UK Equity Income, North American and Absolute Return funds are among those that have already made back their losses since the market sell-off began back in early September, according to FE Trustnet research.
The FTSE All Share index suffered its biggest fall since the eurozone summer sell-off in 2011 between 4 September and 16 October this year and other equity and bond indices also experienced heavy losses.
However, as many experts suspected, the early signs suggest the correction was a mid-cycle blow-out rather than something more sinister. FE data shows 13 out of 38 IMA sectors – including IMA North America, UK Index-Linked Gilts and Targeted Absolute Return – have made money since the sell-off began.
Source: FE Analytics
Among the funds that have made the strongest returns over the period include Terry Smith’s Fundsmith Equity portfolio, which has made an impressive 7.89 per cent even though its MSCI World index has made a slight loss.
The likes of Pictet Biotech, JPM US Equity Income and Jupiter India are also among those that have managed returns over 7 per cent.
Performance of funds and index since 4 Sept 2014
Source: FE Analytics
Popular sectors such as IMA UK Equity Income, IMA UK All Companies, IMA Global and the Mixed Investment sectors have made slight losses, but a number of their constituents have managed to bounce back into the black.
Some protected better against the downside than their respective benchmarks, such as Trojan Capital and CF Woodford Equity Income, while others suffered significant falls but have bounced back harder, like FF&P US Small Cap Equity.
Performance of funds and index since 4 Sept 2014
Source: FE Analytics
Neil Shillito, director of SG Wealth Management, says the buoyancy of markets illustrates the importance of sticking to a long-term plan and not panicking.
He says he didn’t think the correction was a 2008 or even 2011-style warning, and doesn’t expect a full-scale crash in the future.
“There are corrections and there are corrections. Back in 2008 it was obvious that it wasn’t just a correction we were dealing with, but something far deeper-seated,” he said.
“Those days were a real cause for concern and if you’d bought following the initial sell-offs you would have lost much more.”
“The latest one was quite predictable. Markets felt toppy at the 6,820 mark, and there were other things to worry about such as the geo-political troubles. I felt at the time it was a mid-cycle correction and that’s what it looks like it’s turned out to be.”
Shillito says it’s a great shame most investors are so short-term in their approach. Those who are prepared to invest on just a decade-long view had a good opportunity to put some money to work when markets fell, he argues.
“It’s a great pity – I’m not even talking about an ultra long-term view – I’m talking 10 years. You can never say never, but it’s pretty unthinkable to think that investors wouldn’t make money from equities on a 10-year view, especially when you consider what reinvesting your income does to your total return.”
“It ties into what you guys have been talking a lot about recently [the FE income transparency campaign]. Finding a fund with a growing and sustainable income holds you in very good stead.”
Shillito points out that the FTSE 100 has made investors money even since its peak back in late 1999. While the index is actually 400 points or so lower now than it was 15 years ago, the compounding impact of dividends means it has still made a positive return of almost 60 per cent.
Total return and capital growth of index since 30 Dec 1999
Source: FE Analytics
Jason Hollands (pictured), managing director of communications at Tilney Bestinvest, agrees that long-term investors would have been wise to top up their holdings when markets took a turn in September and October. However, he is much more cautious than Shillito in the short to medium term, believing some areas of the equity market could suffer further falls.
“Long-term investors should be ignoring the short-term gyrations in the markets,” he said. “Reacting in the middle of a correction after the bad news is priced in isn’t usually a good idea.”
“If anything a market fall should be seen as a good time to top up existing holdings. I wouldn’t advise investors to try and time the market, but if you do this at least you know that your money is being invested in something that is at a lower point than the day previous.”
“That said, while so far the markets have bounced back, you do sometimes get dead cat bounces. It certainly doesn’t mean everything is rosy – the markets have to contend with the end of QE in the US and there’s also the impending interest rate rises, though it does seem they have been pushed back.”
“At the moment it seems there is a big divergence in both developed and emerging markets. India is the bright spot in emerging markets at the moment but it does look expensive, and the same can be said of the US.”
“I’m not saying you should be sitting on cash, but I’m much happier adding to areas of the market where valuations are less expensive.”
IMA Targeted Absolute Return was in the limelight for obvious reasons during the autumn correction. Funds in this sector are expected to weather the storm better than most, even though some have longer time horizons than others.
As a whole the sector has managed to break even, though performance has been mixed. Some, such as BlackRock European Absolute Alpha and GLG Alpha Select Alternative, have produced a positive return over the period without once slipping into the red.
Others, such as the Standard Life Global Absolute Return Strategies fund, have had a more turbulent time, suffering a max drawdown of 2.6 per cent over the period.
However, our data shows that it has still managed to break even. The fall was reminiscent of the £22bn portfolio’s fall during the taper tantrum last year, though it has bounced back much more quickly.
Performance of funds and index since 4 Sept 2014
Source: FE Analytics
The CF Odey Absolute Return fund – long/short strategy which has a risk profile similar to that of equities – has been the best performer in the sector, managing 7.5 per cent. At the other end of the pile is the £314m Artemis Pan European Absolute Return portfolio, which has lost 5.7 per cent.
Only three IMA sectors – IMA Global Emerging Markets, UK Smaller Companies and Specialist – have lost more than 4 per cent since 4 September. A handful of constituents such as PFS Downing Active Management have managed to generate a positive return regardless.
