Neptune Russia & Greater Russia, Invesco Perpetual Japan and M&G European Smaller Companies are among the internationally focused funds that were hit by losses in 2014 but have made returns of more 10 per cent over the year to date, the latest FE Trustnet research shows.
There’s no doubt that 2015 has seen a significant ramp up in volatility. Despite the opening months of the year being ones when stock markets tended to rise – to the point where many achieved new record highs – concerns such as China’s slowing economy and the timing of the Federal Reserve’s first interest rise mean the months since the summer have seen more of a downward trend.
Performance of indices over 2015
Source: FE Analytics
Of course, this follows a more level 2014 when the bull run of the previous two years started to run out of steam and returns were harder to come by. These led to several areas of the market being relative flat over the year – the FTSE All Share, for example, made a total return of just 1.18 per cent.
But other areas were hit hard. Sanctions for intervening in the Ukraine unrest, the fall in the oil price and a collapse in the value of rouble meant Russian stocks have a terrible 2014 with the MSCI Russia index being down some 42 per cent; the Nikkei 225 and Euro Stoxx were other indices with negative returns, although not to the extent of Russia’s.
Last week FE Trustnet looked at the UK funds that were hit with losses in 2014 but went onto make double-digit gains over the year to date, finding Fidelity UK Opportunities, Standard Life Investments UK Smaller Companies and Unicorn UK Income were examples of funds doing this.
However, when we ran the same filters on the IA Global and IA Global Emerging Market sector we found that no funds have been able to turn last year’s losses into strong 2015 gains. There were a number of country or region specific portfolios doing this though, although it must be kept in mind that past performance is no guide to future returns.
Those focusing on Russia feature heavily on the list as there are five funds in the Investment Association universe doing this and all are up by more than 10 per cent this year. Last year all made losses of 40 per cent or more.
Source: FE Analytics
Russian equities were the worst performing area of the market in 2014 on the back of the issues highlighted previously. This naturally led to contrarians highlighting the country as an obvious pocket of value, albeit one likely to remain volatile.
While Russia funds have made relatively strong returns this year, it’s worth keeping in mind that over the whole period covered in this article – so 1 January 2015 to 16 October 2015 – the average Investment Association Russia fund is still down 32.95 per cent in sterling terms.
Furthermore, every one of the five funds is in negative territory on one, three and five-year time frames. Only Robin Geffen’s Neptune Russia & Greater Russia fund has a 10-year record and it’s made 38.89 per cent, compared with a 1.37 per cent loss from its benchmark.
While most investors are likely to remain wary about Russian equities, we also found that 13 funds from the Investment’s European sectors have turned a 2014 loss into a healthy return this year.
The below table shows all of them, arranged in descending order of 2015’s return. There are mix of funds from the IA Europe ex UK, Europe inc UK and European Smaller Companies funds found here.
Source: FE Analytics
All of the funds aside from Schroder European Alpha Income performed worse than their average peer in 2014 but have, on the whole, outperformed over 2015. The effect of this year’s outperformance has been most of the funds have beaten their sector since the start of 2014.
For example, in the IA Europe ex UK sector, which is the largest peer group focusing on the continent, every fund in the above table (Marlborough European Multi-Cap, Schroder European Alpha Income, Invesco Perpetual European Opportunities and GAM Star Continental European Equity) are first quartile between 1 January 2014 and 16 October 2015.
The highest gain over the period, however, has come from Standard Life Investments European Smaller Companies. This fund has made 14.54 per cent since the start of 2014.
Andrew Paisley has headed the fund since August 2014; he reports to Standard Life Investments small-cap star Harry Nimmo and the process of the fund is based on that which made Nimmo’s name. However, Paisley is an experienced small-cap manager in his own right, having started his investment career in 1999.
The other area of the international equity market where we’ve seen loss-making funds rebound with double-digit gains this year is Japan with five members of the IA Japan sector featuring on the list.
Source: FE Analytics
Like Europe, Japan is another stock market frequently cited as being cheaper than the UK and the US. However, investors are more reluctant to invest here given the large losses that have been seen in the past and the fact that much of the investment case rests on whether prime minister Shinzo Abe will be successful in kick-starting the economy.
Like with the Russia funds, there’s a cautionary tale here. The top performing fund this year - Hideo Shiozumi’s Legg Mason IF Japan Equity – tends to perform very well when sentiment towards Japan is strong, but poorly in down markets.
If the strong returns this year and the 237.41 per cent return over five years catch investors’ eyes, they also need to know that periods of underperformance can be severe: it lost 50.56 per cent in 2006, another 34.27 per cent the following year, 11.54 per cent in 2008 and 11.65 per cent in 2009.
The other funds in the list have been markedly less volatile than the Legg Mason offering, but their maximum gains have been correspondingly lower.
