Two-fifths of the funds that made top-quartile returns in the first five years of the ongoing bull run have held onto this position in the years since, research by FE Trustnet shows.
This week marks the 10th anniversary of the collapse of investment bank Lehman Brothers, which filed for Chapter 11 bankruptcy protection on 15 September 2008. Lehman's bankruptcy filing was the largest in US history as the bank had $639bn in assets and debts of $619bn.
That same year also saw financial institutions such as Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester bailed out to prevent them from collapsing.
The years that followed 2008, however, were ones where markets tended to grind higher on the back of unprecedented stimulus from the world’s central banks and improving economic growth.
Indeed, the chart below shows how the major equity markets posted significant gains between the start of 2009 and August 2018.
Performance of indices between 1 Jan 2009 and 31 Aug 2018
Source: FE Analytics
So, with almost a decade of bull market behind us, FE Trustnet thought it would be interesting to see which winning funds from its earlier days continued their strong run during more recent years. To do this, we compared returns between 1 January 2009 and 31 December 2013 with those from 1 January 2014 to 31 August 2018 – two periods which had some subtle differences.
The first five years of the bull run were characterised by continued nervousness over the health of the financial system – reflected in 2011’s eurozone debt crisis – but the Federal Reserve’s massive quantitative easing (QE) programme helped to allay these fears and push markets higher.
The second period (which is a little short of five years) saw institutions such as the Bank of Japan and European Central Bank continue to pump money into the economy but the Fed’s move to taper and eventually reverse QE reminded investors that conditions would normalise one day – putting a cap on bullish sentiment.
Against this backdrop of broadly accommodative policy, a significant proportion of funds that were in the top quartile of their respective sector during the first period were able to stay there over the following years. Our data shows that of the 1,438 Investment Association funds with a track record going back to 1 January 2009, 10.2 per cent were in the first quartile of their peer group during both periods.
This means that 40 per cent of the funds that were in the top quartile in the first five years we examined stayed there over the following period. Meanwhile, 25 per cent of top-quartile funds moved into the second quartile, 15 per cent went into the third quartile and 20 per cent ended up in the bottom quartile.
While investors in an outperforming fund halfway through the bull run appear to have been better off sticking with it, our data also shows that fourth-quartile funds tended to continue underperforming. Some 32 per cent of funds that were in the bottom-quartile in the first period stayed there during the second while just over 34 per cent went into the third quartile; only 16.3 per cent moved into the top quartile.
Source: FE Analytics
The above table breaks this down by Investment Association sector, showing what percentage of funds that were top-quartile between 1 January 2009 and 31 December 2013 ended up in each quartile for the 1 January 2014 to 31 August 2018 period.
As can be seen, two-thirds of first-quartile funds in the IA Global Emerging Markets Bond, IA UK Equity & Bond Income and IA UK Index Linked Gilts sectors remained there in the second period we examined.
Some of these funds achieving this include: Invesco Emerging Markets Bond and Fidelity Emerging Market Debt from the first peer group; Jupiter Monthly Income and Threadneedle Monthly Extra Income from the second; and Insight UK Index Linked Bond and Newton Index Linked Gilt from the third.
However, the three above sectors are relatively small ones. Looking at the more mainstream peer groups throws up some interesting findings.
Our data reveals that close to 60 per cent of IA North America funds that were top-quartile in the first period held onto this position in recent years. Overall (working out the percentage of the entire sector rather than just first-quartile members), 15.1 per cent of funds were in the first quartile for both periods.
While the sector is considered a difficult one for active managers, not one of the 13 funds achieving this were index trackers; some of the names on the shortlist include Morgan Stanley US Growth, Vanguard US Opportunities, T. Rowe Price US Large Cap Growth Equity, T. Rowe Price US Blue Chip Equity and Morgan Stanley US Advantage. What’s clear is that the growth investing style has paid off over both periods, reflecting the challenging conditions that have faced value investors.
Closer to home, 45.1 per cent of first-quartile IA UK All Companies funds stayed at the top of the peer group in the second period. If we look at the whole sector, 11.3 per cent of funds maintained top-quartile returns in both periods.
Performance of fund vs sector and index between 1 Jan 2009 and 31 Aug 2018
Source: FE Analytics
Slater Growth sits at the top of sector for the whole time frame after making a 546.35 per cent total return. SVM UK Opportunities, Old Mutual UK Mid Cap, Liontrust Special Situations and LF Lindsell Train UK Equity also made it onto this research’s shortlist.
Our research also found that there were two sectors where not one fund that was top-quartile in the first period maintained this ranking in the second: IA Asia Pacific Including Japan and IA Global Equity Income.
When it comes to IA Asia Pacific Including Japan, the two funds – Invesco Perpetual Pacific and Smith & Williamson Far Eastern Income and Growth – went on to move into the second quartile. In IA Global Equity Income, Threadneedle Global Equity Income went from the top quartile to the third while Lazard Global Equity Income and Liontrust Global Income moved from the top of the peer group to the bottom quartile.