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Which have been the best and worst performing sectors in 2015?

31 December 2015

In this review of the year, FE Trustnet takes a look at which Investment Association sectors have fared the best and worst in 2015’s volatile market conditions.

By Alex Paget,

News Editor, FE Trustnet

When investors look back at the market conditions of 2015, there is little doubt most will remember it as a year that delivered high levels of volatility and poor returns.

Macroeconomic forces have dominated sentiment in most asset classes, as while certain regional stock markets reached record highs in the early months of the year, concerns surrounding the Chinese economy, huge falls in commodity prices, the Greek debt negotiations and dithering over the future of US interest rates caused severe price swings throughout the rest of 2015.

In fact, 2015 had its own 1987-style ‘Black Monday’ as the surprise devaluation of the Chinese yuan and already toppy valuations caused an indiscriminate sell-off, meaning most markets had their worst day since the global financial crisis on August 24.

That being said, some areas of the market have still managed to deliver decent gains and this is illustrated in the performance of the various Investment Association sectors.

 

Source: FE Analytics

As the table above shows, funds which focus on European and Japanese equites have on average returned high-single to double-digit returns this year. FE Analytics shows, for example, that the IA European Smaller Companies, IA Japanese Smaller Companies, IA Japan and IA Europe ex UK sectors have made 18.61 per cent, 15.67 per cent, 15.17 per cent and 9.70 per cent, respectively, over the year-to-date.

Of course, there is one major reason for that.

Both Japan and Europe were the most preferred regions with professional investors heading into the year as while it was expected the likes of the US and UK would start to tighten monetary policy, most anticipated that the ECB and Bank of Japan would pump huge amounts of stimulus into the market via their respective quantitative easing programmes.

This QE and the expectation of continued liquidity has meant the two markets have consistently topped the tables throughout the year, despite the fact the eurozone nearly lost a member and Japan fell into recession once again.

Given most were positive on Japan and Europe, it is no surprise that funds which focus on those regions’ smaller companies (which tend to have higher beta characteristics) have been those which have flourished.

That being said, European and Japanese funds have been unable to avoid 2015’s widespread volatility.

According to FE Analytics, all four sectors have had a maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – of more than 10 per cent.

Looking a tad further down the sector performance tables and some may be surprised to see the three UK peer groups all featuring.

Throughout the year, the mainstream media’s headlines have pointed out how poorly the UK stock market has performed and when you look at it from an index perspective, it’s hard to disagree.

FE data shows that, in total return terms, the FTSE 100 have lost 0.19 per cent and in price terms is down some 3.83 per cent.


 

However, those losses have largely been generated by some of the blue-chip index’s largest constituents like mining and oil companies, which have been hit by a number of pressures such as a slowdown in global trade and falling commodity prices.

In fact, the FTSE 350 Oil and Gas Producers and FTSE 350 Mining indices have lost 14 per cent and 45 per cent, respectively, in 2015.

Performance of indices in 2015

 

Source: FE Analytics

Therefore, by avoiding those two sectors (which combined make up some 15 per cent of the FTSE All Share) active managers in the IA UK All Companies and IA UK Equity Income sectors have had the ability to perform well.

Also, by being underweight large caps – which is a relatively easy task for UK managers given the FTSE All Share is 80 per cent weighted to the FTSE 100 – and taking big bets in small and mid-caps –which have received a boost from an improving economy and a surprise Conservative victory during the general election – certain UK funds have delivered returns of more than 20 per cent. This is especially true for those in the IA UK Smaller Companies peer group.

Of course, the question now is whether the average active manager in the UK will be able to continue to perform well relative to trackers in 2016 given the index has been so beaten up this year.

While equity funds have tended to be best performers this year, certain stock-orientated portfolios have delivered substantial losses over the course of the past 12 months.

These have generally been those portfolios which have either have significant exposure to or solely invest in the developing world, a part of the equity market which has been severely out of favour for a number of years now.

Issues such as the slowdown in China, the bursting of a bubble in the country’s ‘A’ shares index, currency weakness, falling commodity prices, the expectation of tighter monetary in the US and the accompanying US dollar strength has meant two of the three worst performing IA sector’s in 2015 have been Global Emerging Markets and Asia Pacific ex Japan.

While the two sectors are down 9 and 3 per cent since this year, since April when fears started to mount, they have both fallen more than 17 per cent.

Performance of sectors in 2015

 

Source: FE Analytics  

Given that weakness in developing world equities, it is no surprise that the IA Global Emerging Market Bond sector is among the bottom three performing peer groups as currency weakness and concerns about debt levels have forced yields higher.


 

That being said, most bond investors (no matter whether they have been in the developed or emerging markets) have had a relatively tough year.

In truth, the widely anticipated bond market collapse – which many believed would bring the multi-decade bull run in fixed income to come to an abrupt end – didn’t occur in 2015 even though the US did eventually raise interest rates for the first time in nine years.

Nevertheless, after UK, US and European sovereign bonds reached record low yields at the start of the year, improving economic data, a kick back against negative real rates in parts of the world and a lack of underlying liquidity caused bond prices to fall uncharacteristically between April and June.

While shorter dated and lower rated bonds initially fared well, concerns surrounding the outlook for equities and fears of slowing global growth has meant all areas of the sterling bond market have had a difficult and volatile 2015.

Performance of bond sectors in 2015

 

Source: FE Analytics

In fact, the IA UK Gilts sector has been the best relative performer with a gain of just 0.19 per cent while IA Sterling Corporate Bond, IA Sterling Strategic Bond, IA UK Index-Linked Gilts, IA Sterling High Yield and IA Global Bonds peer groups are all in negative territory over the year.

Many foresee another tough year for bonds in 2016 as the consensual view is that yields will have to trend higher as monetary policy tightens in the US, but then the large majority of fixed income bears have been consistently wrong over the past five years or so.

Nevertheless, the poor relative performance of bonds versus equities means that the best performing multi-asset sectors have been those with a structural bias towards risk assets.

For example, FE data shows the IA Mixed Investment 40%-85% Shares sector has made 2.47 per cent this year, the IA Mixed Investment 20%-60% Shares sector is up 1.15 per cent while the IA Mixed Investment 0%-35% Shares sector has returned just 0.4 per cent.

 

In an article next week, FE Trustnet will take a closer look at the best and worst performing individual funds in 2015. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.