Investors should be more patient and not change their funds if they suffer a disappointing year, according to Hargreaves Lansdown’s Mark Dampier. 
The head of research said investors are too quick to sell out of underperforming funds, something that has been particularly apparent in the IA UK Equity Income sector this year.
The sector has underperformed the FTSE All Share so far in 2017, returning 8.44 per cent versus the index’s 9.54 per cent gains.
This is the second consecutive calendar year of underperformance after the sector lagged the benchmark by 7.91 percentage points in 2016, as the below chart illustrates.
Performance of sector and index over 2yrs
Source: FE Analytics
“It is really interesting that when I look at all the stats, our investors’ confidence survey and all the rest, the UK is absolutely hated at the moment and I can’t remember a time in my career when I’ve seen that,” Dampier said.
“[In the past] you have heard people say they won’t buy Japan because it has had an awful time for the last 10 years or they don’t want to buy Europe because of Grexit et cetera. But I’ve never really seen the UK off the boil.”
However, he said investors should stick with the UK, as the large swathes of outflows to the UK are similar to those that flowed out of Europe in 2012.
“Every month the Investment Association stats show there is money coming out of the UK and it is very similar to 2012 in Europe when we said to buy Europe but no one wanted to know,” he added.
“Lo and behold it wasn’t a bad time to buy Europe and they are all buying it now.”
Indeed, the MSCI Europe ex UK index has returned 81.22 per cent over the last five years, as the below chart shows.
Performance of index over 5yrs
Source: FE Analytics
Dampier said it is understandable that domestic UK stocks have suffered recently with the uncertainty surrounding Brexit and its effects on the economy, the potential for a Labour government and a fall in the currency last year that despite beginning to come back in 2017 remains some way off its pre-referendum highs, all posing problems for domestic stocks.
“I think it is on political concerns and Brexit mainly. Most of the newspapers are pro-remain and I have never seen such a big knocking effect on the UK,” he said.
“I have to say I understand it. The politicians on both sides – the Tories and Labour – are completely and utterly useless. It is just embarrassing to see.
“But I think investments are about being long-term and being patient and if you want to buy something then it needs to feel deeply uncomfortable.”
Dampier added: “At the moment investors think the UK is deeply uncomfortable which is why they have been selling but actually that is a better reason to buy in.”
He suggested funds such as the Woodford Equity Income, Standard Life Investments UK Equity Income Unconstrained and JOHCM UK Equity Income as three examples of funds that have moved to a domestic approach within the UK.
FE Alpha Manager Neil Woodford has had the toughest time over the last two years, returning 4.52 per cent while Thomas Moore’s Standard Life fund has returned 12.29 per cent.
Performance of funds over 2yrs
Source: FE Analytics
Meanwhile, Clive Beagles’ JO Hambro fund has returned 38.73 per cent over the last two years, the second-best performer over the period, having underperformed in 2014 and 2015.
“They are buying more domestics and saying what has been overbought is the more international side because people want exposure away from the UK,” Dampier said.
“They are saying the large caps are the fashionable trade while the unfashionable trade is to buy the rest of it – which is more the FTSE 250.”
He added that actually the FTSE 250 is up 13.96 per cent this year so it hasn’t performed well on an absolute basis and with sterling beginning to pick up it could be a good place for investors to be.
Dampier noted that while quite a few UK managers are looking at the domestic scene, both domestic and overseas investors don’t want to know.
This is a sign that investors are too short term in their thinking, as over the long term the FTSE 250 has outperformed the FTSE 100.
As such, selling funds that have had a poor run over a few months rather than focusing managers with good long-term track records could mean investors miss out on outperformance over long periods.
“The problem is that if you are going to be a genuine active manager at a time when passive is moving up the spectrum quite considerably you have to do something really different from the market,” Dampier noted.
“Consequently there are going to be times when you are out of sorts with that market. You can’t have it both ways. When other people use the words consistency I am thinking it is pretty hard to be consistent as an active manager.”
He highlighted that even Fundsmith Equity and Lindsell Train Global Equity – run by FE Alpha Managers Terry Smith and Nick Train respectively – are examples of funds that have been consistent over a long period of time, but that will at some point have short-term issues.
Performance of funds over 5yrs
Source: FE Analytics
“If you look at those funds they have had eight or nine years with a fantastic tailwind but Train would be the first to say that he’s never had nine years of consecutive outperformance in his life and I know that sometime he’s going to go through a rough time,” Dampier said.
“So, what worries me then is do all the people just desert that straight away. I think the real point is within the portfolio you need to have funds pointing in different directions.”