UK fund winners in market recovery were biggest losers in sell-off

Eight of the 20 best funds since last April were among the 20 worst performers during the sell-off. 

UK funds that fell the most during the Covid-19 sell-off have been among the biggest winners of the market recovery that has since taken place, research by interactive investor has found.

Using FE Analytics, we looked at how funds in the Investment Association (IA) UK All Companies and UK Equity Income sectors had fared over two time frames: the first quarter of 2020 and from 1 April 2020 to 20 May 2021.

Since 1 April 2020, UK funds have posted strong gains. Over this time period, the IA UK All Companies and IA UK Equity Income sector average returns are 47.5% and 42%.

When mixing together both sectors, the top 20 funds have returned between 77.8% and 114.1%.

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But it is important for investors to be aware that many of these top performers did not cover themselves in glory during the heavy market sell-off in the first quarter of 2020. Eight of the 20 funds were in the bottom 20 performers over that three-month period. 

In total, there are 342 funds when combining the IA UK All Companies and IA UK Equity Income sectors.

VT Cape Wrath Focus is the second-best performer since last April (up 110.6%), but it was the worst-performing fund in the first quarter of 2020, in 342nd place and declining by 44% over that period.

In fact, the five worst-performing funds in the first quarter of 2020 are among the top 20 best performers since 1 April 2020. The other four funds are: ASI UK Unconstrained Equity, Schroder UK Mid 250, Aviva UK Listed Equity High Alpha and Thesis Stonehage Fleming Opportunities.

The other three funds in the bottom 20 performers were Consistent Opportunities Unit Trust, TB Saracen UK Alpha and Unicorn UK Growth. 

Since 1 April 2020, UK funds have been in recovery mode, but only those investors who were brave and fortunate enough to have bought at the bottom would have made big returns.

Investors who have been investing in UK funds from 1 January 2020 onwards, which factors in both the sell-off and subsequent recovery, will in most cases have made a small gain or a small loss. Over this period, the average fund in the IA UK All Companies sector is up 3.8% and the average fund in the IA UK Equity Income sector is down 0.5%.

From the start of 2020, the five worst-performing funds during the sell-off have all outperformed the average fund due to their strong recoveries. Thesis Stonehage Fleming Opportunities is up 19.3%, VT Cape Wrath Focus is up 12.3%, Aviva UK Listed Equity High Alpha is up 9.2%, Schroder UK Mid 250 is up 8%, and ASI UK Unconstrained Equity is up 6.4%.

How top 20 funds since last April fared during Covid-19 market sell-off

Source: FE Analytics. *Data from 1 April 2020 to 20 May 2021. 

When funds lose value, more ground needs to be made up

In each case being 30% or 40% down meant the fund needed to post bigger gains to get back to even. A fund that is 30% down (an investment of £1,000 declining to £700) needs to gain 43% to recover. A fund that is 40% in the red (an investment of £1,000 declining to £600) needs to gain 67%.

The data serves as a reminder that when it comes to funds or investment trusts, investors need to look under the bonnet to gain an understanding of the investment style, strategy and risks involved.

As the figures show, it has been a roller coaster of a ride for investors in any of the 20 funds and those who lost their nerve and sold in last year’s sell-off will have made a sizeable loss.

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A number of the 20 funds invest in mid-caps and small-caps, which in the first quarter of 2020 fell harder than shares in large firms, such as those in the FTSE 100.

Funds that either have a large amount of exposure to, or invest exclusively, in mid-caps or small-caps, will not by their nature limit losses in bear markets. Therefore, to reduce risk investors could look to pair a smaller company fund with a more defensive fund that favours larger companies.   

On the whole, smaller-sized businesses are more domestically focused than their larger peers and are therefore more in tune with the health of the economy they operate in. This means that during times when a country’s economic growth is sluggish or contracting (which in turn makes investors become more cautious), smaller companies fall out of favour.

This is the trade-off that investors have to accept in pursuit of the potentially higher returns on offer over the long term. Smaller companies are riskier than larger businesses and more vulnerable to investor sentiment quickly turning sour.