Energy, natural resources and specialist gold funds are amongst the worst places where investors have lost money over the past three years, according to research by FE Trustnet.
No investment is risk-free no matter how ‘safe’ it is said to be, because the nature of securities is to leverage risk in order aim for a positive return over the longer term. But for many, three years is the minimum period of time to assess a fund’s behaviour and its strategy.
Of course, rather than buying securities investors can opt to hold cash in order to preserve value. This has been increasingly attractive in a world where interest rates are at historic lows and inflation has been falling towards zero.
For those who were hoarding away their cash three years ago in an Individual Savings Account (ISA) rather than buying funds, they would be now sitting on a 9.3 per cent return.
Just over 97 per cent of funds have made a positive return over this period but only 88.1 per cent beat cash in an ISA.
Last time we looked at how a high proportion of funds in the IA Global Emerging Market Bond sector and almost 30 per cent of those in the IA Global Bond were down over three years and even more had failed to beat cash.
However, the worst performer in the equity space is the Schroder ISF Global Small Cap Energy fund which lost almost half its value, with the Schroder ISF Global Energy fund not far behind.
Performance of funds in 2014
Source: FE Analytics
John Coyle and Mark Lacey’s two Schroder funds were some of the most volatile of 2014 and suffered the sharpest falls. Most the portfolios are in oil, gas and consumable fuel stocks, which due to weakness in the oil price where hit hard last year. The pair have also bought Tesco stocks for the Schroder ISF Global Small Cap Energy fund.
Both funds have failed to beat the MSCI World Energy Sector benchmark in every full calendar year since launch in May 2010 as well as this year so far.
Mining and raw materials-focused funds also make up a large proportion of the funds down over three years.
BlackRock GF World Mining, BlackRock Gold & General and First State Global Resources have all had lost double-digits, making the BlackRock Gold & General fund an attractive contrarian play according to the FE Research team.
The FE Research team thinks this fund is the best way to gain access to miners of the precious metal.
“BlackRock has a long track record of investing in natural resources and the group’s reputation in this area means the fund has excellent access to company directors. The team also has the background required to understand the different business models of mining companies,” our analysts said.
“It is well ahead of many other gold funds in terms of performance and it has also taken on less risk. The fund would be well suited to an equity portfolio, as performance between this asset class and gold has shown little correlation over long periods of time.”
Evy Hambro manages both of the BlackRock funds, which have lost investors nearly 50 per cent over three years as the market eyed the end of a 30-year ‘commodity super cycle’.
Performance of funds over 3yrs
Source: FE Analytics
For BlackRock Gold & General there is also a more acute pressure on its returns as gold has been hugely out of favour as a financial asset over the past four years or so. Every specialist gold fund in the Investment Association has lost money over this period.
City Financial head of investment research Gill Hutchison says that while the gold price is still low it is a good time to buy the fund.
“The size of the natural resources equity team’s assets under management, as represented by BlackRock Gold & General, BGF World Gold and other mandates, has fallen materially over the past three years. This has occurred during a period of gold price weakness, poor performance from gold-related equities and the consequent waning of investor appetite for this sector,” she said.
The worst performing gold fund is the MFM Junior Gold followed by CF Ruffer Gold.
Joanne Warner’s First State Global Resources was recently placed in the RedZone list of consistently underperforming funds by Chelsea Financial Services.
Chelsea’s Darius McDermott said: “First State Global Resources has been hit by the slump in oil price and commodities in general. Sitting as it does in the wider Global sector, the underperformance is magnified considerably.”