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The annus horribilis for City fund managers

 (ES Composte)
(ES Composte)

Last year is widely regarded as one of the worst years for investment returns. The classic 60/40 portfolio in which 60% is invested in stocks and 40% in bonds, recorded its worst year since 1937.  Active fund managers generally had a poor year particularly in Europe where S&P Global recently found just 11% outperformed over the last year (US funds did much better).

With much of the world’s asset management industry located in London, SCM Direct decided to analyse the main share class of the Investment Management (IA) denominated UK based retail funds, comparing their performance against their benchmark. A huge data exercise - though not compared to the size of Matt Hancock’s WhatsApp messages it would appear.

The analysis interrogated a large sample of 1,219 funds with £1,071Bn invested in total.  The average return after fees of these funds in 2022 was -9.4% and the average underperformance against their benchmark was -1%.  The result amounted to investors losing a combined £6.8 Bn over and above the return of the benchmark.

We couldn’t foretell the findings, and in some ways a typical under-performance was just 1% overall is less than I expected.  But there are huge variations between passive and active funds, and by asset classes.  The fund groups which did relatively well are either dominated by passive funds e.g., Vanguard, L&G or Blackrock or by ‘value’ strategies e.g., GLG, Invesco and M&G.”

What was shocking was firstly the scale of the losses of Baillie Gifford funds, not just in absolute performance but relative performance. Many of these funds were not tech funds but general funds that seemingly decided to invest in tech regardless of valuation. The second was the number of fund groups producing worthless ‘value assessments’ purporting to show that even funds with consistently dismal performance and high charges are “value”.  This is totally misleading and the FCA needs to step in and either ensure these reports are not just marketing and PR literature or abandon them completely.

How did the various fund groups compare:

A glaring conclusion is that predominantly active fund groups produce more volatile performance.  At the bottom of the class for 2022 was Baillie Gifford. The average performance of their funds analysed last year was -21%, and the total investor loss compared to the benchmark, amounted to a staggering £6.2Bn which was on average 15.5% of their funds.

Unsurprisingly, the biggest losers were those invested in the £2.8 bn Baillie Gifford American Fund which fell an astonishing 50.6% last year, which was 42.3% worse than the S&P 500 index it aims to outperform.  The largest holdings in this fund are currently Shopify, Moderna, The Trade Desk, Tesla and Amazon.  Our research shows this fund is also quite volatile relative to its peers.  Over the last 5 calendar years it has been 1st percentile (i.e., in the top 1%) then 58th, then 1st, then 98th then 99th.  Its 2022 Value Assessment gave it a green light across every category including performance! They also claimed that 36 out of its 37 funds were good value.

https://www.bailliegifford.com/en/uk/intermediaries/literature-library/miscellaneous/value-assessment-report-31-march-2022/

The next worst group in terms of underperformance was Aegon, though arguably this was due to its own goal of having a £610m Sustainable Diversified Growth Fund that sets out to beat the UK Retail Prices Index by 4% per annum.  Longer term performance was also shocking for this fund – its returns over the last 5 years to end January has been just +4.8% vs a target return of +56.2%.

In Aegon’s fund most recent Value Statement, it says ‘The Board of Directors believe the fund provided value in all areas except fund performance’ and Aegon’s 2022 fund report concluded all its funds (including this one) were good value saying ‘There are no funds deemed ‘not providing value’ in this given period.  Absolutely absurd.

The third place for underperformance in the table was Ninetyone where the average loss against the benchmarks was 5.9%.  Its own value assessment of its funds admitted that ‘the Investment Manager has delivered on the performance expectations for 13 of 22 funds which have a track record of longer than the recommended holding period (typically 5 years).’ The worst fund vs its benchmark analysed was their £715m Global Income Opportunities fund which lost 10.8% last year, some 25.7% behind its benchmark.   Unlike others fund groups, at least the Ninetyone Board are honest that a fund with bad performance should not be deemed good value.

https://ninetyone.com/-/media/documents/value-assessment-report/91-ninety-one-value-assessment-report-en.pdf

The fund groups who did best in 2022 tended to be those focussed on value/income stock driven strategies e.g., Man GLG, Invesco and M&G.  At GLG the fund that made the most ‘extra’ returns for its investors was the £1.4 bn Japan Core Alpha fund which made 16.8% last year, beating its benchmark by 21.3% benefitting its investors to the tune of £305m. At Invesco, they benefitted from many of its largest funds e.g., the £2.6 Bn European Equity, £1.3 Bn UK Opps, £2.2 Bn Asian and £2.9 Bn UK Equity High Income beating their benchmarks by between 8 and c.19% last year.

It is hard not to think of these research fundings in terms of the mathematical term ‘tends to zero’.  There are some fund groups and funds that are successful, beat their benchmark and deserve their fund fees and charges.  But there is very little performance consistency as this changes dramatically year by year, both by fund group and by fund.

Over a period of time basic maths wins.  On average these funds are likely to produce the return of the markets less their fees, and even the best funds have tough years.  For example, the latest factsheet of Fundsmith reveals the mega £22.8 Bn fund underperformed MSCI World Equities so far in 2023, in 2022 and in 2021 (albeit by a small margin).  https://www.fundsmith.co.uk/media/jxvhhoir/february.pdf

If its consistent returns for the medium and longer term investors are seeking, think carefully before choosing an active fund within an active fund group.

Alan Miller is CIO of wealth management firm, SCM Direct