What’s driving the strong performance of Irish investment funds?
What’s driving the winning performances amongst Irish fund managers today? And can it be sustained?
Firstly, it’s been a good period to be invested in markets. Over the past year, Irish fund managers have on average returned around 20% in Global Equities and about 12 to 15% in a typical multi-asset fund. These are good numbers.
What types of funds are doing well? Looking at the league tables and the range of funds available to Irish investors, the increasing role of indexed funds is one stand-out. There has been huge growth in passive or indexed funds (which track a pre-determined benchmark}, compared to active funds (where the fund manager decides on stocks and sectors). Irish fund management companies and platforms offer a wide range of these low cost investing options, which have been outperforming their active counterparts over considerable periods.
In the US for example, this year so far, only 18% of active funds have beaten their benchmark. This is lower than it was in 2023 and in fact 2024 is shaping up to be the 14th straight year of underperformance for actively managed funds. League table numbers here at home show a similar picture.
One thing which I think has helped index funds in the past year, especially in the global equity space, has been a significant exposure to US equities, and consequently to many of the large cap technology names. The US market has powered ahead in the past 12 months with returns close to 25% -double what has been achieved in Europe. The MSCI World index today has over 70% exposure to the US. Index managers are not concerned with what may look like daunting valuations, which might give an active stock picking manager pause for thought. This US performance boost has been especially notable in those global index funds which exclude Eurozone equities.
Investors should note not all index funds are the same. One of the best locally managed global equity funds which has returned 36% over the past 12 months – a very strong performer – is indexed. But this fund specifically tracks about 50 of the biggest stocks on the world’s markets. The result is today nearly 85% of the fund is invested in US stocks, and nearly 40% is invested in one sector – technology.
So performance has been exceptional, but has been very dependent on one market and indeed on one sector.
Indexed funds haven’t had it all their own way in Ireland. Some actively managed funds have delivered exceptional returns for their investors. With returns of over 30% in the past 12 months, a number of quite concentrated global equity funds, with a smaller number of holdings, researched and selected by the manager, have done significantly better than their indexed counterparts. Worth noting that these active funds carry a higher cost and there is always a risk that the manager makes the wrong calls.
So while some actively managed funds have excelled, there has been a strong tailwind behind many indexed options in the shape of high US equity exposure – very high in some cases – in the past year.
Investors have enjoyed exceptional returns but may need to consider what risks (very heavy in one market and one sector) they may now be taking on.
Tradewinds 