How 90% of Investors Can Improve Their Investment Returns

• 90% of investors miss out on portfolio growth each year through inefficient fund choices, even in rising markets
• The difference in 5 year returns between a sector average fund and a top performing fund can be as much as 61%.
• There are 3,095 investment funds from 134 fund management brands available to UK investors that have received a sector classification from industry trade body the Investment Association. From these 3,000 plus funds, 516 (16.6%) have managed to consistently outperform at least half of all competing funds within their sectors over the past 1, 3 & 5 years

When a portfolio or a fund experiences growth, many investors assume it is performing well. But a rising market lifts all boats - even those with suboptimal investing strategies.

The reality is 90% of investors could see higher returns, without increasing costs or risk, if their portfolios were invested more efficiently, and the sector ranking of each fund was known and regularly assessed.

Positive portfolio growth doesn't automatically mean you're maximising returns relative to the risks you're taking. Too often, investors mistake an upward trajectory as proof of investing proficiency , without realising market forces are doing the heavy lifting.

For instance, Client A has seen their investment in a Global fund grow by 38% over the past 5 years, which initially impressed them. However, upon further analysis, Client A discovered that the average return for all funds in the Global sector stood at 53.21%, with the top-performing funds achieving an average return of 77.74% during the same period.

Client A has come to understand that in order to achieve optimal returns, it is essential to evaluate the fund's performance (in both bullish and bearish markets) by comparing it to all other funds within the same sector of the Investment Association.

Within this article, we highlight the significance of evaluating fund performance by comparing them not only to their own growth but also to other funds within the same sector.

The top quartile funds in each sector showcased significantly higher 5-year returns compared to the sector average, highlighting the potential benefits of selecting more efficient funds.

What Defines a Top-Quality Fund?

Selecting funds and managers that consistently outperform peers while aligning with suitable asset allocation models can help investors maximise portfolio growth potential. If working with a financial adviser, it's crucial to partner with someone who demonstrates research-driven expertise in assessing fund performance.

While fund performance analysis is not a regulated aspect of financial planning, it's a critical metric that savvy investors and high-quality advice firms prioritise to ensure portfolios productively and efficiently meet objectives by utilising proven top-performing managers.

The Importance of Fund Performance

Past performance does not guarantee future returns, but research has shown that funds and fund managers with a history of outperformance are more likely to outperform going forward than those with a history of poor performance.

Comparative Analysis Reveals Quality

Each fund’s performance can be compared alongside all other competing funds that are classified within the same sectors. How each fund compares over the medium to long term can identify the quality of the fund and the competence of the fund manager.

Each fund’s performance can be compared alongside all other competing funds that are classified within the same sectors. How each fund ranks exposes the quality of the strategy and the competence of the manager. Top-quartile ranks indicate expertise, while persistently poor relative performance signals lack of quality.

Holding Managers Accountable

While past returns don't predict the future, they provide an important accountability measure for fund managers. Those maintaining high comparative performance have demonstrated a reasonable ability to continue delivering competitive returns. In contrast, chronic under performers exhibit an inability to generate desired outcomes.

For investors selecting funds themselves or vetting an adviser's recommendations, robust analysis of long-term comparative performance is crucial for identifying skilled managers most likely to maximise portfolio growth potential.

The Best Performing Funds

There are 3,095 investment funds from 134 fund management brands available to UK investors that have received a sector classification from industry trade body the Investment Association. From these 3,000 plus funds, 516 (16.6%) have managed to consistently outperform at least half of all competing funds within their sectors over the past 1, 3 & 5 years, and have thus received a high quality 4 or 5-star performance rating from Yodelar. There is no shortage of quality funds across all asset classes and having the freedom to make informed choices can help improve portfolio efficiency and overall performance.

A fund manager's ability to maintain a consistent level of performance when compared to competing same sector funds is an important metric for many investors when making investment decisions. The ability of a fund manager to maintain a level of outperformance in comparison to funds within the same sector demonstrates a level of quality and expertise that stands them above their peers.

Discover which funds have excelled in their sectors by downloading our latest Best Funds Report which includes the names, performance growth, sector rankings, and star ratings for each of the 516 featured funds.

Download The Best Funds Report

The Underperformance of Prominent Fund Managers

Despite overseeing £168 billion for clients across their in-house fund range, St. James's Place (SJP), the UK's largest restricted advice manager, has struggled to deliver top-tier performance. In our most recent Best Funds report, only 2 of their 36 unit trust funds featured, with SJP ranking 50th out of 102 fund management brands in our Fund Manager League Table.

Despite their continued poor performance, St. James’s Place continues to increase their customer base with many of their investors unaware of just how poor the majority of their funds rank comparative to their peers. 

Hargreaves Lansdown, who manage £9.7 billion in their 15 funds, ranked even worse. None of their funds featured in our best funds report with 12 of them receiving a poor performing 1 or 2 star rating. Based on their funds performance, Hargreaves Lansdown ranked 100th from 102 fund managers in our Fund Manager League Table

These examples underscore the critical importance of thorough fund and manager research to identify truly best-in-class options aligned with investment objectives. Reputation and brand recognition alone do not guarantee competitive returns, making rigorous analysis essential for efficient portfolio outcomes.

Efficient Investing: Optimising Asset Allocation and Fund Selection

Fund and fund manager performance are important metrics that help to identify the most suitable investment options. But true efficiency is obtained when this is used in conjunction with a defined asset allocation model that maximises protection.  

1. Asset Allocation: Efficient Portfolio Alignment  

The asset allocation model underpinning any portfolio is the single most critical factor in ensuring your investments align with your risk tolerance. Investing across varying asset classes through diversification allows you to minimise the impact of any one sector's underperformance on your overall portfolio.

Regularly reviewing and rebalancing your portfolio is essential to maintain your intended asset allocation as certain sectors outpace others over time. Rebalancing realigns your portfolio weightings, preventing unintended risk drift.

In our experience, the vast majority of self-directed investors struggle to effectively manage their asset allocation and associated risk profiles. However, some advisor-led clients may also overlook the need for regular rebalancing despite paying for professional guidance.

2. Fund Selection: Maximising Growth Potential

Selecting funds that consistently outperform peers while adhering to your asset allocation model is key to maximising your portfolio's growth potential. If working with a financial advisor, ensure they demonstrate robust expertise in assessing fund performance.

While fund performance is not a regulated aspect of financial planning, top advisors prioritise this area. However, a significant portion of advisors exhibit limited knowledge about the quality and performance of the funds they recommend.

By combining a suitable asset allocation framework with an exclusive focus on consistently top-performing funds within each asset class, you address the two central pillars of maintaining an efficiently structured, high-growth potential portfolio over time.

3. Maximising Protection: The Government Financial Services Compensation Scheme (FSCS)

A factor that is all too often overlooked is optimising portfolio protection through effective use of the Governments FSCS. Many investors are not aware that investment funds are also protected by the Governments Financial Services Compensation Scheme to a maximum value of £85,000. Our aim is to maximise client protection by diversifying across multiple fund managers. For example £85,000 invested across 10 providers or fund management brands would increase your protection to £850,000.

Maximising Protection Under the Financial Services Compensation Scheme is available to most investors, however many investors are unaware they are not protected, especially those that are with a restricted provider such as St James's Place.

See related article - Why Your Investments Might Not Be Fully Protected

Summary

It is not uncommon for investors to believe the growth returned by their portfolio is good, when the reality is they are missing out on sometimes significant extra growth each year - without increasing their risk exposure, by implementing efficient processes for fund selection and asset allocation. We often hear statements like “My portfolio performed well this year as it returned growth of 5%”. But market conditions can dictate sector and fund performance which can result in a portfolio of poor performing funds returning a level of growth that is perceived to be good. 

As identified in this report, the 5 year average returns of some of the  most popular sectors show positive growth returns. But when compared to the average of the sector's top quartile ranking funds the difference can be significant, showing the added growth potential from investing in a diversified portfolio of high quality funds.

But it’s only when you compare a portfolio against a similar risk portfolio of consistently top performing funds that you can determine if the performance was appropriate for the level of risk taken.

Assess Your Portfolio's Efficiency with A Free Portfolio Analysis

For years, Yodelar has analysed the performance and quality rating of portfolios for thousands of UK investors. Our extensive analysis has uncovered that over 90% of investors hold portfolios containing inefficiencies that stunt growth potential, resulting in many UK investors to miss out on enhanced portfolio growth. 

Inefficient investing can have adverse long-term consequences, making it crucial to identify and correct any portfolio deficiencies.

Our industry leading portfolio analysis service enables investors to find out how their portfolio compares to a similar risk-profile portfolio constructed with top-performing funds. This unique tool provides measurable ratings that offer complete transparency into the quality of individual fund choices and the overall portfolio's competitiveness.

By leveraging our portfolio review feature, investors gain detailed insights into the performance of their investments and can identify whether their current approach is optimally positioned for growth.

• Evaluate the performance of each fund

• See where each fund ranks within its sector over 1, 3, and 5 years

• Find out how each funds performance rating between 1 to 5-stars.

• Determine the proportion allocated to top, mediocre, or underperforming funds

• Compare portfolio growth against model portfolios built with consistent top performing funds

• Get an overall portfolio performance grade from A to F