The year 2008 will live long in the memory for most investors, with equity markets across the globe falling off a cliff in the aftermath of the biggest financial crash since the 1920s. Our data shows that not one equity sector in the IMA universe made money that year, with the majority posting double-digit losses.
The worst-hit sectors were those deemed as "high risk" and illiquid, such as IMA Global Emerging Markets, Asia Pacific ex Japan and UK Smaller Companies.
Performance of sectors in 2008
Source: FE Analytics
Although 2008 will always be remembered as one of the most important years in financial history, our most recent poll shows that a fund manager's performance over the 12-month period has little bearing on 60 per cent of our readers when they decide where to invest their money.
Gordon Smith, fund analyst at Kilik & Co, agrees that a manager's performance in 2008 does not reveal too much about their capabilities as the environment was so out of the ordinary.
"Obviously it was a very big stress test and so it is important to look back to a certain extent, as it shows how a manager has reacted when he is under severe pressure, because there is no reason to say it won’t happen again."
"However, it all depends on what type of fund you were looking at. You would have expected a high-growth, high-beta fund to be hurt badly in an environment like 2008, depending on how benchmark aware they were," he added.
Bestinvest’s Jason Hollands agrees with Smith, saying that managers who had a tough 2008 should not necessarily be disregarded.
"2008 was almost unprecedented," he explained.
"I don’t think it is right that someone who had a tough 2008 should just be excluded from future investment. The problem was that liquidity dried up across the board and you just simply couldn’t execute your investment views."
"No one had a crystal ball and even very good fund managers struggled. The point being that in 2008, you were either a hero or a zero," he added.
Carl Stick, who heads up the Rathbone Income fund, was one of those who had a poor 2008, losing around 5 per cent more than his benchmark.
Rowan Dartington’s Tim Cockerill told FE Trustnet he believes that Stick has learned from his mistakes and become a better manager as a result.
Nevertheless, 2008 still remains a blotch on the majority of funds' five-year track records – but not for much longer.
Along with one, three and 10 years, a five-year track record is one of the most used metrics to judge the performance of a fund. By March 2014 – just a matter of months away – the pain of the Lehmans crash on funds’ five-year track records will be all but wiped off. Since this event, the vast majority of funds have delivered very strong absolute returns, with some IMA sectors more than doubling investors’ money over the period.
FE Analytics shows that since January 2009, the FTSE All Share and the S&P 500 have both returned more than 80 per cent, with headwinds such as the European sovereign debt crisis and Fukushima disaster only temporarily halting the upward trend.
Performance of indices since Jan 2009
Source: FE Analytics
Although Hollands says that a fund’s performance in 2008 should not be overplayed, he says that as the last five years have generally been positive for equities, investors need to make sure they dig a little deeper into a portfolio’s returns before judging a manager’s ability.
"Investors need to look beyond cumulative data," he said.
"You have to look over certain periods of time because one fund may have been generally performing badly but had a blip period where it outperformed. This can have a big impact on cumulative performance."
"You have to weigh it up and see if a fund’s track record is reflected in consistent performance," he added.
There are a number of funds that have very strong cumulative numbers thanks to one or two years of stellar performance.
FE Alpha Manager Mark Slater’s MFM Slater Growth fund is a good example. It is a top-decile performer in the IMA UK All Companies sector over five years.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
The fund rebounded well in 2009 and topped the sector in 2010 with returns of more than 70 per cent; however, its performance has been very average since then, with bottom-quartile returns in 2012 and underperformance so far in 2013.
The same is true of the Close Special Situations fund, which incredibly returned more than 200 per cent in 2009. This put it at the top of its IMA UK Smaller Companies sector for some time, but bottom-quartile performance in 2011 and 2012 saw it close earlier this year, due to a lack of demand.
Smith agrees that it has been a relatively supportive five years for equity markets since the crash, and that a manager’s ability to perform well in down markets should also be of interest.
However, he does not think a manager’s ability to do well in the last five years should be overlooked.
"You can’t ignore the fact that the period has been a fairly decent one for most equity markets," he said.
"But, I guess like with a lot of things, you are always judging a fund against its peers as every fund has been through the same five years. Every five-year period will still be valid from a relative point of view, no matter which five years you take," he finished.
In an upcoming article, FE Trustnet will identify funds that had a dreadful 2008, but that could be worth a look now.