Four of the top-five best-performing funds over the past three months have a specific focus on investing in bullion and mining stocks. Angelos Damaskos’ MFM Junior Gold fund leads the way with returns of 29 per cent.
Source: FE Analytics
The strong run of the likes of BlackRock Gold & General and Smith & Williamson Global Gold & Resources follows a dreadful period of performance, with the average gold fund still down well over 50 per cent over a three year period.
A handful of deep value investors have long argued the case for the battered sector. Worries over deflation in the eurozone, weakening emerging market currencies and the Ukrainian crisis have all helped support the gold price this year, giving a much needed boost to mining stocks.
“Gold had a selling crescendo at the end of last year, and combined with the poor operational performance of mining companies, there was a perfect storm for these funds,” said fund of funds manager Richard Scott, who runs PFS Hawksmoor Distribution.
“There’s been a bit of a bounce for macro reasons, but there have also been a number of changes in management, and operating performance has improved for a number of companies.”
“It’s very hard to take a strong view on gold because there are strong arguments for it spiking both upwards and downwards, but we think having a little bit of exposure to gold miners is a good hedge against a possible messy end to quantitative easy.”
Scott holds both the BlackRock Gold & General and Investec Global Gold in private client portfolios.
Outside of this niche area of investment, it’s once again been small cap companies that have led the way this year. The two best performing sectors since the beginning of January are IMA European Smaller Companies and IMA UK Smaller Companies, which have returned 4.8 and 4.17 per cent, respectively.
Source: FE Analytics
Standout performers include CF Miton UK Smaller Companies, MFM Techinvest Special Situations and Elite Webb Capital Smaller Companies Income & Growth, which have all returned in excess of 10 per cent in 2014.
Unlike gold funds, these have built on a very successful period, with both sectors delivering more than 20 per cent in 2012 and 2013. Worries are beginning to surface about valuations in these areas however, particularly UK mid caps, which a number of fund managers such as JO Hambro’s Clive Beagles and Threadneedle’s Richard Colwell have been cutting down their exposure to.
2014 has had a far more muted start to the year than 2013, with very few funds managing double digit returns in the first quarter. This is likely to be of little surprise to most fund managers, with many forecasting a softer period for risk assets in light of such a strong five years since the financial crisis.
The average UK, European and US equity fund has just about broken even so far this year, with only a handful managing returns in excess of 5 per cent.
Small to mid-cap focused funds such as MFM Slater Growth and AXA Framlington UK Mid Cap have performed well, as have a handful of deep value funds such as CF Miton UK Value Opportunities and GLG Undervalued Assets, which have the ability to deliver strong share price growth regardless even in flat markets.
More generally however, it’s been the more specialist areas with little correlation to global equities that have delivered the best returns so far this year.
The Franklin MENA fund is another constituent of the IMA Specialist sector which has had a great start to the year, making it into the top-10 with returns of 14.4 per cent. While emerging markets have suffered en masse, frontier markets have thrived over the past two years or so, in part because they have haven’t had to contend with outflows from the ETF market.
Baring MENA has also had a good 2014, with returns of just over 11 per cent.
At the other end of the scale are emerging markets. With the exception of India which has had a relatively strong start to the year, emerging markets have had to contend with further outflows from retail and institutional investors in 2014. Fears over QE tapering, slowing GDP growth, currency weakness and political unrest have weighed heavily on the asset class.
The majority of funds focusing on China, Brazil and most notably Russia have lost money this year, with a number more than 10 per cent in the red. All 10 of the worst performing funds this year have a focus on emerging Europe, with 16 of the 20 having a focus on emerging markets more generally.
Source: FE Analytics
Though emerging markets have taken the headlines, IMA Japan has in fact been the worst performing sector so far in 2014, with losses of more than 6 per cent. Chris Taylor’s Neptune Japan Opportunities has been a particularly weak performer with losses of 10.87 per cent.
The manager’s ultra-bullish stance on market has hurt performance, as has his active management of currencies.
The Neptune fund remains a strong performer over the medium term however, thanks to Taylor’s strong showing in 2013. Our data shows he came close to topping the sector with returns of 50.74 per cent.
Performance of fund since Jan 2013
Source: FE Analytics
Scott says weakness in Chinese growth and the recent sales tax hike from 5 to 8 per cent have been the biggest reasons for the sell-off. However, he remains bullish on Japan’s prospects on the whole.
“I think the monetary and fiscal policy will make sure the economic recovery stays on track,” he said. “There have been comparisons made with the 1997 tax hike, but it’s important to remember this coincided with an Asian currency crisis.”
“The US market rose 20 per cent above earnings growth last year, but though Japan did well its rise actually trailed earnings growth.”
As well as Japan, Scott has been adding to his emerging markets exposure, which he thinks are at an attractive buying opportunity given the recent falls.
Bonds have been far from exciting this year, though risk-averse investors will be pleased to see that they’ve held up against volatility in equity markets. All seven IMA fixed interest sectors have returned between 1 and 3 per cent this year.