Even when investors have an idea of the broad sectors they want to allocate to, fund selection remains a vital consideration, research by Trustnet suggests, with big gaps between the best and worst-performing funds over three years.
In this study, Trustnet has looked at three-year performance to 31 October 2019 to find out where the biggest and smallest gaps between the best and worst performers were found.
The performance of funds in the IA Targeted Absolute Return, IA Specialist, IA Volatility Managed and IA Unclassified sectors were stripped out as comparison is unlikely to yield any meaningful conclusions given the broad range of strategies that they are home to.
Overall, 111.95 percentage points separated the best and worst-performing funds from the Investment Association sectors considered in this study.
The best performing fund from the entire universe was the $3.3bn Polar Capital Global Technology fund from the IA Technology & Telecommunications sector. Managed by Ben Rogoff and Nick Evans, it made a total return of 77.49 per cent. The worst performer, meanwhile, was the IA Global sector's Schroder ISF Global Energy fund with a 34.46 per cent loss.
Source: FE Analytics
The difference between the best and worst performers was widest in larger sectors where there are a broader range of strategies, as the chart above shows.
As such, the £123bn IA Global sector saw the biggest gap between the best performing fund and the worst, with a 95.86 percentage point difference between them.
The best performer from the sector over three years was the five Crown-rated Lindsell Train Global Equity fund – which was up by 61.4 per cent. The £8.4bn fund is popular with financial advisers and is overseen by Alpha Managers Michael Lindsell and Nick Train. Its quality growth style has benefited from positive macroeconomic tailwinds and as such performed strongly in recent years.
The worst performer was the aforementioned Schroder ISF Global Energy fund, a $275.1m strategy overseen by Mark Lacey. It invests in a concentrated portfolio of companies focused on the oil & gas sector, which has seen prices come under increased pressure in recent years.
There were also significant gaps between the best and worst performers in the IA UK Smaller Companies and IA UK All Companies sectors.
According to FE Analytics data, 82.85 percentage points separated the best and worst small-cap strategies while there was a 70.74 percentage point gap for the mainstream UK equity funds.
The best performing UK small-cap fund during that time was the £95.7m, five Crown-rated TM Cavendish AIM fund, managed by Alpha Manager Paul Mumford and Nick Burchett, with a gain of 70.4 per cent over three years. The worst performer from the IA UK Smaller Companies sector was Judith MacKenzie’s £11.5m MI Downing UK Micro-Cap Growth fund, which made a 12.45 per cent loss.
In the IA UK All Companies sector, the best performer was the £360.4m, five Crown-rated MI Chelverton UK Equity Growth fund overseen by James Baker and Edward Booth, which was up by 60.01 per cent. The worst performer over the three-year period was L&G Alpha Trust – managed by Rod Oscroft since the departure of Richard Penny in 2017 – which recorded a loss of 10.73 per cent.
As expected, there were smaller gaps between the two money market sectors where comparisons are less relevant.
Gaps between the best and worst performers were also narrower in sectors that were smaller (e.g. IA UK Equity & Bond Income, IA Asia Pacific Including Japan).
As outliers can skew the results at both ends of the performance tables, we also looked at the gap between the best and worst-performing quartiles in each sector.
Source: FE Analytics
The biggest gap between a top-quartile and a bottom-quartile fund was found in the IA Technology & Telecommunications sector, where the difference between the two averages was 37.56 percentage points.
The average first quartile fund made a return of 71.2 per cent over the past three years, whereas a fund in the fourth quartile would have returned just 33.64 per cent. It should be noted, however, that the sector is home to just 15 funds.
It was closely followed by the IA UK Smaller Companies where the average top-quartile fund outperformed its bottom-quartile peer by 37.29 per cent. A UK smaller companies fund in the first quartile would have returned 51.38 per cent on average, compared with a 14.09 per cent return for the median fourth quartile fund.
Outside of the two money market peer groups, the narrowest gap between top- and bottom-quartile funds would have been found in the 14-strong IA UK Index Linked Gilts sector with just 3.22 percentage points separating the top and bottom quartile peers.
Like the gap between the best and worst-performing funds earlier, there were narrower gaps between the top- and bottom-quartile averages over three years for fixed income strategies, with many displaying percentage point differences in the single digits.