Riskier assets classes have performed the best in 2012, according to data from FE Analytics, despite the doom and gloom.

At the half-way point in the year, IMA UK Smaller Companies, IMA Sterling High Yield and IMA European Smaller Companies top the performance league table with returns of 8.79 per cent, 8.07 per cent and 8.01 per cent.

IMA Technology & Telecoms and IMA Property complete the top five with returns of 7.27 per cent and 6.59 per cent.

In a recent interview with FE Trustnet, John McClure said that he believed there was a lot of growth in the technology sector. His Unicorn Free Spirit fund has 80 per cent exposure in the sector.

Top-10 best performing sectors 2012

Sector	Returns (%)
UK Smaller Companies	8.79
Sterling High Yield	8.07
European Smaller Companies	8.01
Technology & Telecoms	7.27
Property	6.59
North America	5.98
North American Smaller Companies	5.53
Japanese Smaller Companies	5.44
UK Equity Income	5.34
UK All Companies	5.13

Source: FE Analytics

Against the backdrop of a UK economy in recession, a bleak growth outlook for the foreseeable future, the worsening eurozone debt crisis and a dramatic slowdown in China, the outperformance of riskier asset classes – especially European Smaller Companies - is highly surprising. 

Smaller companies and high yield bond funds typically perform strongly in fast-rising markets associated with recovery and bull market conditions.

However, Hargreaves Lansdown’s Rob Morgan says that this is roughly what we have experienced in the first six months of the year.

“The rally really began when the FTSE recovered from 4,800 in August last year and carried on strongly through the start of this year,” he said. “Fears about the eurozone pegged it back to 5,400 but we’ve bounced back since then and are up in the year-to-date.”

“High yield has been really interesting because financials have rallied strongly from an oversold position. Smaller companies are a lot less liquid and tend to do much better than the rest of the market when sentiment suddenly improves.”

Morgan warns that worsening data or newsflow can quickly change the direction of the market as investors who have been watching the markets over the last 18 months will testify.

“People are skittish,” he said. “The eurozone is a real turn-off for a lot of investors and then you have the problems in China as well. Commodities are traded with a great deal of volatility and there are concerns over the so-called fiscal cliff in the US at the end of the year.”

“When there’s no clarity there is volatility,” he added. “There are a huge range of outcomes at the moment and they hinge on what happens in the eurozone. There is the potential for markets to rally strongly and to suddenly fall.”

At the foot of the performance table China focused funds have struggled amid fears of a hard landing and Gilt funds, having been the best performing asset class in 2011, languish at the bottom.

Top-10 worst performing sectors 2012

Sector	Returns (%)
UK Index-Linked Gilts	-1.42
Short Term Money Market	0.23
Money Market	0.38
Absolute Return	0.51
UK Gilt	1.39
Protected	1.48
China/Greater China	1.73
Specialist	1.96
Japan	2.19
Mixed Investment 0%-35% Shares	2.23

Source: FE Analytics

Morgan commented: “While we still have the government engaging in asset purchases it's difficult to see the market falling out of gilts but we are not optimistic because yields are so low.” 

One thing the analyst is sure off is that once some semblance of certainty returns, the market is poised for a lot of growth.

“Fund managers are telling us that trading volumes are very low at the moment. A lot of investors are sitting in the sidelines, waiting for a stimulus rally or an end to the eurozone crisis. I’m not going to say there’s a wall of money ready to enter the market but there’s certainly some there ready to go when things pick up.”