How the Most Popular Funds Have Performed in the Sell-Off

The most popular funds are often those which have performed well in the past, but how have these top-sellers held up in the coronavirus sell-off? 

Jonathan Miller 24 March, 2020 | 11:55AM

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While we know that past performance is no guarantee of future returns, investors often have a tendency to flock to the funds which have been the strongest.

Time and again, we see the greatest inflows going to the funds which have recently posted the best returns. But the darlings of recent years can easily become future flops. Styles can go out of favour, funds can get too big to steer, or there can be a switch in the environment that has helped propel performance.

We have looked at the UK-domiciled active funds with the highest inflows over the three years to the end of February 2020, to then understand how the most popular have fared as markets turned sour.

Vanguard's Rise to Power

Vanguard’s LifeStrategy range has taken the market by storm since launch in June 2011. The range comprises five funds, each with a fixed-allocation to a variety of assets. The straightforward diversified, low-cost approach has a pre-set allocation to a host of equity and bond markets, which is drawn-up by the in-house investment team and invests in Vanguard’s own passive funds. The fact that each portfolio is rebalanced daily back to its target exposure means we consider this at a least a partly active strategy.

For example, Vanguard LifeStrategy 60% has that percentage invested in equities and is the best-seller of the last three years. The 40% and 80% equity options also feature among the top funds in terms of inflows over the past three years and all hold a Morningstar Analyst Rating of Gold.

With £4.8 billion of net inflows over three years, the 60% strategy has fallen 16.7% over the two months to March 20, 2020. Sitting in the top half of its peer group during this time, exposure to government bonds have helped as a cushion.

The majority of multi-asset managers we speak to have seen little value in this part of the market, but these bonds have generally shown their mettle in challenging times. Over three years to date, returns for the fund are flat and over five years it sits within the top 5% of funds in its Morningstar category with annualised returns of 3.4%.

Popular Funds Can Outperform

Fundsmith Equity, led by Terry Smith, is the highest selling equity fund with £3 billion of net inflows over the past three years. It has fallen 15.4% over the last two months, which is 4 percentage points less than its index and it sits in the top 30% of its Morningstar category of Global Large-Cap Growth Equity.

With a Morningstar Analyst Rating of Gold, Smith looks for high-quality businesses that will continually compound in value and holds them for the very long term. A focus on quality means he avoids banks and energy names, with the latter notably feeling the brunt of the sell-off. Around 55% of the portfolio is in US equities, which has also helped sterling investors given the extent to which the pound has weakened in recent weeks. Over three and five years the fund is comfortably in the top 5% of its sector; five-year returns to date are still a strong showing of 14.2% annualised.

top sellers

Next up is Baillie Gifford Managed, which is a more common holding for institutional andprofessional investors rather than retail investors. This sits in the Moderately Adventurous Allocation Morningstar Category with equity exposure standing at around 75%, spread widely across developed Western markets as well as into Asia Pacific and Emerging Markets. Names such as Amazon, Tesla and Netflix feature in the top positions, reflecting the group’s growth philosophy, and this is offset with overseas bonds and nearly 10% in cash. It’s 15.7% fall is 2 percentage points less than the category average.

Despite the poor showing of UK equities – and particularly value stocks - over recent years, Liontrust Special Situations has been a strong performer, which has helped its popularity and generated strong inflows. This outperformance has also been displayed over the long-term and remains the case in the market sell-off. The fund’s team approach identifies firms with intellectual property, strong distribution channels, and significant recurring business. It holds a Bronze Rating from Morningstar and is down 27% versus 32.7% for the FTSE All Share index.

The analysis shows that top-selling funds have in fact continued on the path of outperformance during the sell-off. Their active stance has helped and most notably outside of Vanguard Lifestrategy, a lack of exposure to energy, oil & gas and airlines which have all seen dramatic falls. These are further aspects that have proved beneficial to outperform respective indices on the way down.

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.

About Author

Jonathan Miller  is Director of Manager Research, Morningstar UK

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