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Record-low number of funds beat peers consistently, BMO study finds

04 May 2022

BMO Global Asset Management’s Multi-Manager FundWatch survey reveals just five funds have beaten peers in each of the three years to the end of Q1 2022.

By Jonathan Jones,

Editor, Trustnet

Funds have had a torrid start to the year and investors banking on prior winners to see them through have been left sorely disappointed, according to BMO Global Asset Management’s Multi-Manager FundWatch survey.

The report found that the fewest funds in more than a decade have made top quartile returns over three consecutive 12-month periods when analysing to the end of the first quarter of 2022.

Just five of the 1,115 funds in the 12 sectors researched (0.5%) achieved top quartile returns consistently over a three-year period as at the end of the first quarter. This compares with 2.1% at the end of the fourth quarter of 2021.

This is the lowest number recorded since the FundWatch survey began in 2008 and is well below the historic average of between 2% and 4%.

Lowering the hurdle rate to above-median returns did little to help. In total, 65 funds have beaten their peers in each of the past three 12-month periods, compared to 159 funds last quarter.

“This meant the less demanding ratio decreased from 14.6% to 6.1% in in the first quarter of 2022, however all 12 main Investment Association (IA) sectors still contain at least one fund that delivered above median returns,” the report said.

The most consistent sector was the IA Sterling Corporate Bond with 11.8% of funds performing above median returns for three consecutive years, followed by the IA Asia Pacific Excluding Japan with 10.8%. The IA Europe Excluding UK sector was the least consistent performer, with just one fund achieving above-median performance.

In the past three years that the FundWatch survey covers, funds have had to deal with the “unprecedented” impact of Covid, a return to inflation and the longer-term effects of climate change, as well as related environmental, social and governance (ESG) considerations.

Rob Burdett, head of the multi-manager people team at BMO Global Asset Management, said: “The war in the Ukraine is the latest in market shocks, with the resulting sanctions having a significant impact on commodities, inflation and interest rates, as well as the impact at a sector level, with knock on effects for defence and energy stocks.”

Indeed, the Russia-Ukraine war has contributed to already rising inflation, particularly in the oil & gas sector, where Russia is a large player. This has caused prices to spike around the world, with central banks subsequently raising interest rates to dampen the effects of inflation.

It is a combination of factors not seen for more than a decade – a time when investors had become used to the gains made by giant technology and high-growth companies.

Funds that invested in these areas seemingly perennially outperformed, but the switch in market conditions this year has changed this.

Growth portfolios have plummeted to the bottom of the rankings while value funds – those that buy unloved areas such as oil giants, mining firms and banks – have soared.

Burdett noted: “These crises have caused significant gyrations in financial markets and underlying asset classes, resulting in the lowest consistency figures we have ever seen in the survey.

“Against this backdrop we may see new performance trends emerge, while the impact of this quarter on consistency of returns and volatility of funds may continue for some time.” 

As in the previous study to the end of 2021, there were no funds that achieved top percentile three-year returns with bottom percentile volatility, although the Royal London Sustainable Leaders TrustCarmignac Portfolio Patrimoine and LF Ruffer Total Return made for good low-risk, high-reward options.

Overall, only four of the 52 IA sectors made positive ground in the first quarter of 2022. The straggler of the table was the IA European Smaller Companies sector which fell 13.4% as the already less-liquid part of the market was hit for its geographic proximity to the war and its regional reliance on Russian gas and oil.

All of the IA Bond sectors lost ground, with the worst being the IA Global Emerging Markets Bond Hard Currency sector losing 7.6%.

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