Don’t ditch today’s fund losers

Portfolios that have just endured a poor year should start to recover, says Laura Suter

Investors frequently choose funds that have delivered the highest returns over the past three or five years. However, as the advertisements say, past performance is no guide to the future. Poor recent performance in nominal terms does not mean a fund is badly managed. Nor does it mean that future returns will not be much better.

Here, Telegraph Money identifies five funds that have delivered poor returns in the past but which are positioned to take off.

The fund had an awful year last year, losing 7.1pc over 2016, compared with a 17pc gain in the FTSE All Share index.

However, over five years the fund has returned 68.8pc, compared with the FTSE All Share’s 56pc.

So far this year the fund is slightly up on the index, returning 3pc compared with the index’s 2pc.

Fund manager Steve Davies (below right), in an honest appraisal of his performance, acknowledged that it had been a bad year for the fund. He said: “The first half of 2016 could not have been much worse for the fund.”

He added that the EU vote had hit the portfolio, with its domestically focused holdings, such as Legal & General, Thomas Cook and Dixons, falling hard.

Many of these companies remain cheap in comparison with other parts of the market, when their price is measured against profitability or dividends. This means they could benefit from the market reappraising them over time.

Laith Khalaf of Hargreaves Lansdown, the fund shop, said Mr Davies “has a pretty out-of-favour portfolio, including exposure to banks, travel stocks and companies plugged into the UK housing market”.

“However, if you are investing in turnaround stocks then timing entry will never be perfect, and things often get worse before they get better, so an acceptance of volatility and a long-term view are essential,” he said.

This globally invested fund underperformed its index last year, although not by as much as some others on the list.

It returned 23.8pc, compared with the MSCI World index’s 28.2pc return. However, over five years it has outperformed impressively – returning 138pc compared with the index’s 100pc return.

It remains down so far this year, having returned 1.5pc in 2017 to date, compared with 2.7pc for the index.

James Bullock, one of the portfolio managers on the fund, said that while the returns over 2016 were steady, they underperformed because the weakened pound boosted the index in sterling terms.

He said: “2016’s numerous political upsets had a big impact here, boosting returns in sterling terms through the post-Brexit fall in the pound but tempering the relative performance in other ways.”

In particular, he highlighted the shift towards “value” companies. These are companies that are seen as cheap and more exposed to moves in the economy. They had been out of favour for a number of years, but after Donald Trump’s election as America’s president a shift occurred from “quality” stocks – reliable, but more expensive, companies.

This shift harmed the performance of some of the fund’s “quality” names.

Adrian Lowcock of Architas, a division of Axa, the insurer, said: “The fund suffered from the ‘Trump rally’ and the market’s sudden switch to value stocks as growth and inflation expectations returned in full.

“However, manager Nick Train is a long-term investor with a focus on companies with strong brand and cashflow.” This emerging market fund underperformed in 2016, returning 19.6pc compared with more than 27pc for the index, the MSCI Asia Pacific excluding Japan.

The fund was another victim of the move to “value” stocks at the end of last year. However, its fiveyear performance is strong: it has returned 75.5pc, compared with 53pc for the index.

The fund has not yet recovered this year, still underperforming the index, but Darius McDermott of FundCalibre, the fund research company, said it was likely to turn around this year.

“The fund was hit by the violent swing to value in the second half of the year. It tends to struggle in such a rally – which is what we saw when state-owned banks and resources companies rallied.

“There is only so far these stocks can go, arguably, and this fund also tends to catch up with the rest of the market, and go on to surpass it, as things calm down,” he said. Renowned investor Neil Woodford has attracted £9.6bn of investors’ money to his Equity Income fund. However, the fund had a poor year in 2016. It returned just over 3pc, compared with the 16.8pc return of the FTSE All Share over the year, which saw the index hit an all-time high. The fund is still trailing in early 2017, having returned 0.6pc in the year so far, compared with the FTSE All Share’s 2.4pc. The management team described 2016 as a “difficult year for the fund”, saying that many of the market moves over the past year were not based on fundamentals. The fund missed out on many of the gains in the oil, gas and mining sectors. It also had some notable fallers among its bigger names, such as Capita, which the team admitted had been “a mistake to own over the last 12 months”.

However, Mr Khalaf said: “Longterm investors have been well rewarded by keeping the faith in Neil Woodford. It would be foolish to write him off because of one bad year. To use a well-worn sporting analogy, form is temporary; class is permanent.

“One of the things we have seen from Neil Woodford over the many years he has been managing money is that the market has a tendency to come around to his way of thinking, though while it is at odds with his view you do get periods of underperformance.”

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