21/22 Financial Year Peer Group Analysis
03 August 2022
The Fundmonitors.com website includes information on over 700 actively managed investment funds, with each fund categorised into one of 15 Peer Groups based on their investment universe, strategy and process. This Spotlight article focuses on the relative, and average performance of the constituent funds within each Peer Group over 1, 5, and 10 years.
Over the five years to December 2021 markets in general, and equity markets in particular, were driven by falling or rock bottom interest rates, with only two relatively short pull-backs, the most notable being the COVID induced falls in the early part of 2020. Over 5 years the so called "risk on" assets and funds fared best, as indicated by the first chart below, although the correlation between them was relatively high. Equally obvious, particularly in hindsight, was the effect of central bank tightening in the face of inflation in late 2021, with Russia's invasion of Ukraine in February 2022 further increasing inflationary risks, and a new market "risk-off" environment.
As shown by the 12 month chart below, when the S&P500 fell by 20.6% over the 6 months to June, most Peer Group averages were dragged lower. As a result, only two Peer Groups, namely Infrastructure and Debt funds, with average returns of 11.3% and 4.6% respectively, finished the financial year in positive territory. In this environment, even diversification towards these two medium to long term strategies only provided limited benefit to those (most) investors with a high allocation to equity based strategies.
Peer Group average performance over the 12 months to 30 June 2022.
In FY 20/21 the Global Equity Long - Small/Mid Cap Peer Group (the previous year's best performer) was down 23.8%, and down 25.9% over the last 6 months. All 14 funds in this peer group provided a negative return for the year, with the best performing fund falling -10.7%, and the worst losing -43.3%.
Similarly, Australian Small and Mid Cap funds were hit hard, falling -16.5% for the Financial Year. This group includes 83 funds, so investors would expect some consistency given the size of the peer group. However, this was not the case, with the top performing fund providing a positive return of +21.2%, and the worst returning -46.5%.
The peer group focused on Equity Alternatives, which includes long/short and market neutral funds, performed well indicating the benefits of being able to short stocks in a negative market environment. The exception to this was Asian Equity Alternative funds.
Over the past 12 months the Alternatives Peer Group returned -1.4%, and was negatively affected by the inclusion of a number of Digital Asset or Crypto funds, making up the five worst performing funds in this peer group, providing an average return of -40.7% with the worst falling -52%). Without the influence of these crypto funds, the Alternatives Peer Group would have returned over 6% for the year. The six Managed Futures funds in the Alternatives group returned an average of 19.9% for the financial year, again showing the benefits to portfolios of diversification away from equities.
While the year to June 2022 has been difficult for investors, especially those with high exposure to equities, it has to be seen in the context of some previously strong years. The heat map below shows the average performance of each Fundmonitors.com peer group over the past 10 years. Each line represents a financial year, and the colour on each line varies between the darkest green for the best performing peer group for that year and the darkest red for the worst performing.
This table clearly shows the value of diversification across funds, peer groups and asset classes, and investing for the longer term. It is rare to find a fund or peer group that will perform well in all market conditions, and switching funds to invest in last year's best performer is a great way to achieve mediocre performance.