Just 0.26% of funds across the Investment Association’s 12 major market segments delivered consistent top-quartile returns over the three years to 30 September 2022, according to the latest Columbia Threadneedle Investments Multi-Manager FundWatch survey.
The quarterly analysis suggested continued market volatility and rising inflation and interest rates combined to leave just three out of 1,174 funds across a dozen IA sectors achieving top-quartile returns over the period under review. This is the third quarter in a row a new record low has been set since the FundWatch survey began in 2008, after 0.35% of funds delivered top- quartile performance over the corresponding period to Q2.
The trio of overachievers highlighted in the Q3 survey were Waverton Global Strategic Bond (IA Mixed Bond), Wellington Climate Strategy (IA Global Equity) and Liontrust UK Micro Cap Fund (IA UK Smaller Companies).
All from different IA sectors, the funds differed from the four that had achieved a similar feat three months previously. According to the survey, this shows “no trend of note and that the dominance of one style of investing, such as growth or value, reflects a narrow market”.
UK assets’ tough year continues
In the quarter, the four worst performing IA sectors were all UK-oriented. All UK equity sectors fell, with the average IA UK All Companies sector fund dropping 5.1% , while the IA UK Smaller Companies sector returned -9.3%. The IA UK Equity Income sector also dropped 6.4%. It was a similar story for UK bonds, as the IA UK Index Linked Gilt sector fell 13.1%, having already experienced a 20.2% drop in Q2.
Kelly Prior (pictured), investment manager in the multi-manager people team at Columbia Threadneedle, said: “Following the volatility of last quarter, concerns over financial market stability and the UK Government announcing fiscal policy measures triggering a severe negative reaction in financial markets, it is not surprising we have reached another record low in performance this quarter.
“The intervention of the Bank of England saved worse blushes, but there is definitely work to do to get back some faith in UK assets from here – with sterling the most visible and liquid reflection of this. It has been an exceptionally unusual year with quantitative easing coming to an end and the arrival of inflation, alongside the change in rhetoric from the world central banks from accommodative to tightening.”
Prior continued: “There is likely to be more volatility going forward and, much like the recent past, consistency versus the average is likely to remain low. This is a rolling three-year statistic that we look at and we are currently in the eye of the storm of change.
“The post-global financial crisis environment was one where artificially low interest rates meant growth – generally focused on a small handful of stocks – and passive investing shone. We are in an entirely different regime now, with both inflation and the cost of capital providing a headwind for corporate profitability.
“This will require greater focus on returns on capital and efficiency that should see good companies and management prosper, with so-called ‘zombie companies’ finally faltering. Picking active managers and understanding how they do this – rather than just using funds as a factor play, such as growth, value and small cap – is going to be crucial to reap rewards from here.”