One of the most commonly used phrases by managers with a more cautious outlook is that there is a lack of value within global markets as, up until the last few months, ‘all asset classes have been risen together’ over recent years thanks to policies such as ultra-low interest rates and quantitative easing.
While it is true that correlations have increased and that developed market bonds and equities have delivered strong returns for investors since the market bottomed after the previous financial crisis, there are also funds which have produced eye-watering losses over the past six or so years.
This is demonstrated in the graph below, which shows the performance of an equally weighted portfolio of the top 10 performing Investment Association funds since the crisis against a similarly weighted portfolio of the 10 worst performers.
Performance of composite portfolios since the end of the financial crisis
Source: FE Analytics
Of course, some of the worst performing funds and sectors have fallen for very good reasons ranging from the bursting of a previous bubble, macroeconomic events, changing technology or a general lack of demand.
However, with markets in a state of flux following the recent sell-off, we ask the experts whether investors should now consider these three sets of funds – which have done nothing but fall over recent years – given they are now much more lowly valued and sentiment is so depressed towards them.
Gold funds
Having been one of the most popular asset classes in the years leading up to (and immediately after) the crash, gold equity funds – which are viewed as a leveraged play on the gold price – have fallen massively out of favour.
The reasons for that are clear: the gold price has fallen substantially since its peak in 2011 while corporate governance from an underlying company perspective has been far from positive.
However, you might be surprised just how poorly gold mining funds have performed. According to FE Analytics, the average portfolio is down more than 75 per cent since its peak in 2011 compared to an 18 per cent fall in the gold price and 30 per cent rise in the MSCI AC World index.
Performance of funds versus indices since April 2011
Source: FE Analytics
Clearly there are still risks facing the asset class, but given those losses and the amount of money which has come out of these funds over recent years, is now a time to be looking at gold miners from a contrarian point of view?
Ben Willis, head of research at Whitechurch, doesn’t think so. 
“We are not gold bulls and while we have held BlackRock Gold & General in the past, kept it on our panel and have been having another look recently, we are not convinced,” Willis (pictured) said.
“You have to remember what gold is used for. It is a hedge against the dollar and a store of value in an inflationary environment. The dollar is set to remain strong and inflationary pressures are not prevalent, though I’m not saying that is always going to be the case.”
“However, it also doesn’t yield anything so how do you really value it? What is its intrinsic value? People who hold [gold miners] may be doing it as a speculative play but I don’t buy it.”
Apollo’s Ryan Hughes agrees with Willis. He points out that due to the rise of the gold ETF, the price of the precious metal is no-longer acting in a predictable way (rising during risk-off events, falling when sentiment is high) meaning that it is no longer “investable” as it is throwing off “random outcomes”.
In regards to the gold miners themselves, Hughes warns that the slowdown in China (along with the unpredictable gold price) means they are best left alone. Willis adds, though, that while it may be a speculative trade he may reconsider his position if the dollar weakens, inflation returns or the gold price falls below $1,000.
Energy funds
Energy funds have witnessed a similar fate to gold mining portfolios over recent years, as the collapse in the price of Brent crude (thanks to oversupply and China’s slowdown) has massively affected share prices and sentiment towards the asset class.
According to FE Analytics, the average energy fund in the Investment Association universe is down 34.2 per cent over the past 12 months, though it has still fared better than the price of oil which has fallen more 45 per cent over that time.
Performance of funds versus index over 1yr
Source: FE Analytics
Headwinds such as continued oversupply, slowing demand thanks to China and the impact those two factors would have on energy companies’ business models continue to dog the sector. However, Willis thinks they should now be falling onto a contrarian investor’s radar.
“Yes, there is lots of supply but it is now so cheap,” Willis said.
“Trying to call what will happen over the next 12 months or so is very difficult but if I were a private investor and wanted to buy something for the next 20 years I would consider it. You’ve got to ask, in 20 years’ time is the demand for fossil fuels going to increase?”
“When you’re looking over that sort of time horizon, it might give you a bit more conviction. I would buy it and effectively lock it away in a draw if I were to do it, though.”
Hughes has a similar opinion as while he says the drivers for gold demand are indistinguishable, there is a clear reason why demand for oil will increase and therefore make oil-related companies far more profitable than they are today.
“Energy is a little bit different and is certainly more interesting. There is a bit more of a dynamic there as yes there is oversupply with shale gas and Iran wanting to come back to the market, but the long-term drivers are there as demand is still there,” Hughes said.
“Oil will soon find a floor and we are exploring with a view to make tentative steps back into the sector.”
Within one of his highest risk portfolios, Willis currently uses the Artemis Global Energy and MFM Junior Oils funds.
Emerging market debt funds
They had become increasingly popular in the years of seemingly unlimited quantitative easing from the US Federal Reserve and a subsequent wave of emerging market debt fund launches led the Investment Association to create a new sector dedicated to the asset class.
However, while money poured into emerging market bond funds in 2012 and early 2013 in the search for higher levels of yield, that trend immediately reversed in May 2013 when the US announced it would look to reduce its stimulus programme.
Since the so-called ‘taper tantrum’, FE data shows the IA Global Emerging Market Bond sector is down close to 17 per cent making it the second worst-performing peer group in the open-ended universe over that time.
Performance of sector and indices since the ‘taper tantrum’
Source: FE Analytics
Funds such as Investec Emerging Markets Local Currency Debt have seen their AUM’s more than halve over the period, with that fund in particular shrinking by 60 per cent from £2.3bn to £900m as a result of outflows and capital losses.
Clearly, the threat of slowing growth in China and resulting currency weakness are factors that have investors worried. However, the recent events in global markets and the deflationary impulses out of the world’s second largest economy may force the Fed to push back its first potential rate hike.
As a result, this could make emerging market debt funds more attractive given the higher level of income they offer (the average fund in the sector yields 5.2 per cent).
Nevertheless, Hughes says the emerging market debt funds are best left alone.
“We are not really looking at them right now and they should only ever form a small part of a portfolio. For us, there are enough opportunities out there for us to not go bottom fishing in emerging market debt,” Hughes said.
Willis also has no plans to allocate directly to emerging market debt funds given the risks facing the developing world and the chance of tighter monetary policy in the US.
“Yes, you might get a yield pick-up, but is it worth it? It’s a fixed income asset class where you get equity like volatility. I would prefer to buy an emerging market equity income instead, to be honest.”
However, Willis says he is happy to allocate to an experienced strategic bond manager, who has a tried and tested strategy and has a very flexible remit to hold part of their portfolio in the asset class for diversification purposes.
Two IA Sterling Strategic Bond funds which hold close to 5 per cent in emerging market debt are Investec Strategic Bond and Rathbone Strategic Bond, according to FE Analytics.
