What I’ve learnt from 10 years of picking investment funds

As I select my annual fund picks each January, I’m reminded of Samuel Johnson’s quip about second marriages. Hope over experience is a bit harsh - my win percentage has been better with the investments, and they’ve cost me less. But it is a yearly reminder that picking funds is trickier than it looks.

For the record, this year’s recommendations are: the Dodge & Cox Worldwide Global Stock Fund; Fidelity Special Situations; and Lazard Emerging Markets. Together they are the distillation of my latest investment outlook, also published this week. This, like those of many of my fellow pundits, errs as much towards hope as experience, three years into a remarkable bull market.

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With earnings rising, valuations outside the US undemanding, and interest rates coming down, it is tempting to think all will be well. But my optimism is tempered by caution and expressed with fingers crossed. A fourth consecutive year of rising stock markets would be welcome but unusual.

The Dodge & Cox fund is a value-focused global portfolio with a big underweight to the US. It assumes a continuation of the rotation out of America that we started to see last year. Fidelity Special Sits will benefit if a proportion of that money flows across the Atlantic to what is now one of the world’s cheapest markets. For the Lazard fund to deliver, emerging markets will need to build on last year’s surprising outperformance of the US. Obviously, I think those scenarios are likely, but I offer the picks with the usual dollop of humility.

• Read: Investing in emerging markets – three fund picks

So, I swing a bottle against the hulls of these three funds and wish them well. For now, though, I’m more interested in looking back to see what if anything I can learn from my earlier recommendations. As part of this year’s fund picks process, I tracked the performance of all my picks since 2016 that have had at least five years to run. Those up to and including January 2021.

The good news is that of the 23 fund picks I made over those six years, just one lost investors money if held to the end of 2025. The less good news is that in most of those years a portfolio evenly shared between all the fund picks did not do much better than a passive fund tracking the MSCI World index over the same period. The first lesson from ten years of fund picks, therefore, is that while some active managers beat the market, many do not - and knowing the difference ahead of time is hard.

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The second lesson, however, is that the past is a poor guide to the future. The last ten years has been an unusual period, dominated by a handful of companies in a very concentrated global stock market. It has been extremely difficult to beat the global index unless you had a basket of investments heavily skewed towards America’s technology giants. Given their stellar performance, and their massive contribution to the global index, being underweight has meant, almost by definition, underperforming the benchmark. It’s been a testing time to be a stock-picker, but that could easily change.

The third thing I’ve learned from a decade of trying to beat the market is that patience is a virtue that few of us possess in sufficient quantities. The best example of this was provided by 2020’s recommendation of the Artemis Smart GARP Emerging Markets fund. This pick lost more than 20% of its value when Covid struck just weeks after my recommendation. It then took four years to achieve just a 40% return on the initial investment, but then doubled that gain in just six months this year as emerging markets zoomed back into favour. It has been a long haul, but in the end a satisfactory investment.

The fourth lesson I have learned from my picks is that when you find a well-managed fund the best thing you can do is to put it in a metaphorical drawer and forget about it. I was lucky enough to find my best-performing fund pick in my first year of trying. Rathbone Global Opportunities delivered in 2016 and, with the exception of a painful 2022, when interest rates rose sharply, has continued to do so ever since. An investor who put £100 into the fund at the start of 2016 has £320 today. Even the tech-heavy world index has only risen to £250 over that 10-year period.

Lesson number five has been to keep it simple. The best performers have been the funds with an uncomplicated goal and a broad investment canvas. Like Rathbone’s global growth remit, the Fidelity Global Dividend Fund has a simple objective - high quality dividend growers. I recommended it in 2019 and 2020. Since the first pick, it has doubled investors’ money in seven years.

The final lesson I take from the past decade’s fund picks is the need to accept your mistakes and move on. While patience can be a virtue, inaction can be a drag on your returns too. As a rule, taking a year’s worst performer and reinvesting the proceeds in the year’s best fund would have significantly improved the overall return in subsequent years. Sometimes you just get it wrong and there’s no shame in switching horses. Investment success is about having more winners than losers, and in running the former while cutting the latter.

Picking the right funds without the benefit of a crystal ball is hard. I’ve tested this to destruction over the past ten years. But it is more than just hope over experience. It’s investing with your eyes open. Because a bride at her second marriage doesn’t wear a veil - she wants to see what she is getting.

This article was originally published in The Telegraph.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Overseas investments will be affected by movements in currency exchange rates.  Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investments in emerging markets can be more volatile than other more developed markets. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.