. Looking for investments which provide an element of more flexible income could be one step that less risk-averse investors could take," he added.
In a study published last month, FE Trustnet looked at the best-performing funds over five years. Alex Wright’s Fidelity UK Smaller Companies fund remains top of the tree, with returns of over 300 per cent.
*The study didn’t include money market funds.
