This year has proved no exception, with many of the forecasts made at the start of 2014 being resolutely proven wrong. With this firmly in mind Guy Foster, head of research at Brewin Dolphin, has highlighted the biggest unexpected events of the year.
“2014 has been a year of change and the sheer fall of oil and iron ore prices, the collapse in Russia’s fortunes and Tesco’s accounting irregularities have surprised us all,” he said.
In the below article, we look at five of Brewin Dolphin’s biggest surprises of the year and how they impacted fund investors.
Gilts
At the start of the year few investors expected much upside from government bonds given their already low yields. Some were calling the end of the 30-year bull market in fixed income but they were surprised by gilts’ performance in 2014.
Having started the year with yields at close to 3 per cent, 10-year gilts have since rallied to 1.83 per cent.
Meanwhile, IMA UK Index Linked Gilts is the second best performing sector of the year, beaten only by IMA North America, after returning 17.72 per cent. The average fund in the IMA UK Gilts sector is up 13.38 per cent, putting it in fourth place.
Performance of sectors in 2014
Source: FE Analytics
Foster said: “Few anticipated that there would continue to be so many buyers of bonds relative to other asset classes. Investors seem unperturbed and unconstrained by the poor returns on offer, with historically low yields and still falling.”
Four funds in the IMA UK Index Linked Gilts sector have returned more than 20 per cent over the year to date - Schroder Institutional Index Linked Bond, F&C Institutional Active Index Linked, BlackRock Index Linked Gilt Tracker and F&C Inflation Linked Annuity Conversion.
Meanwhile, seven IMA UK Gilt funds are up over 20 per cent, including Newton Long Gilt, Vanguard UK Long Duration Gilt Index and AXA Sterling Long Gilt.
Russia
The list of the funds making the greatest losses in 2014 includes many focused on Russian equities, as was noted in an FE Trustnet article earlier this week.
Russia has fallen spectacularly this year, after the US and European Union hit it with sanctions over its intervention in Ukraine and the fall in the oil price battered its economy further.
Foster said: “Russia’s status collapsed as it went from host of the Winter Olympics, which celebrates international sportsmanship, to global pariah. Russia’s fall from grace has undone a decade of economic reform and returned her long suffering people to face their seemingly terminal fate of high inflation and low growth.”
The outlook for Russian equities over the coming year is downbeat, as their fortunes remained tied to the actions of NATO when it comes to international politics and to OPEC for the oil price.
Experts anticipate the west will keep political pressure on Russia while OPEC has signalled it is unwilling to cut supply to push up the oil price.
Over 2014 so far the MSCI Russia index has fallen 38.49 per cent while the MSCI AC World has managed to make a 12.40 per cent gain.
The funds hit hardest are Baring Russia, which is down 45.63 per cent; JPM Russia, down 43.59 per cent; and Neptune Russia & Greater Russia, down 43.46 per cent.
Tesco
Shares in supermarket giant Tesco have tumbled 41.20 per this year after the firm issued four profit warnings, was hit by slumping sales and announced a £263m black hole in accounts linked to commercial income. In contrast, the FTSE 100 managed to eke out a 1.77 per cent rise.
Performance of stock vs index over 2014
Source: FE Analytics
Foster said: “Whilst a decline in sales performance by the major supermarkets was expected in the wake of rapid gains by Aldi and Lidl, the magnitude of the decline and the significant impact on profitability of Tesco in particular took the market by surprise. The discovery of accounting irregularities shocked everyone and compounded the issue.”
Several funds count Tesco as a top 10 holdings with Kevin Murphy and Nick Kirrage's five crown-rated Schroder Income fund being one of the largest at £1.5bn. It’s also owned by Schroder Income Maximiser, L&G Ethical and AXA Ethical Distribution.
SJP High Octane has one of the largest allocations to the supermarket at 5.3 per cent. Manager Richard Oldfield topped up his position when Tesco was down about 30 per cent in September, pointing out that management have several options to turn things around, including selling some of its Asian operations.
“We expect, therefore, some ugly quarters in profitability, but ultimately reemergence,” Oldfield told his investors.
The Budget
Chancellor George Osborne unveiled massive changes to the UK pensions system in March, when he announced in the 2014 Budget that tax restrictions on pensioners' access to their pension pots to be scrapped, ending the requirement to buy an annuity.
“George Osborne’s surprise spring Budget announcement certainly caught the life insurers on the back foot. Many are attempting to adjust their business models in time for April next year when the main changes take place,” Foster said.
“Retirees will be able to draw as much of their pension as they wish at their marginal rate of tax after taking their 25 per cent tax-free lump sum. We continue to like those companies which were well placed going into the reforms and those which have the versatility to weather the changes.”
In the aftermath of the Budget, funds holding the annuity-producing life insurers were hit hard. However, the fund management industry is expected to be a long-term beneficiary of the pensions overhaul as retirees look for new homes for their savings.
Analysts at Citi predicted that inflows into funds could rise by up to 22 per cent a year, meaning around an extra £5bn a year into the industry, as some retirees choose to invest their freed-up cash rather than put it in an annuity or spend it.
The overhaul is also expected to lead to new product ranges aimed specifically at the post-retirement market.
Iron ore
Foster’s final surprise is the plunge in the iron ore price, which have halved over the course to 2014 to reach around $70 a metric tonne. The metal’s price is now down some 65 per cent from its peak in February 2011.
He said: “We were not surprised by the direction; however the sheer magnitude of the falls in iron ore prices were rather astonishing. Supply growth was better than expected while demand growth was lacking, resulting in a larger surplus than we and the market were forecasting for 2014.”
The impact on funds can be seen from the worst performer of the year - David Lees’ Oceanic Australian Natural Resources fund, which is down 47.91 per cent. While its largest holding is oil firm Swala Energy, it is exposed to iron ore through major holdings such as Volta Mining and Tawana Resources.
