Triple blow for fund investors
PENSION and Isa investors have struggled to make money in today’s volatile equity markets and it hasn’t helped that three of the UK’s most popular investment funds have fallen behind after years of outperformance.
Fundsmith Equity, managed by star fund manager Terry Smith, grew to £35billion at its peak after smashing the market since launch in 2010, but has now underperformed over one, three and five years.
Tom Slater manages The Scottish Mortgage Investment Trust, which crashed by half in 2022, and has struggled since.
Completing a disappointing hat-trick, Nick Train, star fund manager of the Finsbury Growth & Income Trust, has crashed and many investors are now pulling their money out of these funds.
Fundsmith Equity has thrashed the MSCI World index over 10 years, growing 305 per cent against 213 per cent. However, it’s grown just 18.63 per cent over three years, while the MSCI is up 35 per cent.
Finsbury has performed even worse over the last three years, growing just 4.4 per cent, while the high-risk Scottish Mortgage trust has fallen 33 per cent.
So is this a temporary setback, or should pension and stocks and shares Isa investors with these funds move their money?
Investors have to accept the rough with the smooth, said Laith Khalaf, head of investment analysis at fund platform AJ Bell. “All active fund managers, no matter how good, can undergo periods of underperformance, often extended ones. These three enjoyed lengthy periods of strong performance prior to the recent downturn.”
By chopping and changing every time a fund manager underperforms, you risk missing out if they recover as these three may when investment conditions change.
Khalaf said stock markets have struggled lately, with the notable exception of giant Wall Street technology stocks such as Apple, Microsoft, Amazon, Facebookowner Meta, Tesla and computer chip maker Nvidia. “Most funds will have underperformed as a result, unless they held a huge amount of their portfolio in US tech shares.”
While Fundsmith holds Microsoft and Meta, and Scottish Mortgage invests in Nvidia, Amazon and Tesla, they also hold stocks in less successful sectors, reducing returns. Jason Hollands, managing director of financial advisers Evelyn Partners, said the funds’ underperformance will have surprised many loyal investors. “When three of the big beasts in active fund management go through a period of relative underperformance it’s bound to raise eyebrows.”
While each fund has a different investment strategy, they have one thing in common. “The managers all have a high conviction approach, investing in a small pool of stocks that they aim to hold for the long-term.”
Lesser fund managers often play safe by covertly tracking a big index like the FTSE 100, but that’s not the case here. “When managers are willing to diverge, as these three are, performance can also diverge.
“In many of the last 10 calendar years this has worked in their favour, adding whopping additional returns for investors, but not over the last three.”
Hollands said Smith, Slater and Train have not changed their approaches. “They have worked well over the longer-term and there’s no reason to believe they won’t work well in the future. If readers own any of these funds, I suggest sticking with them.”