Funds focused on China and European smaller companies have been the best performing strategies since the launch of ISAs in 1999, according to Architas investment director Adrian Lowcock.
However, the best performing fund since 1999 is the UK smaller companies-focused Marlborough Special Situations fund.
Lowcock said: “Markets have been anything other than normal in the years since ISAs were launched, which is pretty much in keeping with any other period in history.
“The backdrop to investing is always changing and makes it hard to predict where the stock market returns might be over the next 20 years.”
The investment director noted that, while passive investing has been a good strategy since the financial crisis, there are still areas such as smaller companies, Asia and emerging markets, where investors can capitalise on active management.
Source: FE Analytics
The IA China sector was the best performing sector from since ISAs were launched at the start of the financial year in 1999, however, he noted the low number of strategies with a long-enough track record.
The average Chinese strategy has delivered a return of 824 per cent in the 19 years since the ISAs were introduced, almost 200 percentage points more than the second best performing sector.
The outstanding performance reflects the rapid economic growth seen in the emerging market giant, he said, a fact that has been translated into stock market performance.
“Chinese equity markets traded sideways for a while following the global financial crisis, albeit with periods of volatility,” explained Lowcock.
“However, since 2016 Chinese equity markets have performed strongly and since February 2016, after the last major global market sell off, the IA China Sector has returned 94 per cent reflecting the transition of the Chinese economy from being export led to a leader of technology and innovation.”
With smaller companies’ sectors accounting for four of the top ten spots, reflecting the growth potential of small-cap stocks, the IA European Smaller Companies emerged as the best performer.
Over 19 years, the sector has delivered a 639 per cent total return, although Lowcock noted survivorship bias may have had an impact on the sector’s performance.
“As with the IA China sector, there are only a few funds in the IA European Smaller Companies available for investors – eight of which have been around since 1999,” he said.
IA UK Smaller Companies, the only UK sector among the top ten performers was third on the list generating an average total return of 557 per cent.
The sector is followed by the Asia Pacific excluding Japan and Global Emerging Markets sectors, that have delivered 557 per cent and 527 per cent total returns respectively over 19 years.
Despite emerging behind the average China and European smaller companies sectors, UK small-cap strategies were well-presented in the list of top performers since 1999.
Indeed, Marlborough Special Situations and Artemis UK Smaller Companies, from the UK Smaller companies sector, top the list of best performing funds.
“Marlborough Special Situations by far the best performing fund, returning 2,600 per cent since April 1999. Artemis UK Smaller Companies delivered an impressive 1,505 per cent return,” said Lowcock.
Source: FE Analytics
Of the funds that have survived since the ISA’s were launched, Janus Henderson UK Strategic Income is the only one that has lost investor’s money.
Over this time, the fund has delivered a 14.39 per cent loss compared with a 205.25 per cent total return for the average IA UK Equity Income sector fund.
However, Lowcock said ‘survivorship bias’ is the likely reason that it was the only fund to record a loss over the period.
“Poor performing funds are frequently wound up by the parent companies and money returned to investors,” he explained.
“Another factor that may have dragged on performance is the fund’s size, which is £10.5m. Fixed costs eat into the total returns,” he added.
Given the changeable nature of the markets and the impossibility to predict where returns will come from in the future, Lowcock highlighted the importance of a diversified portfolio.
As such, he suggested Old Mutual Global Equity Absolute Return, MI TwentyFour Dynamic Bond and BlackRock Gold & General for investors.
The $13.6bn Old Mutual Global Equity Absolute Return is managed by Amadeo Alentorn, Ian Heslop and Mike Servent.
He said: “This is systematically run fund using in-house quantitative tools. The system is constantly monitored with adjustments and improvements made regularly.
“The team believes that markets are not fully efficient and that stock prices often diverge from their fundamental value due to investors’ behavioural biases and style drifts.”
“The investment process behind the strategy seeks to exploit these biases in a dynamic and efficient way, resulting in outperformance driven principally by bottom-up stock selection. This is a stable and repeatable process.”
Over three years, the fund has returned 16.97 per cent. It has an ongoing charges figure (OCF) of 0.81 per cent.
Performance of funds over three years
Source: FE Analytics
The second fund backed by Lowcock is the five FE Crown-rated MI TwentyFour Dynamic Bond fund. The fund is managed on a team basis with each member having a specialism in a particular area of the fixed income space.
Lowcock said: “The investment committee establish the bigger picture view of the world leaving the managers to decide how and when to reflect this within the fund.
“The fund can go anywhere in the fixed income space and as such could be considered a best ideas fund.”
Over three years, MI TwentyFour Dynamic Bond has returned 13.47 per cent. It has an OCF of 0.77 per cent and a yield of 4.53 per cent.
Lowcock’s final pick is BlackRock Gold & General which invests in global stocks involved in the mining of gold, commodities and other precious metals.
“The manager focuses on investing in a risk controlled manager with a preference for medium and small companies with high earnings growth,” he said. “This fund is likely to continue to suffer whilst the industry continues to reform.
“However, the manager is experienced and well resourced, through their rigorous analysis they are well positioned to benefit from any uplift in the sector.”
Over three years, BlackRock Gold & General has delivered a 19.32 per cent total return. It has an OCF of 1.17 per cent.