Whatever the disclaimers say, much of the investment industry is reliant on past performance. And although running the winners has proved a sensible strategy for the past half-decade, this could be the year to think again.
As Investec’s Andrew Summers pointed out in these pages last week, “we’re happy to move into funds that have had a tough time because it demonstrates a consistency… that has not served them well but will over the next few years.”
There are limits to this philosophy, clearly. You’d be hard-pressed to find any selectors looking to infamous losers such as Manek Growth. But there is a growing interest in asset classes, sectors and individual funds that have underperformed in recent years, at a time when most conventional securities have raced away.
You may argue that it was last year, not this, that was the best time to buy. Emerging market equity indices returned 10 per cent last year, even before the sterling effect is added on. Emerging market bonds did about the same; the MSCI World Financials index rose 14 per cent; the FTSE World Value index and MSCI World Commodity Producers indices each rose 35 per cent.
But trying to time the bottom of the market is a pursuit destined to end in misery, and there is plenty of scope for further returns.
The difficulty for fund buyers, as we detail on the front page of Investment Adviser this week, is in identifying those funds that have produced truly bad performance. By this I mean those that have underperformed in the way you would expect a proper value fund to have done over the past five years.
There is a complication here. After all, some stocks are included in both value and growth indices. Even those at the top of value indices differ wildly: Microsoft, the largest position in the MSCI World Value index, has returned 122 per cent over the past five years. The next largest weighting, Exxon Mobil, is flat over the same period. Stock selection, rather than style drift, may be behind differing returns.
These are issues that fund buyers will need to consider carefully. The difference between the best and worst financials funds, for example, is almost certainly down to stock selection. Here too there’s an argument for looking beyond the best long-term performers. Take Sanlam Global Financial. Over one year, the fund has returned 59 per cent, well in advance of peers. Its five-year annualised returns, however, still lag the bulk of its competition. Correctly judging the merits and minuses of this kind of fund could be the key to success in 2017.
Dan Jones is editor of Investment Adviser