These 20 Actively Managed Investment Funds Are The 21st Century’s Star Performers Over 20 Years
With equity markets performing so well over the last decade passive index-tracking investment funds have seen a huge rise in popularity. Benchmark indices have performed so well during what is now the longest bull market in history, the post-international financial crisis recovery started in March 2009, it has been particularly difficult for active fund managers to beat them. In fact, Morningstar data shows that only 23% of all active funds beat the average returns of their passive rivals over the 10-year period ended June 2019.
But it is important to keep in mind stock market conditions over the last 10 years have been unique. The recovery from a crash that saw around 50% wiped from the value of major developed market indices was further fuelled by unprecedented levels of financial stimulus from central banks across the world. Throw in a major shift towards a digital economy, which has fuelled massive value growth in the tech sector. And record low interest rates meaning there has been very little incentive to hold cash or low risk bonds.
Actively managed funds are likely to see their popularity bounce back when stock markets again enter a period of greater turbulence and more regular changes in the cycle from bull to bear markets. When the financial market skies are blue, passive funds do best. They do worst when conditions turn stormy and equity markets hit a rough patch.
But despite the tough conditions for active investment funds and their managers over the last decade, there are still those who have managed to consistently beat their benchmark over not only 10 but 20 years – the 21st century to date.
That’s no mean feat considering the huge economic and technological changes we have seen so far this century. The biggest global financial crisis since The Great Depression, the dotcom bubble, the rise of giant tech, the euro debt crisis, Brexit and China establishing itself as the world’s economic engine and rival to the USA both in terms of the size of its economy and in producing technology behemoths.
Some active investment funds have taken all that in their stride and continued to perform. FundCalibre, the independent online fund research ratings agency, has recently published a list of the 20 UK-based funds that have provided investors with the best returns since the turn of the century.
While there is, of course, no guarantee the same funds will continue to outperform in the future, 20 years is a significant length of time to do well over. It suggests things are being done right in these funds and that they may be worth a closer look by investors.
Let’s take a look at the top twenty and the investments that have powered them to two decades of success.
The UK’s 20 Best Performing Funds Of The 21st Century
Source: FundCalibre/The Times
Over the past two decades, the best performing UK-based and actively managed investment fund by some distance has been the £1.4 billion Marlborough Special Situations fund. It has returned 1205% over twenty years – or an average annual compounded return of 60.25%. After fees, £1000 invested at the beginning of the year 2000 would now be worth £12,055.
Among the fund’s best performing assets have been huge value climbing stocks like Hilton Food Group, which makes food packaging, electronics group XP Power and CVS Group, the veterinary services company. All three have seen their share prices rise by over 500% in the last ten years. But the success of even those three stocks pales into comparison against another of the fund’s holdings – JD Sports Fashion. One of the fund’s top 10 holdings, the sportswear retailer’s share price has grown by a whopping 10,956% in the last 20 years. And that’s within the context of a tough high street trading environment.
The largest sectors in the fund’s holdings are consumer services (26%), industrials (23%) and financials (13%). The fund is managed by Giles Hargreave.
In second place is the £1.5bn Aberdeen Standard UK Smaller Companies fund, managed by Harry Nimmo. It’s returned 9481% over the period. Interestingly, and perhaps not coincidentally, this fund has an almost identical sector weighting to the Marlborough Special Situations fund. It’s also been helped along by holding JD Sports in its top 10 holdings.
3rd place, not far behind the Nimmo’s Aberdeen Standard UK Smaller Companies, is the MI Discretionary Unity fund, which has returned 9429%. It’s a lot smaller than the two funds in first and second spot, with only £47.3 million of capital under management. However, that hasn’t prevented it from delivering stellar returns for its investors. Among its top holdings have been Merlin Entertainments, which owns attractions including Legoland and Madame Tussauds and Macfarlance Group, a packaging company.
Brexit Hasn’t Derailed UK And European Small Caps
Brexit uncertainty’s negative impact on the UK economy is supposed to have hit smaller, UK-centric companies. That that hasn’t prevented a total of 9 funds that invest in the shares of exactly that kind of company from making the top 20 performers over the last two decades. With another handful investing in smaller European companies, including the Barings Europe Select Trust and Threadneedle European Smaller Companies, it’s clear that small caps have delivered strong growth this century.
FundCalibre managing director Darius McDermott commented on the positive returns that many of the top performing funds have earned from investing in smaller companies with:
“..this finding demonstrates that smaller companies have the highest potential for long-term growth. What is particularly encouraging is that the presence of funds such as Marlborough Special Situations shows that good active managers in this space can really add value.”
It is the case that most popular passive funds track major indices that are either only comprised of large caps, or whose weightings are dominated by them. An investment in a FTSE All-Share tracker means only 3.5% of your fund will go into smaller UK businesses, even though they represent 44% of the constituent stocks in the index.
Medium-sized and smaller companies appear to be a good fit with active fund manager. Wealth manager Tilney’s Jason Hollands agrees:
“Small [firms] give fund managers a better chance of outperforming. These stocks are poorly researched by investment banks, so there is greater potential to discover hidden gems.”
“The increasingly popular passive funds [which simply mimic the performance of a stock market index] provide very little exposure to smaller companies.”
Has Exposure To China Been A Winner For Active Investment Funds?
With China posting double-digit GDP growth over the first 8 years of the 21st century, and staying well ahead of most other large markets in the world since, it might be expected that funds with exposure to the country had a good chance of doing well. That is indeed borne out by the top 20 active fund performers rankings. Several of the funds have at least some weighting towards Chinese investments, with 2, Schroder International Selection – Greater China, and the Janus Henderson China Opportunities, fully focused on the region.
On average, funds specifically focused on China have returned 500% over the last 20 years, compared to an average of 368% and 357% from European Smaller Companies and UK Smaller Companies respectively. That data comes from The Investment Association.
What About Developed Markets?
Emerging markets, particularly China, have done well over the past two decades. But developed markets have still outshone them, particularly over the last ten years. U.S. companies have been the star performers, with Wall Street fuelled by record low interest rates and borrowing costs. That has seen major American companies drive up their share prices by borrowing to fund major share buyback programmes.
That’s reflected in a significant presence in the top 20 active investment funds of entrants with a heavy weighting towards Wall Street’s finest. Those include the Baillie Gifford Global Discovery fund and the Skagen Global fund.
Technology Sector Investors Have Done Surprisingly Poorly
Arguably the biggest surprise of the findings revealed by the Investment Association’s sector ratings is that the technology and telecommunications sector was way down the list in 34th place on how sector focused funds have performed this century. Willis Owen analyst Adrian Lowcock puts that down to the consequences of the dotcom bubble bursting at the very beginning of the century:
“We were very close to the peak of the dotcom bubble 20 years ago, when valuations of tech stocks were more extreme than even today. It’s taken a long time for the sector to recover from that period of underperformance, with many funds losing 95% and more in value.”
Will The Next Two Decades Resemble The Previous 2 For Active Investors?
It’s impossible to tell with any certainty but unlikely. We only have to consider how technological developments have changed the economy and seen company fortunes rise and fall over the past 2 decades.
Twenty years ago the internet and digital technology were still very much in their infancy. Many of the biggest companies in the world didn’t exist twenty years ago or were relatively small players. Tesla, the electric car maker that is now the third most valuable automaker in the world wasn’t founded until 2008. What does that mean for traditional carmakers that investors are assigning much lower values to, despite the fact their sales numbers, revenues and profits are still way ahead of Tesla’s?
There are trends we think now will dominate economic, technological and societal change over the next decade or two. The international move towards legalised cannabis for example. Driverless vehicles and other AI-powered new technologies, biotech and nanotech transforming medicine, healthcare and materials. If quantum computing is further developed and becomes commercially viable, that could quickly lead to the largest stride forward in the history of humanity. Renewable energy could definitively overtake the cost efficiency of fossil fuels.
But for now these are all prospects. Trends that may or may not be as influential as today’s analysts believe they will. And there will almost certainly be major developments not yet on the radar, that will have an impact on businesses and economies. Nobody knows what will happen in geopolitics.
For investors, and active fund managers, it will be important to take a diversified approach. Those that are the most successful over the next twenty years will be those quickest to spot both positive and negative trends and act on them, while avoiding impulsive kneejerk reactions. It’s a delicate balance to maintain. But finding that balance is what makes the difference between success and failure as an active investor.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.