Make the most of buying exciting new funds, because holding onto them is not always quite so fun. That’s partly because returns can be patchy when it comes to the likes of stockpickers: the funds that deliver huge outperformance in a given year could well have a terrible run later on, often for entirely legitimate reasons. These ups and downs can be difficult to bear, emotionally and financially.
Funds that give us a more comfortable ride by consistently outperforming are a pretty rare beast. That’s something commonly shown by investment firm BMO’s quarterly Fundwatch report. The analysis reveals how many funds in a given sector have outperformed their peers in each of the last three 12-month periods, looking at those that stayed in the first quartile by performance and those that beat the sector median. The latest edition of this research found that just 20 out of 1,085 funds delivered consistent top quartile returns in the three-year period to the end of March 2021.
And just 103 out of the 1,085 funds consistently delivered returns above the median for their sector. This marks a fall in the consistent outperformance rate, from a previous 16.2 per cent to just 9.5 per cent.
Yet some silver linings do exist. The sector with the greatest consistency for top-quartile returns was Investment Association North America – something that may prove reassuring, given the S&P 500 index has long been notoriously difficult for active managers to beat.
That said, just 5.9 per cent of funds in this sector consistently made the top quartile, and this statistic fails to tell us how they fared versus the market. Which leads me to ask: how consistently have the best US equity funds outperformed the index?
Picking out some names with the strongest 10-year total returns, a very rough assessment shows that the very best funds have seemed relatively consistent against the index. Baillie Gifford American (GB00BD9MNS66), the best performer in its sector over the last decade, has beaten the S&P 500 in six of the last 10 full calendar years.
Other results are more encouraging: Axa Framlington American Growth (GB00B5LXGG05) managed a respectable seven years of outperformance out of 10. T Rowe Price US Large Cap Growth Equity (GB00BMXZ8P61) beat the index in eight of those 10 full calendar years, as did UBS US Growth (GB00B7VHZX64) and long/short fund Threadneedle American Extended Alpha (GB00B9NMDM80).
Consistency is just one metric but it can prove reassuring. Moving briefly away from the US space, take Fundsmith Equity (GB00B4LPDJ14). The fund has beaten the MSCI World index in all but one full calendar year since it launched in late 2010. On a cumulative basis, this has helped add up to an impressive level of outperformance.
While consistency is not everything, its general absence reminds us to look at discrete performance periods and ask where the 'top' funds get their strong returns. If a fund has an extremely strong year this can exaggerate its five-year track record, making it important to ask how you would expect a fund to perform in different conditions and whether the investment case still holds. This can also help investors manage expectations: Baillie Gifford American's 121.8 per cent total return in 2020, for example, is well beyond anything it has managed in previous calendar years.
