How ten "Forever funds" have fared over the past five years

Markets have been through a lot these past five years – the pandemic, the sky-high inflation, and that long, aggressive run of interest rate hikes.

That’s a tough period over which to evaluate any investment’s performance. Nonetheless, our ten “buy-and-hold forever” funds, suggested back in 2019 by a range of experts, held up okay, with all but one making money over that rocky time.

So we decided to check back in with those pros to refresh our forever list, ousting a few underperformers and adding in some promising new entrants.

1. Fundsmith Equity

None of the ten funds beat global stock markets over the five years, but Fundsmith Equity, a core recommendation of interactive investor’s Super 60 list, came close. And that’s particularly impressive when you consider that the fund’s approach prevents its manager from investing in the US technology mega-caps that have driven the market higher.

Fund manager Terry Smith favors high-quality, resilient, global growth companies that are good value, which leads him mostly into healthcare and consumer stocks.

He snaps up easy-to-understand businesses that he can buy without overpaying, and that’s proved to be a “successful and resilient approach”, said Darius McDermott, managing director of FundCalibre, which has the fund on its “Elite” list.

Like Warren Buffett, Smith says his ideal holding period is forever – and this fund retains its place among buy-and-hold forever funds.

2. Dimensional World Equity

The second-best performer of our group over the five years, Dimensional World Equity uses Dimensional Fund Advisor’s “passive plus” approach of tracking markets with a tilt toward smaller, cheaper, and more profitable companies.

But the iShares Core MSCI World ETF is a more straightforward portfolio building block. It’s outperformed the Dimensional fund over all periods and is a smidge cheaper at 0.2% a year, versus 0.25%.

So we’re making a swap here given the iShares ETF’s superior performance profile and status as a low-cost pick in interactive investor’s Super 60.

It’s a soundly constructed and reasonably representative portfolio, our analysts say. And it’s well-positioned to carry on with its streak – beating its peers across its Morningstar category.

3. Impax Environmental Markets

Patrick Thomas, head of ESG investment at Canaccord Genuity Wealth Management, recommended the Impax Environmental Markets Ord five years ago and he’s sticking by it as a means to capitalize on the long-term growth of the green economy. That’s despite its poor performance over the past two years, which, to be fair, have been the result of some big-picture, macroeconomic factors.

A lot of the recent underperformance, as Thomas points out, can be attributed to the assets that Impax didn’t own over the past five years: namely the Magnificent Seven tech stocks in 2023 and energy stocks in 2022. That’s one factor, he says, and the market’s habit of generally punishing small and mid-sized firms is another.

Nonetheless, he said, “the environmental challenges the world faces have not gone away.” So the relatively weak global investor sentiment, less-challenging market valuations, and a strong investment process continue to make this investment an attractive proposition, Thomas said.

4. T. Rowe Price Frontier Markets Equity

Producing middle-of-the-pack performance, the inherently risky T. Rowe Price Frontier Markets Equity fund needs longer to prove its worth.

In the meantime, EQ Investors had a look at the list and noted that it lacks a thematic play. So on a recommendation from Tertius Bonnin, an assistant portfolio manager at EQ, we’re setting aside the frontier fund in favor of the iShares Digital Security ETF.

In a world that is becoming increasingly data-focused, digital security is a must. Bonnin and his team like the business models of several software-oriented companies, which typically have a high degree of recurring revenues, high margins, and sustainable rates of growth.

What’s more, this thematic portfolio play also has attributes that could appeal to a sustainability-focused investor, with a load of companies that align with the transition to a low-carbon economy.

5. Federated Hermes Impact Opportunities Equity

Quilter Cheviot fund research analyst Melissa Scaramellini suggested the Federated Hermes Impact Opportunities Equity fund five years ago but then removed the fund from coverage shortly afterward when fund manager Tim Crockford took a job elsewhere.

Crockford set up the Regnan Global Equity Impact Solutions fund at Regnan, part of JO Hambro Capital Management. And it’s fared a lot better than the Federated Hermes fund over the past three years, although both have made losses.

Like other funds on the list, the Regnan fund has lagged world stock markets because it doesn’t hold traditional energy or Big Tech and has a small-cap and mid-cap bias.

The fund is also focused on sustainable themes, which aren't gaining a lot of traction these days, though Scaramellini said still holds a conviction on a long-term view.

6. Finsbury Growth & Income

It’s been a tough time for fund manager Nick Train. His quality-growth style fell out of fashion and some of his stock picks, notably Hargreaves Lansdown and Burberry Group, have led to lackluster returns for the Finsbury Growth & Income Ord.

In fact, the UK equity income trust has underperformed the FTSE All-Share over the whole five years.

But that’s the problem with having a very concentrated portfolio – where the top ten investments account for more than 80% of the fund – it leaves little room for error, said Ben Yearsley, co-founder of Fairview Investing.

Train’s strong long-term track record of outperformance means this investment trust keeps its place in the top ten, however. Yearsley said longevity counts in his book: Train’s quality approach helps reduce the risk of permanent loss and ensures that companies are well set up for the long term.

7. Capital Gearing

Capital Gearing Ord, a multi-asset investment trust with a capital preservation mandate, has disappointed over the past few years, particularly when viewed against stubbornly high inflation.

And losing money over the past 12 months, when inflation was lower, is “especially galling”, said James Carthew, head of investment companies at QuotedData.

But two main factors made that unavoidable, he said. The first was the fact that rising interest rates hit the valuation of the longer-dated inflation-linked government bonds to which the trust is exposed. And the second was the general widening of investment trust discounts, which hit its portfolio of investment companies pretty hard.

A core constituent of ii’s Super 60, the fund remains a long-term buy and hold.

Carthew added that the broadening of those trust discounts “should rectify itself in time” and has created opportunities for the fund’s managers to add value.

8. Fidelity Emerging Markets

Fidelity Emerging Markets Ord has been a core holding of Yearsley’s for years. Unfortunately, the past few years haven’t been easy.

Emerging markets have generally had a rougher time. China has dragged much of Asia down with it, and this fund suffered because a reasonable chunk of it was in Russian stocks that were written down to zero after Vladimir Putin invaded Ukraine.

Despite this, Yearsley would still stick with the fund. Too much emphasis is placed on shorter-term numbers, he said, and that’s especially relevant given the unusual markets the world has seen in the past few years.

He cited three big reasons for staying the course on this fund. First, emerging markets generally – and Asian stocks specifically – are multi-decade growth stories. Second, the quality-growth bias of the fund is ideally suited to long-term investing. And, third, Fidelity is “excellently resourced”.

9. Premier Miton UK Smaller Companies

Fortune has not favored smaller companies in recent years and the Premier Miton UK Smaller Companies fund has suffered more than most.

Not surprising, then, that the fund’s underperformance of the FTSE 250 index had us looking for an alternative.

To fit the bill, McDermott at FundCalibre suggested Liontrust UK Smaller Companies, which has beaten the Premier Miton fund by more than 30% over five years.

The fund has a clear, well-thought-out investment philosophy, which he said has been “executed with diligence and skill” for many years by managers Anthony Cross and Julian Fosh.

And the fund’s emphasis on quality stocks, rather than cyclical ones, has worked particularly well with smaller companies, resulting in strong relative and risk-adjusted performance figures.

10. Baillie Gifford Global Discovery

Baillie Gifford Global Discovery is at the bottom of the pack – and the only fund of the ten to have lost investors’ money over the five-year time frame.

The fund invests on a five-to-ten-year view and is biased toward smaller companies operating in industries with the potential for structural change and innovation.

FundCalibre retains its “Elite” rating on the fund – with an important caveat. McDermott says the fund has a place as a long-term holding in a balanced portfolio, but it’s only a buy-and-hold forever asset if it’s “actively and consistently” rebalanced through the market cycle.

“It tends to have outsized outperformance during bull markets and acute losses during risk-off market events,” McDermott said. “Investors should use these pockets of extreme alpha to take profits.”

Let’s hope those profits are soon forthcoming.