Last year proved challenging for investors in most markets as concerns such as geo-political tension, the threat of rising interest rates, the spread of Ebola, renewed macroeconomic weakness and the rise of ISIS damaged sentiment and sparked a return of volatility.
The first half of 2014 was marked by exceptionally low volatility, with indicators such as the VIX dropping to multi-year lows. However, this did not last and volatility soon returned to the markets in force, with three mini corrections occurring in the final six months of the year.
FE Analytics data shows that 675 funds out of the 3,420 in the Investment Association universe have a volatility score of more than 10 per cent over the past year, while 52 have a volatility score of greater than 20 per cent.
The list of the 10 most volatile funds is dominated by those focused on a few headline-grabbing areas, as the table below shows. Most of these volatile portfolios posted a loss during 2014, although one made significant gains.
Source: FE Analytics
As the table makes clear, many of the most volatile funds were in the IA Specialist sector, and portfolios focused on gold equities were hit especially hard. This trend carried over from the previous two years, when gold equity funds were also the most volatile.
Despite posting losses across the board by the year-end, gold equities started off 2014 with strong gains. Between the start of the year and 17 March, the average gold fund in the IA universe gained more than 23 per cent. However, this soon reversed, with the portfolios yo-yoing over for the summer before starting a gradual move downwards.
The initial rise was attributed to gold miners looking attractive on valuation grounds - they had sold heavily over previous years as the price of gold moved down from the record nominal high of $1,920 seen in September 2011.
However, they were hit hard by the market sell-offs in the second half of the year as investors fled risk assets, which fell harder than global equities and were slower to recover.
Performance of funds and index in 2014
Source: FE Analytics
Angelos Damaskos’ MFM Junior Gold was the most volatile fund of 2014, with a score of 46.45 per cent. It also lost 18.2 per cent, but this wasn’t the biggest fall from a gold fund - that was seen by SF Webb Capital Smaller Companies Gold, which dropped 26.05 per cent, with 21.58 per cent volatility.
Seven of the 20 most volatile funds invested in gold equities, but this was not the only trend - energy funds were also among the least stable.
John Coyle and Mark Lacey’s Schroder ISF Global Small Cap Energy fund was the third most volatile fund of the year and suffered a fall of close to 50 per cent. It has 85.8 per cent of its portfolio in oil, gas and consumable fuel stocks, an overweight position that dragged it down when the oil price halved last year.
However, 2014 was not the only year it underperformed - the one FE Crown-rated fund has failed to beat its MSCI World Energy Sector Small Cap benchmark in every full calendar year since launch in May 2010.
Among the other funds that had a volatile ride in 2014 due to the falling oil price were Damaskos’ MFM Junior Oils Trust, David Lees’ Oceanic Australian Natural Resources - which also had to deal with the plummeting iron ore price - and Schroder ISF Global Energy, also managed by Coyle and Lacey.
Performance of funds and index in 2014
Source: FE Analytics
Russia, where the economy is reliant on oil and the rouble crashed, also had a shocking 2014. Of the four IA funds that focus on the country, all posted losses of more than 40 per cent last year, with an average volatility of 29.54 per cent.
Robin Geffen’s Neptune Russia & Greater Russia proved to be most volatile, with a score of 31.43 per cent. It posted the largest loss of its group at 46.56 per cent. However, it is up 8.27 per cent over 2015 so far.
Of course, more volatile funds also bring with them the possibility of higher returns. This was the case with one of the funds with some of the most volatile runs of the year - JPM Turkey Equity.
This fund, managed by Oleg Biryulyov and Sonal Tanna, made 27.66 per cent in 2014 with volatility of 30.40 per cent. As the graph below shows, the fund and its benchmark were up and down all year, but the general trend was upwards.
Performance of fund and index in 2014
Source: FE Analytics
Over longer time frames, the fund is just as volatile. While it was up close to 30 per cent last year, it fell 22.16 per cent in 2013, rose 41.72 per cent in 2012 and dropped 30.94 per cent in 2011. It is up 10 per cent so far in 2015 and some investors have picked Turkey as a key beneficiary of the falling oil price, but it’s an area that is only for those who can stomach the volatility.
Biotech is another area where higher volatility paid off for investors last year. Both the AXA Framlington Biotech and Pictet Biotech funds had a volatility score of more than 20 per cent, but their returns were stellar - 45.50 per cent in the case of the AXA fund and 30.73 per cent for the Pictet portfolio.
Investors hoping for a year of calmer markets are likely to be disappointed, commentators reckon, as many of the factors that caused turmoil in 2014 remain present.
Marino Valensise, head of the global multi-asset group at Baring Asset Management, said: “The dramatic fall in the price of oil and – more recently – the sharp rise in the Swiss franc both signal that, in certain situations, market forces are uncontrollable.”
“The market has already been very anxious about a probable increase in interest rates by the US Federal Reserve and this had created expectations of higher market volatility. Recent turmoil in the energy and foreign exchange markets has confirmed investors’ expectations of a choppier ride in 2015 and a new volatility regime in the coming months.”
