Fundwatch – Volatile Times

The number of funds consistently achieving top returns fell dramatically during the first quarter of 2022 due to a barrage of market shocks

During the first quarter of 2022, the smallest number of funds in more than a decade generated top-quartile returns over three consecutive 12-month periods, according to the latest survey by the multimanager investment team at BMO Global Asset Management. Just five (0.45%) of the 1,115 funds in the 12 sectors researched achieved top-quartile returns consistently over a three-year period as at the end of Q1 2022, compared with 2.1% in the previous quarter.

This is the lowest number recorded since the Fundwatch survey began in 2008 and is well below the historical average of 2-4%. The funds registering top quartile returns were from five different sectors, Investment Association (IA) Europe ex UK, UK All Companies, £ Corporate Bond, £ Strategic Bond and Japan.

Lowering the rate to above median returns in each of the past three 12-month periods produced another new low as just 65 of the 1,115 funds managed the feat, compared with 159 funds during the previous quarter. This means the less demanding ratio decreased from 14.6% 6.1% in Q1 2022. However, all 12 main IA sectors still managed to contain at least one fund that delivered above-median returns.

The most consistent sector was IA £ Corporate Bond, with 11.8% of funds producing above-median returns for three consecutive years, followed by IA Asia Pacific ex Japan, with 10.8% of funds. IA Europe ex UK was the least-consistent performer, with just one fund achieving above median performance.

The BMO Global Asset Management (EMEA) Multimanager Fundwatch survey reviews 12 major market sectors, filtering out only those funds that are consistently above-average in each of the past three 12-month periods, and those consistently in the top quartile. Fundwatch uses the team’s process to highlight the past quarter’s developments in the fund world. It is fact-based and uses performance analysis techniques that form part of its investment process. All IA sector data is from Lipper and is calculated in sterling total return terms for periods ending 31 March 2022.

Market shocks

Already-rising bond yields and commodity prices were significantly affected by the Russian invasion of Ukraine and the subsequent global sanctions against Russia. Only four of the 52 IA sectors made positive ground in the first quarter of 2022.

The straggler was the IA European Smaller Companies sector, which fell 13.4% as the already less-liquid part of the market was hit for its geographic proximity to the war and its regional reliance on Russian gas and oil. All of the IA Bond sectors lost ground, with the worst being the IA Global Emerging Markets Bond Hard Currency sector, down 7.61%.

Turning to UK bonds, the IA UK Gilt sector fell a significant 7.29%, reflecting the longer duration of the government bond market. The IA Corporate Bond sector benefited from structurally lower duration in the quarter, falling a comparatively modest 5.57%.

Rob Burdett, head of the multi-manager people team at BMO Global Asset Management (EMEA), part of Columbia Threadneedle Investments, says:

“The number of funds consistently achieving top returns fell dramatically in the first quarter of 2022 due to the significant impact of the war in Ukraine and the geopolitical impact on resource supply. “In the past three years the Fundwatch survey covers we have seen the impact of several significant market events on funds, with the unprecedented impact of Covid, a return to inflation and the longer-term effects of climate change and related ESG considerations. “The war in Ukraine is the latest in market shocks, with the resulting sanctions having a significant impact on commodities, inflation and interest rates, as well as the impact at a sector level, with knock-on effects for defence and energy stocks. “These crises have caused significant gyrations in financial markets and underlying asset classes, resulting in the lowest consistency figures we have ever seen in the survey.”

Home and away

Liontrust Russia suffered a turbulent quarter with suspension of the fund lasting most of March.

Fund manager Thomas Smith clearly could not hide from the storm and the strategy was down 64%. One manager’s misfortune is another’s luck, and Bosch de Hood, manager of JPM Brazil Equity Fund, found himself with a tailwind in Q1 2022 as resource rich Brazil was in favour after being out in the cold for some time. The fund rose 36%.

The IA Latin American sector topped a table of IA sector averages gaining an impressive 26.5% as the resource-rich region benefited from Russia’s position in the commodity markets being questioned. The IA Commodities and Natural Resources sector (compromising 13 funds) was next best for the second quarter in a row, gaining 13.5% after 7.3% last time around.

All UK equity sectors fell, with IA UK All Companies down 4.9% and UK Smaller Companies returning -13.1%. The IA UK Equity Income sector was by far the best home equity market, with a flat return of -0.04% due to the combination of the typical value style for income funds and a common overweighting of the already large oil and mining sectors in the UK market. The recently rejigged IA Bond sectors all lost ground with the least worst of the bunch being IA USD High Yield Bond falling just 1.75%. Even the IA UK Index Linked Gilt sector fell 6.79%, as duration trumped inflation linking, despite 30-year high inflation prints during the quarter.

The IA Targeted Absolute Return sector returned -1.8% in the quarter, collectively missing its objective over this short period. The 12-month return for the sector is now a dull 1.6%. Looking at the Mixed Asset IA offerings, one might expect a conventional stack with more equity equalling greater loss. However, the impact of duration meant that the sector with the least equity was actually the worst performer.

The IA Mixed Investment 0-35% Shares sector fell 3.8%, followed by the sector with the most equity, IA Mixed 40-85% Shares, falling 3.6%, then the IA Mixed Investment 20-60% Shares at -3.4% for quite a tight range overall reflecting the twin headwinds of equity beta and duration for the quarter.

The IA Global Equity sector fell by 4.8% against a return for the IA Global Equity Income sector of -0.97%.

Have your cake and eat it?

Here we search for funds with good risk characteristics and establish which funds offer the Holy Grail of low risk and high returns. For this purpose, a longer time period is required, so we look back over three years to the end of the quarter. Measured to the end of Q1 2022, yet again no fund achieved the perfect mix of top of the sector three-year returns with bottom of the sector three-year volatility. This mix remains elusive.

The Royal London Sustainable Leaders Trust again featured as one of the best risk/reward combinations, as did Carmignac Portfolio Patrimoine, but LF Ruffer Total Return has the best mix of all with second-percentile returns and 98th percentile volatility. The middle ground is becoming a crowded place – to achieve long-term excellence patience is a necessity. The three years this survey covers have been extraordinary for the real world and this has caused significant gyrations in many financial markets and underlying asset classes. From these chaotic conditions some new performance trends may emerge, though the impact of this quarter on consistency of returns and volatility of funds may continue for some time.

See also: Investment Funds for investors wanting access to FTSE 100 companies

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