Investors lose billions as UK’s 3 most popular Isa funds FLOP – should they sell? | Personal Finance | Finance

Fundsmith Equity, managed by star fund manager Terry Smith, grew to £28billion after smashing the market since launch in 2010, but has underperformed over the last three years. Another hugely popular fund, the Scottish Mortgage Investment Trust, managed by Tom Slater, crashed by half in 2022, and has struggled to recover since.

Completing a disappointing hat-trick of falling stars, Nick Train, manager of the Finsbury Growth & Income Trust, has also tumbled to earth after underperforming for five years.

These funds are shrinking in size as their stock picks underperform and loyal investors lose heart and withdraw their money.

Terry Smith became the undisputed star of the fund management world after Neil Woodford, once the biggest star of them all, went into meltdown.

Over 10 years, Smith’s flagship vehicle Fundsmith Equity thrashed its benchmark index, growing a total of 305 percent, against 213 percent on the MSCI World index.

Yet in the last three years, Fundsmith has grown a modest 18.63 percent. That’s roughly half the total return on the MSCI World, which is up 35 percent.

It’s important to note that Fundsmith hasn’t fallen in value over that timeframe, just grown at a slower rate than before.

Finsbury Growth & Income has also done poorly over the last three years, growing just 4.4 percent. Scottish Mortgage has had the most torrid time of the bunch, crashing 33 percent over the same period.

Its value has shrunk from more than £22billion at its peak to around £10.7billion, due to poor performance and withdrawals, a loss of more than £10billion.

So is this just a temporary setback or should pension and Isa investors move their money?

Investors who buy actively managed funds have to accept the rough with the smooth, said Laith Khalaf, head of investment analysis at fund platform AJ Bell. 

“All fund managers, no matter how good they are, can undergo periods of underperformance. All three of these funds did well prior to the recent downturn, and may do so again.”

Khalaf said global stock markets have struggled lately, with the spectacular exception of the Magnificent Seven US technology mega-cap technology stocks, Apple, Microsoft, Amazon, Google, Nvidia, Facebook-owner Meta and Tesla.

“Most investments funds will have outperformed, unless they held a huge amount of their portfolio in these tech shares.”

Fundsmith does include Microsoft and Meta in its top 10 holdings, and Scottish Mortgage has exposure to Nvidia, Amazon and Tesla. However, they also hold lots of companies operating in less whizzy sectors, reducing returns.

Jason Hollands, managing director of financial advisers Evelyn Partners, said Fundsmith does not invest in oil and gas companies, and lost out during the energy shock, when rising prices sent their shares through the roof.

Scottish Mortgage invests in smaller, growing companies, which often do less well when the economy is struggling to grow, as it has been lately. This is by far the riskier of the three, and investors need to tread carefully.

Nick Train focuses in UK shares, many of whom have found the going tough.

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Hollands said the struggles facing Smith, Slater and Train have still come as a shock. “When three of the biggest beasts in active fund management go through a period of relative underperformance, it’s bound to raise eyebrows.”

While each fund has a different investment strategy, they all have one thing in common. “The managers all have a high conviction approach, investing in a small pool of stocks that they aim to hold for the long-term.”

Lesser fund managers often play safe by quietly tracking a big market index like the FTSE 100, but that’s not the case here. “When managers are willing to diverge, as these three are, performance can also diverge.”

Hollands said all three fund managers resist the urge to chop and change to keep pace with the latest investment fashion. “For many years they gave investors whopping additional returns, just not the last three.”

He said managers have not changed their approaches, which have served them well for years and may do so again. “If readers own any of these three investments, I suggest sticking with them.”

Isa investors who do not hold these funds may even see this as an opportunity to buy them at a reduced price.

As Smith, Slater and Train’s mixed fortunes show, past performance is no guide to the future. So always invest in a balanced portfolio of funds with a minimum five-year view, and never put all your faith in one manager, regardless of their reputation.