Investments: Is big also beautiful for fund investors?

Are the biggest hedge funds really good investments?

TOP FUND managers look after vast sums on behalf of ordinary investors, which means that millions are entrusting them with their future prosperity. The five most popular actively managed funds now hold an incredible £80 billion among them, but size is no guarantee of success.

You should check the performance of all your funds regularly, whether held inside or outside a stocks and shares Isa, because even the best and brightest can miss the mark.

Three of the top five have disappointed in recent years, and only one of these behemoths has delivered super-sized returns. Big is not always beautiful.

The UK’s biggest investment fund is now M&G Optimal Income, which manages an incredible £21.9 billion.

Since its launch in December 2006, it has been run by Richard Woolnough and mostly invests in lower risk government and corporate bonds, plus some stocks.

It is aimed at older investors looking to generate income in retirement. Roughly half the fund is invested in US and UK fixed interest bonds, plus German, French, Spanish and Italian bonds, and over the last five years it has delivered a total return of 27.5 per cent, according to

Woodford claims he will be proved right when the stock market collapses, but investors who blindly followed him have missed out on the recent equity rally.” -Damien Fahy

That is a lot less than you would have got on stocks and shares, for example, the HSBC FTSE 100 Index returned 51 per cent over the same period.

However, this is roughly double the total return you would have got from putting your money into a five-year fixed-rate savings bond instead.

Darius McDermott, managing director at independent financial adviser Chelsea Financial Services, says: “M&G Optimal Income has been solid and deserves its popularity.”

However, he notes that two similar, smaller bond funds have done better over five years, with the £733 million Baillie Gifford Corporate Bond and the £1.6 billion TwentyFour Dynamic Bond both returning around 33 per cent.

Weighing in at second place is Standard Life Investment’s Global Absolute Return Strategies, or GARS, launched in May 2008 and managing £21.1 billion today.

Absolute return funds aim to provide a positive return whether stock markets are falling or rising, by investing in derivatives as well as stocks and bonds.

However, Standard Life GARS has returned a disappointing 15.9 per cent over five years, scarcely better than cash.

The original team behind the fund left to set up what is now the UK’s fourth biggest fund, Invesco Perpetual Global Targeted Returns, launched in September 2013 and now managing £12 billion.

This giant has also proven to be lumbering, growing just 4.6 per cent over the last three years, against 7.6 per cent across its benchmark and 33 per cent growth on the FTSE 100 in that time.

These two funds may do relatively better when stock markets are falling, but have not justified the faith financial advisers have put in them.

Yet another absolute return fund, Newton Real Return is the UK’s fifth most popular with £10.3 billion invested, but has returned an underwhelming 5 per cent over three years.

Again, McDermott says some smaller absolute return funds have done better, such as the £1.4 billion Jupiter Absolute Return, up 10 per cent over three years, and the £489 million Brooks MacDonald Defensive Capital, up 18 per cent.

Patrick Connolly, certified financial planner at Chase de Vere, says absolute return funds are popular because they offer capital protection with stock markets at record highs: “While some do a good job, too many charge too much and deliver too little.”

The most popular choice for those wanting an out-and-out stocks and shares fund is Fundsmith Equity, run by star fund manager Terry Smith.

This global fund weights in at a whopping £13.8 billion, the UK’s third biggest, and it is not hard to see why.

It has returned a blistering 168 per cent since launch in November 2010, more than double the sector average.

However, Fundsmith is more than 60 per cent invested in the US whose stock market is at an all-time high, and would be vulnerable if the US crashes.

McDermott tips two smaller global equity funds, the £1.1 billion Rathbone Global Opportunities, up 121 per cent over five years, and the £892 million Fidelity Global Dividend, up 93 per cent.

There is danger in putting your trust in a big-name fund, as it is difficult to outperform the market year after year.

Even the big star names can suffer. Neil Woodford, perhaps the best-known investment manager of the last 20 years, has struggled lately.

His £8billion fund CF Woodford Equity Income actually fell over the last year, despite global stock markets soaring.

Woodford has argued that stock markets are overvalued and is refusing to take on too much risk, but that is little consolation today. founder Damien Fahy says investors should never place blind faith in a fund or manager and Neil Woodford is a great example of that: “Woodford claims he will be proved right when the stock market collapses, but investors who blindly followed him have missed out on the recent equity rally.”

Size isn’t everything when it comes to choosing an investment fund, and nor is reputation.

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