Here are the fund sectors with the highest proportion of top-performing funds over the past three years.
The Investment Association’s (IA) North American sector boasts the highest proportion of top-performing funds over the past three years as tech stocks propelled US markets, according to the latest Multi-Manager FundWatch survey from BMO Global Asset Management.
The sector saw 7% of its funds consistently delivering top-quartile (in the top 25% of the sector) performance over three consecutive 12-month periods, while 26.7% achieved above the median return for the sector, the highest of 12 sectors the report analysed. This is the third quarter in a row that the North American peer group has topped the table. Within the sector, the £5 billion Baillie Gifford American fund was the standout performer, benefiting from its growth bias and heavy exposure to Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA).
At the bottom of the league, in contrast, was the strategic bond sector, which has no top-quartile funds over three consecutive 12-month periods. The sector was bottom in terms of the number of funds that have produced above median returns, with only one in 10 funds achieving this target. At the individual fund level, TB Guinness Global Energy struggled the most owing to the “malaise” in energy-related areas.
BMO’s analysis also revealed that the total number of funds achieving consistent top-quartile returns over three years at the end of the third quarter in 2020, fell to 4% versus 5% in the previous quarter.
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Riskiest and safest funds outperform
Overall, in the first nine months of this year, 19 out of 39 Investment Association sectors made positive gains, with both the riskiest and the safest assets outperforming, including long-dated bonds, technology and small-cap equity. This could have been driven by the same theme of “lower for longer” interest rates, the report suggests.
The IA Japanese smaller companies sector stood out with a 10% gain in the third quarter, while all corporate bond sectors made positive returns, with high-yield funds on average up 3.2%.
The global equity sector returned 4.2% in the quarter versus 1.5% for global equity income, due to the reduction in company dividend payments across the market. The difference year-to-date between the two sectors is a negative return of 4.7% for global equity income versus a positive return of 5.1% for global equity.
Of the UK equity sectors over the third quarter, IA UK smaller companies was the best performer, gaining 5.3%, although it is still down 11.7% in total over the year so far. In fact, four out of the eight top sectors were small-cap equity focused.
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Look for hidden gems
“The US has been the standout so far this year, and this is reflective of the IA North American sector securing the highest proportion of funds to achieve top-quartile and above-median returns consistently over this period,” says Kelly Prior, investment manager in BMO Global Asset Management’s multi-manager team. “This comes as no surprise, with big tech stocks making up some of the biggest drivers of the US market rally.”
She also points out: “In contrast, the IA strategic bond sector has faltered somewhat, failing to record any consistently top quartile performers over this period. This is perhaps a reflection of the breadth of the mandates for the managers, with little gains in spread relative to a long-duration strategy in recent times.”
Prior adds that there are some “hidden gem” funds to be found that have performed well in challenging markets, if investors do their research.
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