Inflation and interest rates have been perhaps the biggest buzzwords across the financial industry over the past two years and there seems to be no sign of this going away anytime soon.
This week the UK market was rocked by inflation data, which showed a 0.1 percentage point increase in inflation figures for December.
Prices rose 4% for the month on a year-on-year basis, up slightly from the 3.9% reading the month before. On the day, the FTSE 100 lost 1.5% as investors extrapolated the news to mean that the Bank of England would not cut rates as quickly as had been hoped.
Markets are banking on rates to fall as companies have largely enjoyed more than a decade of cheap money in which they could borrow inexpensively to fuel growth. This was abruptly ended post-pandemic as rates have risen sharply, causing a shock to some and leaving the most indebted companies at risk.
The phenomenon has impacted all parts of the investment industry and caused major headaches for even the most veteran of fund managers. Take FE fundinfo Alpha Manager Nick Train for example.
Trustnet analysis shows that all of Lindsell Train’s funds have been in the bottom quartile of their respective sectors over three years, with the exception of the WS Lindsell Train UK Equity fund, which is in the third quartile.
Train admitted that he was disappointed by the figures.
Yet he tends to avoid poor companies with lots of debt – the type one might expect to struggle in the current climate. Instead, he invests in quality companies that are steady compounders. Some refer to these stocks as ‘bond proxies’ – low risk companies that pay good dividends and have single-digit growth.
These companies were turbocharged in the era of cheap money and low rates as bond investors had to move up the risk spectrum to find yield.
With cash and bond yields now at decade highs, the need to be in these companies has lessened and investors have voted with their feet.
Yet investors will surely be unwilling to ditch a manager who was among the best performers of the 2010s. Indeed, Lindsell Train's UK fund was the fourth-best performer in the IA UK All Companies sector between 2010 and 2020. It remains a top-quartile performer over 10 years to today, even after a poor three years.
Train is not alone in this change of fortunes. Trustnet analysis shows there are 68 funds that have been top-quartile performers over 10 years but bottom of their sectors over three years.
The £9.7bn MS INVF Global Opportunity fund, the £5.6bn Baillie Gifford Managed fund and the £2.9bn Baillie Gifford American fund all joined the Lindsell Train stable with the unwanted record.
None of these ‘heroes to zeros’ are bad funds and all could have their day in the sun again – particularly if the data causes markets to shift in their favour once more.
But it brings into focus the need to diversify. Earlier this week Matteo Anelli wrote how investors can rebalance their portfolios at the start of 2024 to make sure they avoid simple traps and keep from blending funds that will perform similarly.
This has been a common idea over the past few years, but the figures presented above highlight how crucial it is. While I would never bet against Train, or the likes of Baillie Gifford, nor would I throw all my eggs into their baskets.