Following the crowd doesn't lead to the investment gems

Jake Moeller

Jake Moeller

The ‘wisdom of the crowd’ might for some be a reassuring phenomenon that can be readily applied to mutual fund investing.

There is some sense to this: most investors are not fund experts, so a large and popular fund – in the absence of any other information about it – has probably had its tyres kicked enough times to act as some type of warranty.

There are many reasons for a fund or a fund house to be popular. Brand recognition, the effectiveness of its sales team, and its portfolio range are key, as is availability on platforms and, unsurprisingly, historical performance.

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However, it is also true that many approved lists and guided architecture platforms have a very similar feel about them.

Clearly, there are a number of the same funds that are appealing for a large number of gatekeepers – so those ‘tyres’ have probably been diligently researched.

For better or worse, and probably for some of the reasons above, there is a high degree of investor concentration across funds in the UK.

Because of the vagaries of fund passports and domiciles, it is difficult to summarise regional fund markets precisely, but Thomson Reuters Lipper data suggests the UK fund market consists of 3,800 funds (if you include closed funds with remaining assets), containing around £1.2trn of assets, as of April 30 2017.

Considering these aggregated totals, concentration is clearly revealed. The largest 30 funds contain one-fifth of the UK’s assets under management. 

Ranking all of these funds by April 2017 assets under management, 50 per cent of the total UK asset base comprises only around 170 funds.

The debate on the merits or otherwise of ‘blockbuster’ funds is fodder for another article, but it is undeniable that the likes of Standard Life Investment’s Gars, M&G Optimal Income, Invesco Perpetual High Income, Newton Real Return, and Woodford Equity Income have become names familiar to anybody in financial services.

We can take a snapshot of how the more popular funds are performing by considering the monthly rolling one-year performance deciles over five years, to the end of May 2017, and take the average of these to ‘score’ each fund – where 1 is an excellent first-decile average and 10 is a poor 10th-decile average.

Of the 30 top funds by assets under management in the UK, five don’t have the requisite performance to score, although what data they do have scores them reasonably well. Seven are index funds – none of which score above 5 – and only three of those remaining vehicles score 4 or higher.

This suggests that the recent performance of the most popular funds in the UK currently may not justify their investor commitment.

Such analysis has considerable limitations, since individual investor experience differs according to entry point. But it certainly supports the more rigorous studies of fund size, which suggest that – for mutual funds at least – the gems may not always lie where the crowds are headed.