The number of fund consistently achieving top quartile returns over three years has plunged below the historical average in Q1 2021 as stylistic skews toward value and growth and bifurcated markets have driven inconsistent performance.
BMO Gam’s Fund Watch survey found that just 1.8% of the 1,085 funds analysed from the 12 main Investment Association sectors consistently achieved top quartile performance over the last three 12-month periods, compared to 3.2% in the previous quarter and below the historic average of between 2% and 4%.
Meanwhile the number of funds managing to deliver above median returns in each of the last three 12-month periods was an “astonishing” 103 or 9.5% in Q1 2021. This is down dramatically from 16.2% in Q4 2020 and the lowest figure over the past decade.
Managers leaning into value and growth styles creating less consistent performance
BMO Gam investment manager Kelly Prior (pictured) said that these results offer a “taste of what might be to come in terms of volatility between styles of investing leading returns”.
Prior said that over the decade that FundWatch has been running, interest rates have followed a downward trend “allowing certain styles of investing to freewheel to the front of the leader board in the performance charts, while others have had to pedal hard just to stand still”.
Against this backdrop managers have leaned into their preferred style of investing, such as value or growth, as the market has become more bifurcated, leading to less consistent performance of individual funds versus the average.
Prior said: “As we look ahead, with the headline level of markets in valuation terms being far from cheap, we would hope the performance of active managers will improve. Companies that are well placed to respond to the changing landscape should see superior earnings, compared with those that have been propped up artificially.”
Fixed income sectors disproportionately hit thanks to reflation jitters
The analysis found that the IA North American sector had the highest proportion of top quartile performing funds at 6% over three years as of Q1 2021, while the IA Global Bond, IA Strategic Bond and IA UK Equity Income sectors failed to deliver any funds that achieved this level of consistency.
While 22 of the 39 IA sectors saw positive returns, 10 of the sectors that lost money were either money market or fixed income sectors as reflation fears saw markets move towards risk on sectors.
The IA Global Emerging Markets Bond Local Currency was the poorest performing IA sector in Q1 2021, losing 7.8% due to specific issues in countries such as Turkey and Brazil, as well as a spike in the US yield curve.
However, IA £ High Yield was the only corporate bond sector to make positive ground, largely due to positive attitudes to equity, while the IA Corporate and IA Strategic Bond sectors fell back 1.2% and 3.2% respectively driven by their greater sensitivity to interest rates.
BMO found that there were no funds with top decile returns and bottom quartile risk over the three years to the end of the quarter, commenting that to make good returns in these years, a fund may have had to weather more volatile performance to achieve it, adding that “the middle ground is becoming a crowded place – to achieve long term excellence patience is a necessity”.
