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Against the odds: funds that sailed through the last decade to top the charts

By James Hoey

Updated on Monday, 8 October, 2018

Lehman Brothers collapsed a decade ago. It was a key milestone in the global financial crisis, teaching investors a painful lesson that nothing is too big to fail. A lot has happened since then and anybody you ask will tell you it’s been a tough decade all round, both on political and economic fronts. In addition to the global financial crisis, the period also witnessed the European debt crisis which has had a significant knock on effect for the countries in Europe. Political events such as the Brexit referendum in 2016 led to further uncertainty in the region.

Despite the negativity, the last ten years has also provided opportunities; to buy stocks at the bottom and to benefit from what we now know to be the longest bull market run in history. Using our extensive fund data, we have used this as a chance to assess the market over the last 10 years and see which the best performing sectors and funds were, and why. We have also drawn on the expertise of FE’s research manager, Charles Younes, to do this.

What does the data say?

On a sector basis, FE data shows that from the IA universe, smaller companies and technology sectors have fared well over the past decade. A total of eight sectors achieved a first quartile ranking within the IA universe, with four of those being smaller companies sectors, namely: IA Japanese Smaller Companies, IA North America Smaller Companies, IA UK Smaller Companies and IA European Smaller Companies. This might seem surprising to some given the riskiness associated with smaller companies.

Another feature of the last decade has been the significant rise and impact of technology-disrupting companies known as the FAANGs (Facebook, Apple, Amazon, Netflix and Google). Not surprisingly, the IA Technology and Telecommunications topped the sector list having achieved a top quartile ranking over the last 10 years, clocking a total return of 348%. It is also the only sector in the IA universe to achieve either a first or second quartile ranking consistently (year-on- year) over the 10-year period.

We asked our research manager, Charles Younes for his thoughts: “In the last 10 years central banks have injected a significant amount of money into financial markets, creating a friendly market environment for investors with a high-risk appetite. So, it is not surprising to us that the riskiest assets have outperformed – in this case equities and smaller companies.”

Top performing sectors ranked in the top quartile of the IA over the last decade.

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Which funds have been most consistent?

Another interesting finding from our analysis was that just 11 funds from the IA universe have achieved a first or second quartile ranking year on year over the last 10 years. Charles Younes explains why this might be the case: “It was not an easy ride from the lowest point in 2008, which explains why only a small number of funds have managed to outperform their sector peers every year for the last decade. The markets have been quite volatile and there have been significant market rotations around macro-economic events such as the European debt crisis, the Chinese slowdown and the Brexit referendum.”

The 11 funds to achieve a first or second quartile ranking year on year over the last decade.

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The importance of stock selection

Our data further shows that regardless of a fund’s performance, the ability of a fund manager to generate excess returns can be gauged by comparing the fund’s returns to its sector peers. For example, FE data shows that of the 23 smaller companies and technology & telecommunications funds to achieve a top quartile ranking over the last 10 years, eight have delivered an excess return of 175% or more above their sector average.

This shows that even in strong performing sectors, a skilled manager can add further value by picking the right stocks.

The eight funds (smaller companies sectors & IA Technology & Telecommunications) to outperform their sector by over 175% over the last 10 years.

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FE Alpha Manager Ratings 

Of the eight outperforming funds listed in the table above, four of them are managed by FE Alpha Manager-rated fund managers. The FE Alpha Manager Rating is a quantitative rating that distinguishes the top UK fund managers based on alpha generation and outperformance across their career history, including all funds they have managed, and places worked. Only the top 10% of the managers receive this accolade, representing those who are the very best of the best in the industry.

For more information, please contact us.