The Harder Funds Fall, the Bigger the Bounce?

The 2008 financial crisis saw some of the greatest fund losses on record, but 2009 delivered staggering returns, showing that investors who bail out in times of crisis miss out on big gains

Holly Black 19 March, 2020 | 9:19AM
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Any market downturn is a nerve-wracking time for investors. Having the discipline to stay the course and not to sell holdings when stock markets are in freefall is incredibly difficult.

Yet analysis of fund performance during the last major crisis suggests that funds which fall sharply during a bear market could bounce back stronger than ever after the volatility subsides.

We looked at the oldest share class of all UK equity funds that were available during the 2008 financial crisis and which are still available to investors today. Of the 197 funds, none achieved a positive return in the worst year of the crisis but, crucially, all posted positive returns the following year as equity markets bounced back.

In fact, some of the funds which endured the greatest falls in 2008 delivered the strongest gains in 2009.

The below table shows the 10 best-performing UK equity funds in 2008. We can see that even the top performer, Trojan Income, was down 12.14% in the year. The fund, which has a Morningstar Analyst Rating of Silver, returned 14.73% the following year.

2008 vs 2009

It’s worth pointing out, of course, that even a strong year of performance might not be enough to erase the losses of a bad year. If you have a £1,000 investment that falls 50% to £500, it has to return 100% to get back to £1,000. That means few of the funds in our list managed to recoup all of their 2008 falls the following year. Indeed, Morningstar analysis shows the length of time it takes for a fund to rise from trough back to peak can vary wildly. 

One fund which did manage this feat, however, was Majedie UK Equity. A £1,000 investment in this fund would have fallen 19.6% to £804 in 2008. However, the following year the Neutral-rated fund returned 32.67% which would have grown the investment to £1,066. The Unicorn Outstanding British Companies fund also would have clawed its way back into positive territory after a strong year in 2009.

While investors would obviously prefer to minimise the losses they endure in any situation, the performance of the weakest funds from 2008 makes for interesting analysis. The below table shows the 10 UK equity funds which suffered the greatest falls in 2008 – all were down more than 45% in the year. However, among this group the returns delivered in 2009 were, in many cases, far superior to those funds which hadn’t fallen as far.

2008 vs 2009

The SVM UK Opportunities fund, for example, lost a hefty 54.87% in 2008 yet the following year delivering a stonking 103%. It’s worth noting, however, that even this incredible performance in 2009 would not have quite put investors back into positive territory overall. A £1,000 initial investment would fall to £451.30 in 2008, and would climb to £916 after 2009.

While there is no way of knowing how far a fund will fall in a crisis, or how long it will take to recover, for long-term investors it is important to bear in mind that a difficult drop can often be followed by a big bounce - and if you sell up at the bottom, you'll miss out on the recovery. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk