In May 2013 the markets went into a sharp sell-off after Ben Bernanke, the then chairman of the US Federal Reserve, said the central bank would soon look at turning off the quantitative easing (QE) that had boosted stock markets over the previous years.
Although many indices did recover their losses by the end of 2013, the month after Bernanke’s announcement (now known as the ‘taper tantrum’) saw double-digit losses in many parts of the world – including the UK, where the FTSE All Share was down close to 11.5 per cent in total return terms.
Performance of indices from 22 May 2013 to the end of 2013
Source: FE Analytics
What’s more, this marked the entry of a new period for markets where the Federal Reserve was watched more closely than ever. Several mini taper tantrums stemmed from announcements warning the market that it needed to prepare itself for the withdrawal of the QE-driven liquidity that had supported asset prices since the global financial crisis.
The three years since Bernanke’s announcement have seen most major equity indices post gains but they have generally been more subdued than the strong periods that followed the implementation of ultra-low interest rates and the launch of the US’s long-running QE programme.
Since 22 May 2013 the S&P 500 has made a 33.03 per cent total return while the developed market-focused MSCI World has made 18.33 per cent. Returns have been harder to come by elsewhere, however, with the FTSE All Share gaining just 4.18 per cent and the MSCI Emerging Markets index falling 16.30 per cent.
Looking at fund sectors and smaller companies have been the best place to have been invested, on average, over the past three years.
Source: FE Analytics
UK smaller companies funds were buoyed by the general improvement in the UK’s economic outlook over recent years. Furthermore, the fact that many small-caps are focused on the domestic economy has enabled them to side-step many of the international headwinds that have plagued markets, such as plunging commodity prices and slowing growth in China.
In fact, the average smaller companies funds across the globe has fared well since the taper tantrum with the IA European Smaller Companies sector sitting in second place, IA Japanese Smaller Companies in fourth and IA North American Smaller Companies in sixth.
These areas have benefitted from similar trends to UK smaller companies – signs of improvement in their domestic economies, recovering investor appetite for risk and a desire to look for investments outside large-cap indices, which have a high weighting to under-pressure sectors such as energy, mining and banks.
However, the past three years have not been fruitful ones for all fund sectors. The two major headwinds mentioned above – low commodity prices and slowing Chinese growth – combined with concerns over tighter US monetary policy have mainly fallen on the developing world.
The below graph shows the performance of the Investment Association’s bottom five sectors over the three years since the taper tantrum. All five’s fortunes can be linked to these concerns – the IA Specialist sector’s inclusion is down to the fact that natural resources, energy and Latin America funds have been hit by heavy losses over the period.
Performance of sectors since 22 May 2013
Source: FE Analytics
On an individual fund level, a very mixed bag of funds is found at the top of the table.
MFM Techinvest Special Situations, which resides in the IA UK All Companies sector has made the largest total return after gaining 77.94 per cent. Around two-thirds of the portfolio is invested in micro-caps, which have the potential for explosive growth but are inherently more volatile – as shown by the fact that the fund has the second highest annualised volatility of its peer group.
Coming in close sector is another fund where a small-cap bias has led to strong returns but some of its sector’s highest volatility. Legg Mason IF Japan Equity has made 77.48 per cent (with the sector’s highest volatility) over a time its average peer was up just 6.15 per cent.
And then there’s a property fund in third as Canlife UK Property – which resides in the IA Unclassified sector – has made 76.18 per cent. The fund primarily invests in the main UK commercial property sectors of offices, retail, industrial, warehousing and leisure; close to 65 per cent of holdings are in London and the south-east.
The list of the top 15 performers over the past three years does include a number of UK smaller companies funds but certain absolute return, specialist healthcare and Indian equity portfolios have also had a good run.
Source: FE Analytics
A look at the bottom of the table shows 10 funds have made losses of more than 40 per cent since the taper tantrum – including MFM Junior Oils (down 56.23 per cent), JPM Brazil Equity (down 52.31 per cent) and Artemis Global Energy (down 45.55 per cent).
In an article later this morning, FE Trustnet will put the fixed income sectors under greater scrutiny to see how they have held up in the years since 22 May 2013.