Best and worst fund sectors five years on from Covid sell-off

Five years ago, investors had to navigate stock market turbulence triggered by Covid-19 becoming a global pandemic.

Over a four-week period, starting on 21 February 2020, steep falls occurred. In the first quarter of 2020, the FTSE All-Share index lost 25.1%, while the MSCI World Index gave up 15.7%.

However, five years on, a key lesson is that even an unlucky investor who gets off to a bad start through unfortunate market timing can see the value of their investments recover over time.

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History shows that stock markets do recover from crises, and the Covid-19 pandemic proved to be no different.

Today, five years on from the start of the sell-off, figures from FE Analytics (from 21 February 2020 to 21 February 2025) show that 47 out of 57 fund sectors are in positive territory.

Over the five-year period, the average multi-asset fund with 20%-60% in shares is up 15.1%. For those with higher-risk investments, returns of 25.3% were achieved by the average multi-asset fund with 40%-85% in shares.

The figures are a reminder to investors of the power of diversification. When constructing a portfolio, it’s prudent to spread risk across different asset classes, sectors, geographies, company sizes, and investment styles. This means that should some parts of your portfolio struggle, others can prop them up.

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From the start of April 2020, a recovery began, but it hasn’t been plain sailing. In fact, far from it. Over that five-year period, there’s been various headwinds, such as a rise in geopolitical tensions, including the Russia/Ukraine war and conflict in the Middle East.

Monetary policy has also been tricky to navigate. At the end of 2021, interest rates rose from rock-bottom levels in an attempt to cool red-hot inflation, which peaked at 11.1% in the UK in October 2022.

Rate rises hurt growth-focused funds and investment trusts as investors dialled down on risk. Moreover, alternative investments paying an income fell out of favour.

Meanwhile, winners of interest rate rises included cash savings and bonds, where rates of interest and yields increased.

Sector winners

Overall, though, there has been a clear winner over the five-year period – technology funds – with an average gain of just over 100%.

A key performance driver for such funds is the strong share price gains made by the world’s biggest companies since the start of 2023 amid excitement over advancements in artificial intelligence (AI). The so-called Magnificent Seven stocks are Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Amazon (NASDAQ:AMZN), Facebook-owner Meta Platforms (NASDAQ:META), Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA).

US funds and global funds have also benefited from the strong performance of the world’s biggest companies.

For those backing a global fund throughout the period, the average performer returned 52.4%. Many index funds or exchange-traded funds (ETFs) produced a higher return compared to most actively managed funds, with the MSCI World Index up 77% over the period, while the FTSE All-Share is up 34.9%. This is due to index funds and ETFs having higher weightings to the Magnificent Seven than active funds.  

None of us know whether global markets will have another strong decade, but one thing is clear, stock markets have become more concentrated, and therefore more reliant on the fortunes of a few companies.

As Ruffer Investment Company (LSE:RICA) says: “The seven biggest US companies in the MSCI World index are a larger weighting (at 20%) than the weightings of Japan, India, Switzerland, France, China and the UK combined. In 2024 alone, the value of the Magnificent Seven has risen by $6 trillion – that’s greater than the entire market cap of the Nikkei, or around twice the FTSE 100.”

Those seven companies now comprise around one-third of the S&P 500 index and over 20% of the MSCI World Index.

Naturally, a technology-focused passive fund will have higher weightings to the seven companies than a US passive fund tracking the fortunes of the S&P 500.

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When looking at individual fund performance, passive technology funds come out on top. The top three performers are iShares S&P 500 Information Technology Sector ETF (LSE:IITU), L&G Global Technology Index and Xtrackers MSCI USA Information Technology (LSE:XUTC), with respective returns of 178.5%, 168.5% and 168.2%.

On the one hand, it would be very bold to bet against US larger companies, including the tech giants, over the long term.

However, there are plenty of other areas, including the smaller-company end of the US market, that offer cheaper entry points. In a recent article, various professional investors explained how they’ve been shifting exposure to areas with cheaper valuations.

Top five fund sectors five years on from Covid sell-off

Source: FE Analytics. Date range: 21 February 2020 to 21 February 2025. Past performance is not a guide to future performance.

Sector losers

Rising levels of inflation and interest rate rises are well recognised as major headwinds for bond funds, as both erode the value of the income that bonds pay. Therefore, it’s not surprising to see bond fund sectors as the biggest laggards over the five-year period.

However, the large paper losses for the two gilt sectors are steep. The average UK Index Linked Gilts fund is down -35.5%, while the average UK Gilts fund is -24% in the red.

This is because such funds invest in long-duration bonds. Duration is the sensitivity of a bond, or bond fund, to any change in interest rates. Long-duration bonds typically have lifespans of 20 to 30 years. Given that investors have to wait a long time for their capital to be returned, a higher level of income is demanded to compensate for the greater levels of risk involved. As a result, this part of the bond market is the most sensitive to interest rate rises.

In the case of UK Index Linked Gilt funds, while the income payments have risen in line with inflation, the price of the bonds has fallen sharply and to such an extent that it’s outweighed the inflation income benefits the funds offer.

Worst five fund sectors five years on from Covid sell-off

Source: FE Analytics. Date range: 21 February 2020 to 21 February 2025. Past performance is not a guide to future performance.

Five-year performance cliff edge?

Investors are often told to invest in funds for a minimum of five years. This is also seen as a good period to judge performance, as it usually incorporates both rising and falling markets.

However, from early April, the five-year window will exclude the dramatic Covid-19 stock market sell-off. This will skew the data, with the strong stock market rally following the sell-off making the five-year performance figures more favourable.

In some instances, funds that sank heavily during that sell-off went on to make a strong recovery. This might make a fund seem like a better performer than one that simply rode out the crisis with fewer peaks and troughs.

According to Simon Evan-Cook, a fund-of-funds manager at Downing Fund Managers, rather than looking at very defined time periods, you can learn more from looking at specific moments in time.  

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However, in practice, he says that this is really hard for retail investors to do, due to fund factsheets detailing defined time periods, such as one, three, and five years.  

In an interactive investor On The Money podcast episode about how to separate fund manager luck from skill, Evan-Cook said: “People look for certain time periods. What’s the magical time period? Should you look at one year or three years or five years? The truth is I would say that’s a complete red herring looking for a specific year.

“I’d point you to the quote that was originally, I think, about Russian history, which is that there are decades in which nothing happens and then there are weeks in which decades happen. And that’s entirely appropriate for financial markets because there can be years and years where markets just drift upwards and it doesn’t really tell you much about the fund manager whatsoever. But then you can get periods, perhaps like the pandemic sell-off, or what we saw in 2022, when all sorts of stuff happens all at once.

“And, as a fund buyer, that’s what I’m looking for with funds. I’m looking for specific time periods. And this is where it gets harder for a retail investor because you tend to get spoon-fed very defined periods of six months or a year or three years based on a factsheet or a performance table.”