Number of funds delivering top-quartile results rises

More funds are delivering top-drawer returns as inflation continues to ebb at cash savings. Here are the top performing fund sectors

Man raising his fist in celebration at a graph showing rising prices
(Image credit: Getty Images)

More funds are achieving top-quartile returns according to the latest Columbia Threadneedle Investments FundWatch survey.

The Q2 2023 FundWatch survey found that 27 (2.1%) out of the 1,286 funds achieved top-quartile returns over three years to the end of Q2 2023. 

This number is considerably higher than the same period last year which registered four funds (0.35%) on the same measure. 

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Households have been grappling with high inflation and rates below inflation from regular savings accounts, ebbing away at potential returns.

Kelly Prior, investment manager in the multi-manager team at Columbia Threadneedle Investments, says investors must carefully consider what to do with cash in order to maximise returns.

She says:  “While economic growth trumped stubborn inflation and higher interest rates in the second quarter of the year, we are at multi decades of high-interest rates in most major and minor economies of the world. It is generally accepted that it takes around 18 months for the impact of interest rates to have an effect on the real economy. As the first hike in the UK was in December 2021 and in March 2022 for the Federal Reserve in the US, investors should be thinking about when this will have an impact, and where.

“Against the backdrop today, cash has become a viable asset class, however this is not the automatic phenomenon that many assume, particularly as financial institutions are holding back in passing on rate increases,” she adds.

Top performing sectors

The Investment Association (IA) UK Smaller Companies sector was the top performer for the second quarter in a row, with one in 10 funds (9.3%) achieving consistently top quartile returns over three years. The sector includes funds which invest at least 80% of their assets in UK equities of companies which form the bottom 10% by market capitalisation.

This was followed by the IA Japan sector with 7.4% of funds. 

On the flipside, the IA UK All Companies, IA Strategic Bond and IA Global Mixed Bond sectors failed to have any funds with consistently top quartile returns in the three consecutive 12-month periods, and the IA North American sector only had one fund, the Artisan US Value Equity which met the mark.

The survey showed that the number of funds with a three-year track record in the 12 main sectors in the IA UK universe has been on a steady rise since the second half of 2021 when there were 1,046 funds included. There are now 1,286 funds in the universe, a 12% rise. The vast majority of these have been in funds classified in the IA Global sector, which has risen from 199 to 313, while the number of funds in all three IA UK equity sectors has fallen.

UK sectors struggle

While consistency in three-year fund performance improved, only 20 out of the 57 IA sectors made positive ground in the quarter. 

Against the backdrop of stubborn inflation and higher interest rates, all three IA UK sectors struggled in Q2 2023, with the UK All Companies falling the least at -0.8%, IA UK Smaller Companies sector was the next best losing -1.4%, and the IA UK Equity Income the worst losing -1.7%. 

UK bonds also faltered in the quarter with the change in prospects for interest rates and persistently high inflation causing the IA UK Index Linked Gilt sector to fall -8.8% followed by the IA UK Gilt sector losing -5.6%. 

Across the board, equities have been shunned by savers and investors, with UK households holding less than 4% of their financial assets in shares, according to an analysis by the Centre for Policy Studies (CPS).

The think tank says retail investors control just 21% of UK assets under management, the lowest percentage in Europe. In contrast, around 36% of household financial assets in the US are in equities.

There’s a good reason why savers may consider becoming investors, with an estimated £113 billion in savings accounts being lost to inflation over the past year, according to an analysis by AJ Bell.

“Although some of that money will have been in fixed-rate accounts earning higher interest, a large proportion will also have been in accounts earning zero or minimal interest. We know that £250bn of savers’ money is sitting in accounts earning no interest, with that money alone losing £18 billion in real terms,” says Laura Suter, head of personal finance at AJ Bell.

In stock markets over the past 12 months, the FTSE 100 delivered a total return of 7.5% months, while the S&P 500 handed investors a similar return of 7.3% - rates not quite high enough to overcome inflation, but certainly more positive than rates offered by hush-street banks.

Investment trusts have also caught the eye this year, with dividend-dealing trusts gaining attention alongside specialist emerging-market offerings.

“As is so often the case in investing, being active can make all the difference to the outcome you achieve,” adds Columbia Threadneedle’s Prior.

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Tom Higgins

Tom is a journalist and writer with an interest in sustainability, economic policy and pensions, looking into how personal finances can be used to make a positive impact. He graduated from Goldsmiths, University of London, with a BA in journalism before moving to a financial content agency. 

His work has appeared in titles Investment Week and Money Marketing, as well as social media copy for Reuters and Bloomberg in addition to corporate content for financial giants including Mercer, State Street Global Advisors and the PLSA. He has also written for the  Financial Times Group.

When not working out of the Future’s Cardiff office, Tom can be found exploring the hills and coasts of South Wales but is sometimes east of the border supporting Bristol Rovers.