Choosing the right fund in a given sector can make a huge difference to your returns, writes Nick Sudbury.
It has been a tumultuous 12 months on the markets and this is reflected in the performance of the various funds. Out of the near 250 in the UK All Companies sector, the difference between the best and worst is a staggering 54%, which shows how important the manager selection decision can be.
Top of the pile was Ardevora UK Equity, an interesting long/short fund that can back the stocks that it believes will do well, while short selling those that it thinks will fall in value. It is a difficult strategy to pull off, as if the manager gets it wrong he can lose on both sides of the book, but over the last year he has done a good job and generated a market-beating return of 12.6%.
The FTSE All-Share was down around 11% over the period and there are lots of index trackers that have performed more or less in line with it. If you rank the 250 funds in the UK All Companies sector on their one year performance from best to worst, these passively managed options tend to cluster around the 130 to the 150 mark, which pretty much puts them in the middle of the table.
Ethical funds shine
One of the most striking aspects is the number of ethical mandates amongst the best performers. In fact the top ten contains no less than three with returns of between four and ten percent. They are: Royal London Sustainable Leaders, Premier Ethical and Ninety One UK Sustainable Equity.
The Royal London fund invests in companies that are considered to make a positive contribution to society. It has benefited from the fact that it has a high exposure to healthcare and technology stocks, two areas that have done well during the pandemic and a low weighting to energy that has struggled due to the fall in the price of oil.
It is a moot point whether the strong relative performance justifies the case for ethical investing, or if it is just a fortunate consequence of the sector positioning, but there is no getting away from the fact that many governments are using the pandemic as a catalyst to move to a more environmentally sustainable way of doing things.
Another bad year for value
It has been another bad 12 months for value with many of these funds propping up the foot of the table. If it was a football league they would have been relegated years ago and wouldn’t have got anywhere near to getting back into the top flight.
Growth stocks have outperformed for most of the last decade and the situation has been exacerbated by the lockdown. During this period many traditional companies have seen their revenues plunge and have had to suspend their dividends, while their growth-oriented peers like the large tech stocks have seen a surge in demand.
The value-focused laggards include: Mark Barnett’s two former funds, Invesco Income -29.3% and High Income-28.7%; Schroder Recovery -25.6%, M&G Recovery -23.4% and JOHCM UK Dynamic -22.2%. In the past, this style of investing has always caught up, but it is not clear whether the pattern will repeat itself this time around.
Picking the right fund is a tricky business and can make a huge difference to your returns. As the numbers demonstrate, it is probably safest to stick to a cheap index tracker, or spread your money over two or three proven managers with different approaches.