Lipper’s Moeller: Last year’s fund winners may prove long-term losers


Looking to last year’s investment “winners” and “losers” is of limited use, as we examine our portfolios and cast an eye on the annual performance league tables.

Such comparisons are of limited use in analysing the relative worth of an investment, and if anything they should form only a small component of much deeper and multi-period analysis. Not only are mutual funds generally a medium- to long-term investment vehicle, but fund managers rarely manage money on a one-year time horizon, short-duration bond funds and money market funds aside.

Similarly, while many fund managers might have a year-end performance point for establishing their remuneration, it is unlikely that one-year performance constitutes a material or exclusive component of their bonus calculation.

The difficulty of evaluating funds on a one-year metric can be revealed by examining funds within popular Lipper global sector classifications for the calendar year 2015 and then looking at those same funds for the one-year period ended December 2010.

Corporate bonds

There were 19 funds with a five-year track record in the Lipper Bond GBP Corporate sector with first-quartile one-year performance as of December 31, 2015. Of those, nine appeared in the first quartile for the same period ended December 31, 2010. Morgan Stanley Sterling Corporate Bond, for example, had a one-year first-quartile performance of 0.2 per cent as of end of 2015, against the sector return of -0.2 per cent, but it returned a fourth-quartile 6.0 per cent, against the sector return of 8.2 per cent, for 2010. Similarly, Jupiter Corporate Bond returned a first-quartile 0.3 per cent for 2015 but a third-quartile 7.6 per cent for 2010.

In the Lipper Bond EUR Corporate sector there were 38 funds with a five-year track record that had first-quartile one-year performance as of end of 2015. Of those, 16 funds had first-quartile performance for the one-year period five years earlier. The best performer of this group for 2015 was Anaxis Bond Opportunity, with a negative 4.0 per cent, against the sector average return of -5.6 per cent. This same fund returned a third-quartile outcome for 2010 of minus 0.2 per cent against the sector’s 0.1 per cent.


In the Lipper Equity Europe sector there were 212 funds with a five-year track record in the first quartile for one-year performance in 2015. Of these, 97 funds achieved first quartile performance in 2010 and 25 of them appeared in the fourth quartile.

In the Lipper Equity US sector there were 440 funds with a five-year track record in the first quartile for one-year performance to December 31, 2015. Of these, only 155 funds appeared in the first quartile for the one-year period five years earlier, and 81 of them appeared in the fourth quartile. Of the ten top-performing US funds for 2015, five were in the first quartile five years ago.

UK equities are particularly prone to the calendar-year league table analysis. Income funds are some of the largest and most popular in the UK among investors and advisors alike and are regularly quoted in one-year analyses.

There are 20 UK equity income funds with a five-year track record that appear in the first quartile for one-year performance to December 31, 2015. Of these, only seven received the same accolade five years ago. Santander Equity Income returned a first-quartile 12.5 per cent against a sector benchmark of 4 per cent for 2015, but it was entrenched in the fourth quartile for 2010.

Market favourites Invesco Perpetual High Income and Invesco Perpetual Income returned first-quartile performance of 9.3 per cent and 8.4 per cent, respectively, for 2015, but they were both fourth-quartile funds for the year ended December 31, 2010, with 11 per cent and 10.3 per cent, respectively against a sector return of 12.9 per cent.

Neil Woodford’s new launch, CF Woodford Equity Income, came out of the blocks very strongly with one-year first-quartile performance of 15.9 per cent for 2015. It will be interesting to see how Woodford is faring in five years’ time.

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Sectors and Styles

The same analysis can be applied to sectors, fund classifications and styles. Most of us are familiar with the colourful poster on many office walls showing which asset class “wins” in each calendar year. There is, of course, no discernible pattern to this. Making asset allocation decisions on the basis of the asset class that performed well last year is certainly a rules-based methodology, but it is unlikely to bring much joy in return outcomes.

The active-versus-passive debate has perhaps never been more pronounced than it has been in the past few years. Acolytes in both camps can utilise short-term figures to claim a victory in style.

Last year can be said to have been a good year for active UK managers. In broad-based indices, excluding small-cap trackers, the majority of the first- and second-quartile funds for 2015 were actively managed. The highest ranked broad-based tracker fund – Allianz UK Index – appeared at the top of the second quartile five years ago, with many big active names below it—not such a good year for active then.

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Longer view

One-year calendar performance is an interesting metric to provide a snapshot of fund rankings. However, such rankings often provide little more than a good headline. It is much more relevant to consider fund performance over longer periods and in terms of risk. If we are generous, looking at the sectors above, only about 50 per cent of first-quartile funds in any given one-year period held that rank five years earlier.

There are two exceptions to the value of one-year data. The first is when a fund launch occurs with a fund manager who has an established pedigree elsewhere and carries the identical fund management process with them. The second is when you analyse a fund over multiple rolling periods, say quarter to quarter. This allows an investor to build up a crucial picture of consistency.

Thomson Reuters maintains the Lipper Leaders scoring system, which allows investors to compare various performance metrics for like-for-like investments over longer periods of time. Other data providers have similar types of rankings. Whether it is leaders, stars or crowns, investors should at least consider risk-adjusted-return metrics over multiple three- or five-year periods to best understand a fund’s performance profile.

A year as defined by the vagaries of the Gregorian calendar provides an interesting punctuation point for us to evaluate many things. For our investments, however, the end-of-year performance league table should be given but a cursory glance.

Jake Moeller is head of UK & Ireland research at Thomson Reuters Lipper.


Key takeaway: The two exceptions to the value of one-year data are when an established fund manager launches a fund with a management process that is identical to a previous one and when you analyse a fund over multiple rolling periods.