The power of compounding through market cycles

By Darius McDermott on 24 March 2026 in Income investing

Most people’s investment horizon can be measured in decades rather than years. Inevitably those decades will include periods of geopolitical and economic upheaval. Good fund managers will ruthlessly prioritise the long term. This skill is perhaps particularly important today as investors are forced to navigate, at last count, tariffs, military incursions and major technological upheaval, alongside the usual ebb and flow of economic progress.

Decades-long tailwinds

The top funds over the past two decades have been those that have been on the right side of these changes. This has been easier for some funds rather than others. It’s been a good twenty years to be a technology manager, for example. The average return of a fund in the IA Technology and Technology Innovation sector was 1,032%*.

The top managers have made the best of a great market. The Fidelity Global Technology fund, for example, has delivered 1,698%*. The US has been a similarly fertile market, with the average fund in the North American sector up 575%*. Nevertheless, AXA Framlington American Growth and Baillie Gifford American have delivered returns of 824% and 896% respectively*. In both cases, they have had to sit through some uncomfortable periods to achieve those returns.

Gary Robinson, manager of the Baillie Gifford American fund, says the group’s approach is to focus on what they know:

“The fallout from huge geopolitical events is inherently unknowable in the moment. But time eventually reveals what truly matters for long-term growth investing. For example, 2006 also included things most people didn’t discuss at dinner. Amazon introduced Simple Storage Service (S3) and Elastic Compute Cloud (EC2), metered storage and compute delivered over the web.”

He says this helped to lay the groundwork for how media, commerce and communication operate today. “YouTube also launched in 2005 and has gone on to replace traditional TV across the world, built on top of cloud technologies. As long-term growth investors, that’s the point. Every year brings change and significant events at an increasingly rapid rate. Our job is to keep asking a simpler question: What is most likely to drive growth and compounding over the next five to 10 years?”

Asia’s growth story

Asia has also held plenty of growth opportunities. The region has seen strong and consistent economic expansion over the past twenty years, which has created plenty of opportunities for investors. Nevertheless, some have exploited this more successfully than others. While the Asia Pacific ex Japan sector is up 421%, the Baillie Gifford Pacific fund is up 904% over 20 years*.

Manager Roddy Snell has had to navigate changing market perceptions of China, new markets such as Vietnam and Asia’s changing role on the world stage. He has been focused on the domestic growth story in the region, which has proved particularly fruitful. It is still a region that requires careful navigation, with pockets of corporate governance weakness and state ownership where returns have been lacklustre. While Baillie Gifford has been an outlier, other Asian funds have also found opportunities – FSSA Greater China Growth (724%), Invesco Asian (679%) and Schroder Asian Income (630%) are all significantly ahead of the sector average*.

Finding growth in slower regions

Making the most of a great market is impressive, but fund managers also need credit for eking out returns in regions with little or no growth. This is why the 664% return from the BlackRock European Dynamic fund* deserves a mention. Europe’s economy has been persistently weak with the Euro Area growing at an annual pace of just over 1% for much of the past twenty years. Manager Giles Rothbart and his predecessors have managed to uncover pockets of growth. The fund has outperformed the IA Europe ex UK sector by 384% over a 20-year period*.

The IFSL Marlborough UK Micro-Cap Growth fund would also go in this category. While UK small and micro-caps have had periods of success over the past 20 years, fund managers in the sector have always had to navigate significant highs and lows, and it has been a very difficult period for the sector since 2022. The Marlborough fund is up 521%, almost double the average return of 248% from the IA UK Smaller Companies sector*.

The team at Marlborough are focused on finding idiosyncratic opportunities among the UK’s smallest listed companies. For example, the fund currently holds IQE, a manufacturer of epitaxial wafers, which are used in semiconductor manufacturing, alongside Creo Medical, a medical device company focused on endoscopy, and XP Power, a power controls business**. Artemis UK Select (414%) and Jupiter UK Dynamic Equity fund (418%)* have also significantly outpaced a difficult UK market.

Where were the challenges in the past 20 years?

It is worth noting the other end of the performance tables. Bond funds and the Targeted Absolute Return sector have delivered slower growth, as might be expected. Property’s weakness is perhaps more surprising. The sector has been through a series of difficulties. It suffered liquidity constraints, which saw a number of open-ended funds close due to redemptions. The sector was already wobbling over the impact of online retail on the high street when the pandemic hit, ushering in the ‘working from home’ era and new threats for the office market. Higher interest rates provided yet another setback.

Nevertheless, even in this difficult sector, some managers have been able to produce good returns. Marcus Phayre Mudge has been at the helm of TR Property since 2011 and has steered it through many of these difficult moments. He believes the sector may be due a revival:

“Equity prices remain heavily discounted. The little bit you hold in real estate is very much the designated driver at the party, the steady-eddie…at some point investors will need that.” He also sees more potential M&A, helping realise value in the sector.

In 2006, the world was embroiled in another Middle Eastern war, Nintendo was releasing its first Wii, while the UK was subject to a wave of terror attacks. It is a reminder that the world has always been volatile and unpredictable. The best fund managers find a way to focus on those factors likely to be the real game changers over the long term.

*Source: FE Analytics, total returns in pounds sterling, 16 March 2006 to 17 March 2026

**Source: fund commentary, February 2026