Take no notice of five-year returns, investors told

Take no notice of five-year returns, investors told

Disregarding the five-year figure goes against conventional wisdom, which suggests that it is fairer to judge a fund manager over a longer the time frame, or several.

Tom Becket, portfolio manager at Psigma Investment Management, said: “Investors should look at three-year performance numbers not five. This is a truer reflection of how a fund manager has faired. Over the last three years we have had a full investment cycle where markets have had good and bad periods and investors have had to mitigate their way through two eurozone crisis.”

The global financial crisis in 2007 and 2008 ravaged thousands of savers’ nest eggs and caught out even the most skilful of fund managers. Banks and retailers were hit hardest, resulting in some share prices halving in size.

However, almost five years on from US bank Lehman Brothers filing for bankruptcy, stock markets have staged a strong recovery. Popular funds staged a comeback, particularly in developed economies such as the UK and US. But it has helped many disguise the poor runs they had in the preceding period. Data from analyst Morningstar shows a wide disparity between five and three-year performance.

For instance, the best performing UK fund since the credit crisis – Standard Life UK Equity Unconstrained – has returned 163.5pc. By contrast, the best fund over three years – Neptune UK Mid Cap – has made 99.9pc. This is more instructive, experts say, because the strong stock market rally in the two years preceding the credit crisis is not reflected in the numbers.

The same is also the case with a number of other funds, for instance the Schroder UK Mid 250 fund, managed by Andy Brough has returned 84.7pc over five years. When the financial crisis numbers are taken out the fund has made a loss of 9.6pc.

Adrian Lowcock, an investment manager at Hargreaves Lansdown, said investors should favour funds which held up strongly during the crisis and have continued to outperform rivals in rising markets, such as Standard Life Investment’s UK Equity Unconstrained and CF Lindsell Train UK Equity.

Experts warned once the full effects of the crisis are expunged from the data, investors will struggle to ascertain how a fund manager performed during the financial crisis.

Mr Lowcock said: “Some of the fund performance over five years looks fantastic but it does not tell the full story, as some of the best performing funds now were some of the worst performers during the crisis.”

Darius McDermott, of fund broker Chelsea Financial Services, said investors should examine a fund’s 2008 performance numbers separately.

“One of the first questions we always ask a manager is to explain how they performed in 2008 because it was such a challenging period,” he said.

“Investors need to assess how a manager has faired in falling markets and also whether they have held their own in rising markets. This means breaking five-year numbers down into smaller time frames.”

Jason Hollands, director of financial advisers Bestinvest, said investors should steer clear of past performance data altogether.

“To select a fund on backward-looking data alone is akin to driving a car at high speed while only staring in the rear view mirror and not looking ahead,” he said.

“If you are a DIY investor, do not underestimate the importance of access to quality research to help you make decisions. Unbiased research, rather than relentless marketing, should be an important consideration when selecting an execution-only broker or DIY platform.”

Free fund performance statistics are available on websites such as Morningstar and Trustnet, as well as on websites of leading brokers.

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