Funds through a Peter Lynch lens: what to look for, what to ignore
Peter McGahan
Monday 18th May, 2026.
I HAVE always liked Peter Lynch’s line “there is always something to worry about”. It should be stamped on the front of every fund factsheet, preferably in red ink and next to the glossy one-year performance chart.
The worry list changes costume but never leaves the stage. Ukraine, inflation, rate rises, gilts wobbling, banks wobbling, tariffs, trade wars, elections, oil, China, America, artificial intelligence and the next market guru with a crystal ball from the pound shop. Lynch’s point was not that risk is imaginary. It was that waiting for the all-clear is like waiting for the tide to apologise. It won’t.
For fund investors, that means ignoring most short-term noise. A fund manager’s quarterly macro view may be interesting, but it is not a reason to buy or sell. Neither is a one-year performance table. One good year may show skill. It may also show the manager happened to own the most fashionable corner of the market when the music was loudest. I’ve repeatedly warned in this column against painting by numbers in fund selection and against treating simple ratings or noise as investment judgement.
What matters first is the mandate. What is this fund hired to do? Is it global growth, UK equity income, strategic bonds, infrastructure, property, smaller companies, or a single-sector technology punt wearing a respectable tie? You do not judge a sheepdog for failing to fly. A UK equity income fund which fails to keep up with Nvidia-led US technology is not necessarily broken. A global growth fund charging 1.2 per cent a year while repeatedly lagging its proper benchmark might be.
Then look at the holdings. Not every day, unless you enjoy making yourself miserable. Twice a year is plenty for most long-term investors. Read the top 10 holdings, sector split, geographic exposure, benchmark and charges. Has a value fund quietly become a growth fund because growth was fashionable? Has one stock swollen into too much of the portfolio? Has the lead manager left? Lynch’s selling discipline was simple: know why you bought it and sell when that story changes.
Drawdowns are not a fault in equity funds. They are the price of admission. Curvo’s FTSE All-Share data shows a six-year and three-month drawdown from June 2007 to September 2013, with a trough loss of 54.6 per cent. That was not a typo. It was the UK market doing what equity markets sometimes do.
The behavioural cost of misunderstanding this is brutal. Morningstar’s Mind the Gap research focuses on the difference between fund returns and what investors earn because of cash-flow timing; it describes that timing gap as one of the major factors affecting investor outcomes. A perfectly good fund can be turned into a terrible personal experience by buying after a hot spell, panicking in the inevitable fall, and then returning after the recovery. That is not investment management. That is emotional hopscotch.
Performance chasing is the great retail trap. Lynch warned against “hot stocks in hot industries”. In fund terms, that means last year’s hero sector, last year’s five-star darling, and last year’s manager with a halo and a marketing budget. SPIVA’s Europe year-end 2025 report found that 89 per cent of UK large and mid-cap equity funds, and 97 per cent of UK small-cap equity funds, underperformed their benchmarks in 2025. Morningstar’s 2025 European Active/Passive Barometer also found that costs matter: low-fee active funds had better long-term success rates than expensive peers.
Survivorship bias makes the shop window prettier than the storeroom. FE Trustnet found that including dead and merged funds reduced the 20-year return of the IA UK Smaller Companies sector average by about 140 percentage points. Poor funds do not always improve. Some simply disappear from the display.
The FCA has tried to improve clarity. PS19/4 focused on fund objectives and benchmark presentation, including requiring managers to explain how investors should assess performance. Consumer Duty now expects products to meet customers’ needs, characteristics and objectives and to be monitored regularly. Quite right too. Selling someone a specialist fund because it topped a table, without making clear the risk, is not advice. It is a sales funnel with shoes.
So, the Lynch test for funds is beautifully dull. Understand it. Check it. Expect pain. Ignore theatre. Do not chase heat. Ask whether the fund is still doing the job you hired it to do inside the portfolio.
Anything else is just watching the kettle and shouting at the steam.
I will be creating a guide to investing, so, if you would like a complimentary copy, please email info@wwfp.net.
If you have a financial enquiry, please call 01872 222422. Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
