Number of funds delivering top quartile returns over three years drops to record low: Columbia Threadneedle Investments Q3 2022 FundWatch survey

by | Nov 3, 2022

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The continued volatility in markets, rising interest rates and inflation as well as geopolitical noise has led to the third consecutive record low number[1] of funds delivering top quartile performance over a three-year period, as at Q3 2022, according to the latest Columbia Threadneedle Investments Multi-Manager FundWatch survey.

Superseding the first two quarters of 2022, only three (0.26 percent) out of the 1174 funds achieved top quartile returns over three years to the end of Q3 2022. This is the lowest proportion of funds recorded since the survey began in 2008 and follows the previous record lows set in Q1 2022 with five funds (0.45 percent) and four funds (0.35 percent) in Q2 2022, which consistently achieved top quartile returns.

The three funds achieving top quartile performance in this quarter were each from different IA sectors, Waverton Global Strategic Bond (IA Mixed Bond), Wellington Climate Strategy (IA Global Equity) and Liontrust UK Micro Cap Fund (IA UK Smaller Companies). These top funds differ to those achieving top quartile returns in the previous quarters, showing that there is no trend of note and that the dominance of one style of investing, such as growth or value, reflects a narrow market.

Lowering the consistency rate to above median returns in each of the last three 12-month periods, saw a marginal uptick this quarter, with 60 (5.1%) out of the 1174 funds reaching this feat compared with 58 in the previous quarter. Of the 12 main IA sectors, 11 contained funds that met the less demanding above median consistency hurdle. The most consistent sector on this measure was the IA £ Strategic Bond sector with 12.2 percent, followed by IA UK Smaller Companies with 10.6 percent. On the flipside, the UK Equity Income sector failed to have any funds that met top or median quartile returns this quarter.

A tough time continues for UK assets

In the third quarter of 2022, 22 of the 52 IA sectors made positive ground, the strong dollar was a key factor in this with the vast majority of the top performing sectors being in USD Bond, Global Equity linked or Emerging Markets.

Against the backdrop of recent market volatility and subsequent sell-off, the bottom four worst performing sectors were UK assets, either in Gilts, Corporate Bonds or Equity. All UK equity sectors fell in Q3 2022 with the IA UK All Companies sector down 5.1 percent, IA UK Smaller Companies sector was at the bottom of the table for UK equities overall, returning -9.3 percent while the IA UK Equity Income sector fell 6.4 percent. It was not a pretty quarter for UK bonds, the IA UK Index Linked Gilt sector fell 13.1 percent, having already dropped -20.2 percent in Q2 of this year. The IA UK Gilt sector was close behind falling 12.6 percent with the IA Corporate Bond sector falling 9.4 percent. 

Source: Lipper 30.6.22 to 30.9.22

Kelly Prior, Investment Manager in the Multi-Manager People team at Columbia Threadneedle Investments, comments: “Following the volatility of last quarter, concerns over financial market stability and the UK Government announcing fiscal policy measures triggering a severe negative reaction in financial markets, it is not surprising we have reached another record low in performance this quarter. The intervention of the Bank of England saved worse blushes, but there is definitely work to do to get back some faith in UK assets from here, with Sterling being the most visible and liquid reflection of this. It has been an exceptionally unusual year with quantitative easing coming to an end and the arrival of inflation, alongside the change in rhetoric from the world central banks from accommodative to tightening. There is likely to be more volatility going forward and, much like the recent past, consistency versus the average is likely to remain low. This is a rolling three-year statistic and we are currently in the eye of the storm of change.

“The post Global Financial Crisis environment was one where artificially low interest rates meant growth (generally focused on a small handful of stocks) and passive investing shone. We are in an entirely different regime now, with both inflation and the cost of capital providing a headwind for corporate profitability. This will require greater focus on returns on capital and efficiency that should see good companies and management prosper, with so-called zombie companies finally faltering. Picking active managers and understanding how they do this, rather than just using funds as a factor play, such as growth, value and small cap, is going to be crucial to reap rewards from here.”

Other highlights from the Q3 2022 survey included:

  • The IA India/Indian Subcontinent sector topped a table of IA sector averages in the third quarter, gaining 17 percent due to capital continuing to flow into this high growth area of emerging markets.
  • The IA Latin America and North American Smaller Companies sectors were next best rising 13.8 percent and 7.8 percent, respectively, buoyed by the 8.8 percent rise in the dollar.
  • The IA Targeted Absolute Return sector fell -1 in the third quarter. The 12-month return for the sector is now negative at -3.8 percent.
  • The IA Global Equity sector gained 2.3 percent against a return for the IA Global Equity Income sector of +0.3 percent.

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