The sell-off in the fixed income market means that bond sectors dominated the list of the worst performing peer groups over the first half of 2015, but specialist funds investing in areas such as Turkey and Brazil posted double-digit losses over the period.
Last week, FE Trustnet looked at the best performing funds over the two quarters, noting that the Japan, China and smaller companies sectors made the highest gains. When it comes to individual funds, those specialising in Korea had a good run, as did those owning bombed-out Russian stocks.
However, volatility ramped up in the opening six months of the year after investment sentiment was hit by a multitude of factors, including the UK general election, the Greek debt crisis, deflation in some parts of the world and the looming rate rise in the US.
It was the bond market that caught investors’ eyes the most during the first half. As well as the concern over the timing of the Federal Reserve’s first interest rate increase, issues such as signs of better than expected economic growth and a pushback against negative rates in some parts of the bond market led to a strong sell-off in fixed income.
FE Analytics shows the IA Global Bonds sector was the worst performing peer group over the six months in question as the average fund here lost 2.94 per cent. As the below graph shows, the sector was up just over 3 per cent in early April but the trend from there was broadly downwards.
Other bond sectors fared slightly better over the first half, but still ended June with losses. The average fund in the IA Global Emerging Market Bond sector was down 2.73 per cent, IA UK Gilts lost 1.84 per cent, IA Sterling Corporate Bond 0.92 per cent and IA UK Index-Linked Gilts 0.60 per cent.
Performance of sectors over 2015’s first half
Source: FE Analytics
Chris Iggo, chief investment officer for fixed income at AXA Investment Managers, says investors should not expect the volatility that has stalked bond markets over recent months to end any time soon.
“The advice I have taken regarding my holiday in Greece is to hold lots of cash,” he said. “I recommend the same thing for investors in the short term because volatility in the weeks ahead is likely to create value opportunities for credit, high yield and emerging market bond investors that have not been seen in a while.”
Within the IA Global Bond sector, the Pimco GIS Euro Ultra Long Duration fund was the worst performing portfolio with a 15.41 per cent loss over the six months. The fund has two-thirds of its assets in European government-related bonds, which were hit hard during the sell-off.
However, this was not the worst performing fund in the whole Investment Association universe - that spot has been taken by HC FCM Salamanca Global Property, which is down 20.96 per cent.
The £8.8m fund invests in real estate assets in emerging markets, but these regions have been overshadowed by fears of the impact of the Fed’s first interest rate hike and macroeconomic worries in individual countries.
That said, the fund has struggled over recent years. While it was the second highest returning property portfolio in 2011, the one FE Crown-rated fund was one of the sector’s worst performers in 2012, 2013 and 2014 – posting losses in all three years.
Source: FE Analytics
The second worst performer over the two quarters was JPM Turkey Equity, which was down 17.03 per cent. The Turkish stock market sold off on the back of uncertainty over an election in early June and the prospect of a US rate rise.
Turkey is seen as one of the countries most at risk when the Fed lifts rates. Added to this was the run-up to a parliamentary election, in which the ruling Justice and Development Party (AKP) failed to get a majority and scuppered the hopes of president Recep Tayyip Erdoğan in pushing through constitutional changes.
But as the above graph shows, funds with a focus on Latin America – and specifically Brazil – litter the list of the first half’s worst performers.
JPM Brazil Equity posted a 14.12 per cent fall over the six months, but HSBC GIF Brazil Equity, BNY Mellon Brazil Equity, Neptune Latin America and Charlemagne Magna Latin American were all hit by double-digit losses during the period.
The Brazilian economy has been gripped by a severe recession, which has caused earning for firms listed on the Ibovespa to fall by an average of 25 per cent in the first quarter of the year. More companies in Brazil are forecast to cut dividends than in any other major developing nation, according to research by Bloomberg, with Vale SA and Cia Hering among those tipped for cuts.
The country is also expected to be affected by rising US interest rates, but macroeconomic forecasting consultancy Capital Economics says the biggest risk to Latin America is the slowdown in China. However, the worst of this may now be coming to an end.
“While many parts of the emerging and developed world are sweating over the potential fallout from a looming Greek exit from the eurozone, a deeper downturn in China remains the key external risk for Latin America,” the group’s analysts said.
“Fresh concerns over China’s outlook have surfaced in recent weeks following a decline in its equity market over the past month and further policy easing by the People’s Bank. For our part, we think that the bulk of the slowdown in China – and its impact on Latin America – has probably now happened.”
“Following steep falls since 2011, prices of many industrial metals such as copper look set to rebound over the coming quarters, while others such as iron ore are unlikely to fall much further from here. A turnaround in industrial metals prices should give a timely boost to the region’s major metals exporters – particularly Chile, Peru and Brazil.”
Of course, this does not necessarily mean the region’s stock markets will bounce on the back of this. Although Brazil is in the midst of a harsh recession, policymakers are limited in how much they can kick-start growth given their battle to bring down inflation from 9 per cent.
