More than 90 per cent of funds fall short of delivering above-average returns over a three-year period, according to new research by BMO Global Asset Management’s Multi-Manager team.
Of 1,129 funds in 12 major market sectors, only 9.6 percent (109) delivered above median returns in each of the past three years, the Third Quarter 2017 FundWatch survey showed.This was down from 11.5 per cent of funds at the end of the second quarter of 2017.
According to Kelly Prior, investment manager in BMO Global Asset Management’s multi-manager team: ‘Building on the previous quarter, the number of funds generating consistent returns continues to deteriorate.’
‘Over nine in 10 funds failed to consistently generate above-average returns over a three-year period, with vicious sector rotations and gyrating yield curves creating a lack of consistency from funds.’
Such poor performance and lack of consistency among funds will increasingly push investors towards the much cheaper and supposedly more consistent market trackers such as ETFs.
According to Oliver Smith, a portfolio manager at IG, these latest findings ‘help to highlight the relative attractiveness of using ETFs as a core long-term building block of people’s investment portfolios.’
‘Consistently outperforming the market is very difficult, particularly at the moment, when the best-performing stocks are relatively concentrated into certain names and sectors, and many fund managers are mandated to run money to a certain investment style.’
Some funds and sectors, however, performed much better than others. The most consistent sector in the past three years, in terms of achieving above-median returns, was investment Association (IA) UK smaller companies. Around 21 per cent of funds in this sector managed to produce above-median returns.
According to Prior, ‘Our survey shows that the last three years have rewarded the brave, although the investment backdrop is not an easy one to navigate, as we live in curious times with volatility eerily absent.’
By contrast, in the same time period, the IA UK equity income sector was the least-consistent performer, with only 1.3 per cent of firms in this sector performing above average.
When it came to the third quarter, China-focused investment funds performed most strongly. According to the survey, IA China/Greater China was the best-performing sector, gaining by 8.3 per cent.
By contrast, the worst performing sector in the third quarter was IA UK index linked gilt, which fell by 0.6 per cent.
Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.
Subscribe to Money Observer Magazine
Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.Subscribe now