Investments  

UK funds have worst year since 2007

UK funds have worst year since 2007

Funds investing in UK companies have been hit by the worst year since 2007, as investments have suffered at the hands of turbulent markets.

Data from Morningstar indicates just 21 per cent of the UK’s actively-managed funds outpaced the markets this year.

This is a steep decline from last year when 72 per cent outperformed the markets.

Article continues after advert

Many British companies have fallen victim to the UK’s decision to depart from the European Union, with domestically-focused companies being hardest hit by hesitant investors.

Data shows that even during 2008, when the financial crisis shook the markets, 36 per cent of UK funds outperformed.

In 2007, outperformance slumped as low as 32 per cent.

Jonathan Miller, UK director of manager research at Morningstar, said there are two main reasons that explain this year’s underperformance: An overweight position in smaller companies, which suffered during the Brexit vote, combined with a large cap surge in the week or so after the vote. 

Mr Miller pointed to the 11 per cent outperformance from large caps versus mid caps in June, which is the largest monthly relative gain since the mid cap index was launched around 25 years ago. 

“That one month goes a long way to explaining the outcome we’ve seen,” he said.

Philip Milton, managing director of Philip J Milton & Company, said these figures were “amazing” in some respects, saying this has been a "phenomenal year" for his clients.

He said fund groups “believed their own spin” about the fears for 2016, frightening themselves over the Brexit vote uncertainty, and ended up holding too much in cash and secure assets, rather than investing in UK stocks with overseas’ earnings.

“As good, old-fashioned fundamental value-based investors, we bought more and more of the sectors as the prices fell,” Mr Milton said, adding his overweight in non-sterling assets gave portfolios a dramatic boost as the values rocketed.

Peter Lowman, chief investment officer at the Investment Quorum, said: “Indeed if you look at the top performing fund to the worst over a rolling one year there is over a 50 per cent difference in performance levels.”

However, he said it is important to look at performance over a longer time frame than a year.

“As asset allocators we do have exposure to UK-focused funds; what is very clear is that we are entering a new paradigm, and what you held in the last decade, might not necessarily work over the next. 

“Certainly we are now nearer the end of loose monetary policies, and low inflation, and over the next few years we will experience higher interest rates and inflation coupled with a change of political demographics.

He said it is likely stock pickers will be “back in vogue” over the next few years, with concentrated portfolios holding between 30 to 40 stocks.

Alex Reynolds, IFA at Advies Private Clients, said: “Brexit has made investing more difficult this year and perhaps there have been too many bold calls on what might happen to markets post Brexit which never materialised.