Performance chasing has proved the most successful of five active investing strategies over the last 10 years… but it hasn’t beaten simply buying and holding a global tracker fund says AJ Bell’s head of investment analysis, Laith Khalaf (pictured), as he shares with us his latest deep-dive into the data.
“One of the basic tenets of investment is not to buy an asset just because its price has gone up. And yet, in the last decade, performance chasing has been a much better strategy than buying investments which have seen their prices fall sharply – a blind bargain-hunting approach which appeals to many people, but comes with its own health warnings. AJ Bell has put five common investing strategies to the test to see how they stacked up against each other (see table below). Perhaps not surprisingly in such momentum-driven markets, performance chasing came out top, with bargain-hunting bringing up the rear.
| 1 year return | 10 year return | |
| Performance chasers | 23.5% | 154.7% |
| Egg spreaders | 10.5% | 120.3% |
| Herd investors | 7.8% | 86.0% |
| Contrarians | 7.9% | 73.9% |
| Bargain hunters | 13.8% | 62.7% |
| Global index tracker | 21.0% | 225.1% |
Sources: AJ Bell, FE, Investment Association, Morningstar. Data to 31 December 2024.
“We modelled these strategies using fund sectors, and the analysis is meant to be instructive rather than exhaustive. For performance chasers, we assumed that at the beginning of each year, they bought a fund in the best performing sector of the previous 12 months. Our bargain hunters bought a fund from the worst performing sector of the previous 12 months. Herd investors bought a fund from the most popular sector, and contrarian investors bought a fund from the least popular sector. Our egg spreaders diversified across five equity fund sectors, putting 20% in each of US, UK, Europe, Japan and Emerging Markets funds, and rebalancing each year to achieve an equal weight in each.”
Performance chasing – a winning strategy?
“Performance chasing returned 23.5% in 2024 and 154.7% over 10 years. In other words, £10,000 invested in this strategy a decade ago would now be worth £25,468. To model this strategy, we assumed a performance chaser switches their investment at the beginning of each year to a fund in the best performing sector of the previous 12 months. Throughout 2024, this meant being invested in the Technology and Telecoms sector, which returned 38.9% in 2023.
“However, performance chasing comes with large risk warnings attached. An area which has performed well in one year has probably become a crowded trade and vulnerable to both overvaluation and profit-taking. This may have been mitigated in recent times as trends have tended to be extreme in both size and duration, most notably in the technology sector. Nonetheless a reversal in market trends could be exceptionally painful for undiversified performance chasers.
“Performance chasing can also lead you down some less well travelled paths, often to high octane specialist sectors. In the last decade performance chasers would have invested in technology, healthcare, India, China and commodities funds. This is reflected in the wide range of calendar year return outcomes, ranging from a loss of 14.2% to a gain of 44.4%. The same risky dynamic holds when it comes to bargain-hunting, as the extremes of performance, both positive and negative, tend to occur in the most specialist funds, often exhibiting low levels of diversification across industry or geography.”
Buying and holding a passive fund implicitly involves performance chasing
“Importantly, buying and holding a global tracker fund has beaten a performance chasing approach over the last 10 years. It will also have done so at a lower cost, and with less effort than switching your investments every 12 months. £10,000 invested in a global tracker fund 10 years ago would now be worth £32,510. Looking under the bonnet though, a global tracker fund implicitly includes an element of performance chasing. Stocks which have done well become a bigger part of the index, and hence a larger allocation in the funds which follow it.
“Some of the biggest returns in the global stock market have in recent years been driven by a small clutch of big US technology companies. The result is the so called ‘Magnificent Seven’ US tech titans now make up 22% of a global tracker fund. That’s before you add up the other technology stocks from the US stock market, or indeed the wider world, which are exposed to the same industry theme. A reversal in fortunes in this sector could therefore prove painful for fans of global index funds.”
Is a more globally diversified portfolio the solution?
“Against this backdrop there’s a case to be made for a more diversified strategy. In our analysis, egg spreading has been the second most successful of the five strategies we tested over the last 10 years, returning 120.3%. In other words, turning £10,000 into £22,026 in a decade. The approach we modelled is investing equally in five regions (US, UK, Europe, Japan and Emerging Markets), and rebalancing each year to maintain 20% in each. There is an intuitive appeal to this approach to spreading risk around, though over the last 10 years it has delivered much less than a global tracker fund, which allocates money to regional markets based on the size of companies within them.
“For investors considering a more regionally diverse portfolio, there’s no need to keep to 20% in each region as per our analysis. Investors can dial up or down exposure to depending on their confidence in each market, and how much active risk they want to take versus a global tracker fund, where around three quarters would currently be invested in US shares. Of course if the US continues to outperform other markets, this more regionally diversified approach will fall behind a simple global passive strategy. But if the current hegemony of the Magnificent Seven proves to be a speculative bubble which bursts, a little egg spreading could lessen the pain.
“Deciding between a pure passive approach to global markets and one which spreads your allocation more liberally across the world isn’t an easy decision, especially if you think about it in the context of which approach will deliver the best performance. That is a known unknown. Perhaps then, it’s better to think in terms of the risks involved in each approach. Underweighting the US comes with the risk of underperforming a global index tracker if the S&P 500 keeps knocking it out of the park. On the other hand, a market neutral weighting in the US now exposes passive investors to a substantial downside if the tide turns on US tech stocks. Ultimately you can’t choose the returns you get from investing in the stock market, but you can choose the risks you take on. Whichever approach you eventually land on, acknowledging and understanding these risks means you won’t be surprised if they materialise, and will still have the confidence to maintain your investment strategy for the long term.”
Bargain hunt – best left to daytime telly
“Over the last decade, bargain hunting brings up the rear in terms of the five strategies we modelled, with a 10 year return of 62.7%. To put that another way, £10,000 invested 10 years ago would now be worth £16,268. This strategy is the opposite of performance chasing. Instead of investing in the best performing fund sector of the previous year, our bargain hunter invests in the worst performing. Throughout 2024 this meant being invested in the China fund sector, which returned -20.6% in 2023. Returns in 2024 were pretty decent at 13.8%, as Chinese equities staged a comeback, but over the long term the bargain hunting strategy hasn’t delivered vintage performance.
“Bargain-hunting can be a natural tendency amongst some investors. Markets do tend to over-react in both directions, and so when there is a big sell-off it can be followed by a relief rally. Some investors may seek to exploit this dynamic, but the numbers suggest it’s far from a one-way ticket to riches. Investors who are tempted to catch falling knives should remember that the mathematical definition of a stock that has fallen 90% is one which has fallen 80%, and then halved in value.
“It’s tempting to equate bargain-hunting with value investing. Both have struggled as strategies over the last 10 years. The MSCI World Value index has returned 137.1% over the last 10 years, which compares with 221.4% from the standard MSCI World index and 317.1% from the MSCI World Growth index. But professional value investors don’t simply look for stocks which have seen their share price fall. They are interested in stocks which are trading at low valuations, taking earnings into account, and which stand a good chance of recovery in the long term. Value investing isn’t simply investing in the worst performing areas of the market. Often there are good reasons why share prices fall heavily, and no guarantees of a rebound in the opposite direction.”
The middle ground
“Our final two strategies, herd investing and contrarian investing, have delivered remarkably similar results over the last year, despite being polar opposites. We modelled herd investors as those who invest in the most popular fund sector of the previous 12 months, in terms of where other investors are putting their money, whereas contrarians invest in the least popular. Over the longer term, there is some daylight between the two, with herd investors claiming a lead over 10 years. Neither has been a particularly successful strategy though, when compared to egg spreading or performance chasing, or to simply buying and holding a global tracker fund.
“Part of the reason these strategies may have struggled is that in risk-off markets, safe haven assets tend to be popular, and likewise in risk-on markets, they tend to be unpopular. Hence absolute return funds make it into both herd and contrarian investment strategies several times over the last decade, and that can lead to muted returns compared to an approach that invests more heavily in shares. In addition, for eight of the last 10 years, UK equities have the dubious honour of being the least popular fund sector, and have frequently lagged other international stock markets, hampering the returns from a contrarian investment style. Taking a step back it’s not a particularly bright idea to invest in something on the basis that someone else is buying it, or indeed not buying it.”
The strategies in detail
Below are the sectors used in this analysis for the one year figures (2024), and the fund sectors investors following these strategies would currently be holding for 2025.
| Strategy | 2024 fund sector | 2025 fund sector |
| Herd investors | Volatility Managed | Corporate Bond |
| Contrarians | UK All Companies | UK All Companies |
| Bargain hunters | China and Greater China | Latin America |
| Performance chasers | Tech and Telecoms | Financial and Financial Innovation |
| Egg spreaders | 20% in each of US, UK, Europe, Japan, Emerging Markets | |
Sources: AJ Bell, FE, Investment Association, Morningstar.
Below are the sectors used in previous years to generate the 10 year performance figures for each strategy.
| Performance Chasers | Bargain hunters | Egg spreaders | Herd investors | Contrarian | |
| 2015 | IA India | Latin America | 20% in each of US, UK, Europe, Japan and Emerging Markets | UK Equity Income | UK All Companies |
| 2016 | European Smaller Companies | Latin America | Targeted Absolute Return | UK All Companies | |
| 2017 | Commodity/ Natural Resources | Short Term Money Market | Targeted Absolute Return | UK All Companies | |
| 2018 | China/Greater China | USD Government Bond | £ Strategic Bond | UK All Companies | |
| 2019 | Healthcare | European Smaller Companies | Global | UK All Companies | |
| 2020 | Tech & Telecoms | UK Direct Property | Global | Targeted Absolute Return | |
| 2021 | Tech & Telecoms | Latin America | Global | Targeted Absolute Return | |
| 2022 | India | Latin America | Global | IA UK Equity Income | |
| 2023 | Commodity/ Natural Resources | UK Index Linked Gilts | Volatility Managed | UK All Companies |
Sources: AJ Bell, FE, Investment Association, Morningstar.
