What are the best performing funds over five years?
A performance horizon of five years is generally accepted as a good barometer for a fund’s overall success.
A one-year time scale isn’t long enough to judge whether a fund looks like a good long term bet for your money.
Three years is still a relatively short time period. But over five years (or even better seven or 10), compared to a benchmark, the figures become more meaningful.
Looking by sector, Japanese Smaller Companies, North America, Technology and telecommunications, China and UK Smaller Companies have all performed relatively well on a cumulative basis over the last five years. According to Morningstar, Japanese Smaller Companies lead the way delivering returns of 149 per cent over five years (see table below).
“Cumulative” returns means the total return over that period including the effect of compounding and the payment of dividends. Annual or yearly returns are the annual returns that would produce the same cumulative return over that period - so an annual five-year return of 20.03 per cent (the 5-year annual figure for Japanese smaller companies in the table below) would produce the 5-year cumulative figure of 149.12 per cent).
If you are investing for the long term, then checking the best performing funds over the past five years and not just looking at recent performance history is a good idea. However, it is important to remember that past performance is not a reliable indicator of future performance and a fund that has performed well over the last five years could perform poorly over the next five, particularly as companies that are earlier stage tend to outperform and sectors that are expanding rapidly will also achieve higher growth. So it might well be the case that a fund or sector that has performed poorly over the last five years or has a history of fewer than five years to compare is primed for five years of much higher growth.
Nevertheless, here are five of the best funds over the last five years, used here purely as examples, with returns quoted on an annualised basis (i.e. what an investor would have received annually, if they’d invested in the fund five years ago). After around the first four years, on an annualised basis, (the average annual return taking into account the effect of compounding) an investor in any of these funds would have roughly doubled their money.
Legg Mason Investment Funds Japan Equity
With an annualised five-year return of 27.2 per cent, this fund, “seeks to achieve capital growth through investment in securities of Japanese companies… which have above average growth prospects relative to the shares of Japanese companies as a whole.” A high risk profile, according to Morningstar, and below average sustainability of two out of five.
Baillie Gifford Japanese Smaller Companies
The five-year annualised return on this fund is 26.23 per cent. Its objective is “to produce attractive capital growth over the long term by investing, whether directly or indirectly, in Japan, with particular emphasis on smaller companies, in any economic sector.” An above average risk profile, according to Morningstar, and a low sustainability rating of one-out-of five.
AXA Framlington Global Technology
The fund has returned 25.29 per cent on an annualised basis over the last five years. It “seeks to achieve long term growth principally through investments in companies engaged in the research, design and development of technologies in all sectors including information technology and the internet and in companies manufacturing and distributing products and/or providing services resulting from such research, design and development.” An above average risk profile and a low, one-out-of-five sustainability rating, according to Morningstar.
Old Mutual UK Smaller Companies
Over five years, the fund has returned 24.18 per cent on an annualised basis. It aims “to provide capital growth from investing primarily in an equity portfolio of UK smaller companies.” Top holdings include Blue Prism, Fevertree and Alpha FX. The fund has a high risk profile.
Vanguard US Opportunities
Delivering a 23.59 per cent annualised return over five years, this actively managed fund “seeks to provide long-term capital growth by investing in U.S. stocks with above-average earnings growth potential that is not reflected in current market prices.” It has a higher than average sustainability rating from Morningstar, with four out of five stars. It is rated above average for risk.