Why five-year performance is crucial for picking a fund to buy

When looking at what actively managed fund is right for you a key factor is the long-term performance of the portfolio itself, and the team behind it.

‘Long-term’ is always prescribed as the ‘ideal’ investment time horizon and this usually equals at least five years, because the longer amount of time you give your money to work, the more chance you have to ride out the inevitable bouts of volatility along the way.

While past performance is no guarantee of future returns, a five year time horizon should be long enough for the fund to have gone through at least one market cycle – i.e. a pattern of growth, decline and recovery – and have its principles tested.

Paul Angell, Head of Investment Research at AJ Bell, said our Investments team aim to ideally judge an actively managed fund over rolling five-year rolling return periods before buying into it.

“The longer the time period the more you eliminate luck,” he said.

“The more you can identify skill and consistency. This doesn’t mean that an older fund is better necessarily, but it means that you can build your research process with stronger convictions.”

Hunting for consistency

Angell pressed for a rolling return over cumulative as well, as this gives a more comprehensive look at a portfolio’s consistency of performance.

Most fund factsheets will show cumulative total returns, which shows the total change in an investment value over a period of time. So, if you went from point A to point B.

This is still a useful data point but rolling returns gives an extra level of insight into a fund’s long-term performance.

It measures the average annualised performance of a fund over multiple overlapping periods, rather than between two fixed dates. By continuously shifting the investment timeframe, rolling returns provide a more comprehensive view of a fund’s consistency, long-term performance, and risk across different market conditions and economic cycles.

Sometimes though, a portfolio might have only been up and running for three years or even less. That doesn’t mean that there’s no value in those performance data points, it just means that it’s not giving you as full a picture.

In this case, one thing Angell’s team also does is to compare the fund’s performance versus an appropriate thematic index, as well as its formal benchmark and its average peer.

Most funds tend to hold a particular style bias, growth or value being the top two, but if you are a global value fund your benchmark may be the MSCI AC World Index, which includes both growth and value stocks.

To help assess the shorter time frame, Angell’s Investment Research team will look at the available performance data versus a more specialist index, say the MSCI ACWI Value index, to cut out the growth stocks skewering the data set.

This is fairly involved, often requiring specialist data feeds, and not something the average DIY-investor would be able to easily replicate.

But, in investors’ own research, Angell said they could use a handy trick to circumnavigate forking out £30,000 a year for their own Bloomberg terminal; that is, doing the same comparison but with a thematic ETF instead of the specialist index.

“In some ways, this could be better than the index because the ETF fees can give a more direct comparison to the end take-home versus just the benchmark,” Angell said.

Same process works for a fund manager

The same analysis can be applied to a fund manager, especially if they change jobs, although it could take a bit more work.

The lead/named fund manager is often crucial for delivering an investment thesis, even though all firms will stress that during any team changes, the process will remain intact.

We previously looked at why it matters if a fund manager retires or quits, taking the 2024 example of when value veteran Ben Whitmore announced he was leaving Jupiter Asset Management after 18 years to set up his own firm – Brickwood.

JO Hambro's Alex Savvides came in to pick up the mantle of Whitmore’s Special Situations fund after 16-years running his own rival portfolio. When this changing of the guard happened, the AJ Bell Investments team removed Whitmore's former fund from its model portfolio solutions (MPS) because they anticipated changes in process and implementation to adhere to Savvides’ preferences.

Indeed, the Jupiter fund was renamed the UK Dynamic Equity strategy upon Savvides arrival and if applying a five, or even a three-year minimum time period, it could be tougher for an investor to build conviction, even though the fund has an almost 20-year track record, because the manager running it has only been there a short time.

“You want to see the manager and their ideas and decision making being tested,” Angell said.

“As with anything in life, the longer the better for taking out luck and identifying consistency.”

“The longer you know someone, or something, the more you trust them. But there are ways to build conviction quicker in fund managers with shorter time periods, if necessary.”

In this case, given the similar investment style, investors may want to ‘stitch’ Savvides’ performance as a manager at his former firm to now.

This is a tad tricker Angell acknowledges, but it is a good way to assess if the investment style holds up over more market cycles.