On top of this, given that the global economy was expected to strengthen, the poor performance of most equity markets has caught out the large majority of asset allocators and individual investors.
I say most, as there has been a clear divergence in performance between different regions as while the IMA UK All Companies, IMA Europe ex UK and IMA Japan sectors are either flat or have lost money, US equities have had another thunderous year.
Source: FE Analytics
As the table above shows, the IMA North America sector has topped the performance league this year as it is up a healthy 18.52 per cent year to date – building on its 30.87 per cent gains in 2013.
Factors such as the strengthening US economy, a continued appetite for risk among investors and the relative weakness of the dollar against sterling for the first part of the year have all contributed to those gains.
However, active managers in the US have once again failed to beat the wider S&P 500, which is up 21.98 per cent so far this year having broken through its record high on a number of occasions over the last 12 months.
In fact, only 21 funds out of the 114-strong sector have beaten the index this time around.
The likes of Janus Opportunistic Alpha, Fidelity American Special Situations, F&C North American, Standard Life American Equity Unconstrained and Old Mutual North American Equity are among the funds to have beaten the index.
One of the major reasons why the S&P has outperformed this year is because the largest constituents of the index – which most active managers are underweight – have driven the rally. This is shown by the fact that the IMA North American Smaller Companies sector has returned 10 per cent this year, making it the sixth best performing sector.
Nevertheless, the strong outperformance of US equities relative to other developed markets will be a major reason why the IMA Global and IMA Global Equity Income sectors have made it onto the list of best performers, given North America makes up such a significant chunk of the MSCI AC World and FTSE All World indices.
As mentioned earlier, bonds have had a surprisingly good year in 2014 and that is reflected in the fact that three of the top 10 performing sectors have been those which purely focus on fixed income.
Though monetary policy has been tightening in the US and the prospect of higher interest rates in the UK has been on the cards, 10-year gilts currently yield just 1.82 per cent, after starting the year at just shy of 3 per cent.
Funds within the IMA Index-Linked Gilts sector have been the prime beneficiaries of that rally – due to their longer duration characteristics – and the average fund is up 17.72 per cent this year, making it the second best performing IMA sector.
Performance of sectors vs index in 2014
Source: FE Analytics
The IMA UK Gilt sector – which has returned 13.38 per cent – and the IMA Sterling Corporate Bond sector – which is up 9.27 per cent – rank fourth and eighth respectively in the list of best performers this year.
However, though bonds have performed well, the IMA Property sector – which is increasingly being used as an alternative to fixed income funds – is up a healthy 13.25 per cent.
Though most of those returns have been generated by property shares funds, like BNY Mellon Global Property Securities, M&G Global Real Estate Securities and F&C Global Real Estate Securities, which have all gained more than 25 per cent year to date, traditional bricks and mortar funds have also performed well.
Funds such as Threadneedle UK Property, L&G UK Property and Royal London Property have all delivered double-digit returns in 2014.
However, given those returns and as investors have increasingly been looking towards alternatives for diversification, concerns have been raised about the growing cash balances of direct property funds as managers have been unable to invest their inflows quickly.
Two other sectors which have performed well this year are IMA Asia Pacific ex Japan and IMA China/Greater China, which are intrinsically linked given the large proportion most Asian funds have to China and Hong Kong.
Nevertheless, on the back of low valuations due to the consensual view that emerging markets would continue to struggle this year both sectors have surprised and have delivered returns of close to 10 per cent.
Apart from the US, developed equity markets have struggled and that is shown by the fact that six of the bottom 10 worst performing markets focus on the UK, Japan or Europe.
Issues such as the strength of the pound, the prospect of higher interest rates, the falling oil price, geo-political tensions, weak growth in the eurozone and profit taking from last year have all meant the IMA UK All Companies sector has struggled this year. It is now up 1.5 per cent year to date, but that is largely due to the recent ‘Santa rally’.
Certain funds have performed much better, however. The top five performers in the sector – MFM Slater Recovery, MFM Slater Growth, Neptune UK Mid Cap, Invesco Perpetual UK Strategic Income and CF Miton UK Value Opportunities – have all returned more than 10 per cent.
Performance of funds versus sector in 2014
Source: FE Analytics
On the other hand, the likes of Schroder UK Opportunities, M&G Recovery and Unicorn UK Growth have all lost more than 8 per cent, placing them in the bottom decile.
Though the five best performing IMA UK All Companies funds have a relatively high weighting to mid and small caps, the IMA UK Smaller Companies sector was the worst performing IMA sector this year with losses of 2.21 per cent.
While 17 of the 53 funds within the sector have delivered a positive return, the market rotation out of high-multiple growth stocks in the spring and the volatility over the autumn and winter months has meant managers in the UK small cap space have struggled.
Highly-rated funds such as Schroder UK Dynamic Smaller Companies and Standard Life UK Smaller Companies have lost more than 8 per cent this year, for example.
Given that Europe has been plagued by the threat of deflation and slowing economic growth, it won’t come as much of a surprise that the IMA Europe ex UK and IMA European Smaller Companies sectors are among the three worst performers this year with respective losses of 0.21 per cent and 1.29 per cent.
However, though the Japanese equity market has been flooded with liquidity thanks to the Bank of Japan’s quantitative easing programme, the IMA Japan sector has also had a tough time of it in 2014.
It has returned 1.2 per cent this year and those gains have come about recently, largely thanks to prime minister Shinzo Abe’s super majority in the recent snap election.
The sales tax hike earlier in the year, concerns about the longevity of Abe’s structural reform and the fact the economy fell into recession recently have all weighed on the Nikkei, but many are tipping it to perform well in 2015 given its low valuation, decent earnings growth and the expected huge central bank support.
