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The winning and losing funds since interest rates were hiked

17 March 2016

The Fed’s decision to raise interest rates in December was one of the worst kept secrets in the world of finance, but while some funds have rallied more than 60 per cent since then others have fallen 25 per cent.

By Alex Paget,

News Editor, FE Trustnet

Gold mining funds have been the best performers in the whole Investment Association universe since the US Federal Reserve raised interest rates in mid-December, according to data from FE Analytics, while biotech funds – which had been the biggest winners over the past five or so years – are currently the worst performers out of 3,471 portfolios since the hike.

The future of US monetary policy was one of the main headwinds facing global markets last year, though many were left disappointed when the central bank decided to keep rates at ultra-low levels at the FOMC’s October meeting thanks to macroeconomic uncertainty – and equities corrected as a result.

However, with improving economic data, Fed chair Janet Yellen finally took the decision to lift the federal funds rate for the first time since time since 2006 and the initial market reaction was positive as it seemingly heralded the end of the global financial crisis.

Since then (and as investors will no doubt know), much has changed in markets.

Global equities took a plunge in January and early February as a result of China’s woes, another significant drop in the oil price and heightened geo-political tensions. Though these concerns contributed to a ‘flight to safety’ (the likes of government bonds rallied hard in early part of the year), there have also been signs that investors are losing faith in central bankers – with some viewing the Fed’s tightening as a policy error.

Performance of indices since the US raised interest rates

 

Source: FE Analytics

This is shown by the dramatic rise in the gold price which, according to FE data, had rallied close to 25 per cent between mid-December and up until two weeks ago as investors craved its ‘safe haven’ characteristics.

Following a period of profit taking, gold has once again surged 3.3 per cent today (which isn’t shown the graph above) on the back of comments from the Fed yesterday which indicated only one more rate hike this year compared to the four it had predicted in December.

Given the fact gold mining equities tend to be a higher beta play on the price of the precious metal, it may come as little surprise gold funds have performed well over the period – but the extent of the returns may well be.

According to FE Analytics, seven of the top 10 performing funds in the whole Investment Association sector have been those that focus on gold mining equities.


 

The 10 best performing funds since the US raised interest rates

 

Source: FE Analytics

As the table above shows, the best performer (out of a possible 3,471) has been Angelos Damaskos’s £8.2m MFM Junior Gold as it has surged 64.39 per cent since 16 December.

The MFM fund is then followed by Investec Global Gold, WAY Charteris Gold and Precious Metals, Blackrock Gold & General, Smith & Williamson Global Gold and Resources and CF Ruffer Gold which rank second, third, fourth and fifth, respectively, over that time. In tenth spot, with returns of 21.05 per cent, is the SF Peterhouse Smaller Companies Gold fund.

It means that, taken on average, IA gold funds have returned 45.09 per cent since the rate hike compared to a 4.19 per cent rise in the MSCI AC World index.

This is certainly a huge change in fortune for the funds, which have suffered massively over recent years as the gold price has fallen and as many mining firms have been poorly run and unable to cope with the bear market conditions.

For example, MFM Junior Gold (which focuses on smaller gold mining firms) has posted losses of more than 18 per cent each of the last five calendar years. As a result, the fund is down and eye-watering 83 per cent since its peak in April 2011 despite its 60 per cent gains over recent months.

Performance of fund versus index since April 2011

 

Source: FE Analytics

Though many will no doubt see this recent trend as nothing more than a relief rally, there are an increasing number of industry commentators who argue the bull market for gold miners is set to continue.

These include FE Alpha Manager Geoff Legg, who co-runs the Kennox Strategic Value, who recently told FE Trustnet thata the rally is set to continue. 

“I wouldn’t be surprised to see the gold miners doubling or tripling as the companies are now far cheaper than they were and are better run due to lower capex,” Legg said.

Apart from gold funds, the other best performing funds in the Investment Association universe since the US rate hike include BlackRock GF World Mining and First State Natural Resources (which have been boosted by a rally in most bombed-out physical commodities) plus Legg Mason IF Japan Equity, which has continued with its stellar 2015 performance.


 

While gold funds have largely been the worst place to put your money over the past five years, biotechnology portfolios (which have arguably been the best) have been hit the hardest since the Fed tightened monetary policy.

FE data shows, for example, that Pictet Biotech, Candriam Equities Biotechnology, AXA Framlington Biotech and Polar Capital Biotechnology have been the four worst performing funds over that time with an average loss of 20.28 per cent.

The top 10 worst performing funds since the US raised interest rates

 

Source: FE Analytics

The pain for this very high growth area of the market started with comments made by potential US presidential candidate Hilary Clinton in September attacking drug companies, but businesses in the space have also suffered in the recent market corrections due to their perceived riskiness and high valuations.  

It must be noted, however, that the average IA biotech fund has still returned 170.99 per cent over five years despite their 30 per cent falls since Clinton’s tweet.

On top of that, the likes of star manager Mark Barnett believe the recent falls shouldn’t dissuade investors from backing smaller biotechnology stocks as their future is still bright.

“I have been interested in this area for some time because I think that looking at an economy like ours, the true innovation in the pharmaceutical industry is being carried out in university laboratories,” Barnett said.

The other worst performing funds in the open-ended space include GAM Star China Equity, FP Argonaut Absolute Return and Neptune Japan Opportunities.
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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.