While the consensus at the start of 2016 was that it was likely to be a difficult year for investors, few would have guessed just how challenging it would prove to be. 
Events such as the UK voting to leave the European Union and Donald Trump being voted US president were initially seen as the ‘worst’ outcome for markets but when they occurred investors soon shrugged off their worries and bought back in, pushing up indices across the board.
One common theme was the general underperformance of active funds, after the surprise political results and the market’s seemingly unexpected reaction to them wrong-footed many of them. But some did make very high returns – more than 130 per cent from the best performer of the Investment Association universe.
In the following article we look at how the year played out in a variety of ways – from points of view such as asset class, geography, fund sectors and FTSE industries – to show how 2016 really looked for investors.
Asset classes
Source: FE Analytics
The fall in the value of sterling that was exacerbated by the Brexit result bolstered the returns made by UK investors and meant that 2016 tended to be a strong year regardless of the assets held. As the above chart makes clear, sterling investors could have made total returns of more than 20 per cent from global equities, government bonds, corporate bonds and commodities last year. When performance calculated in their local currency (typically the US dollar for the above indices) then returns are much lower, tending to sit between 5 and 10 per cent over the year. Oil had a particularly strong year (after some heavy falls previously) thanks to signs of stronger global economic growth and, more recently, the Organisation of the Petroleum Exporting Countries’ decision to cut production by around 1.8 million barrels a day.
Geographies
Source: FE Analytics
When looked at in local currency terms, the above chart appears very different – the FTSE All Share is the clear leader as the returns from emerging markets and the US were closer to 10 per cent while Japan was up just 31 basis points. For UK investors with unhedged exposure, however, the S&P 500 and the MSCI Emerging Markets index were the places to be invested. US equities had been rising for most of the year but enjoyed a late rally after the election of Donald Trump as many of his proposed policies are expected to stimulate the world’s largest economy.
Style
Source: FE Analytics
One of the big investment themes of recent times has been the outperformance of the quality and growth investment styles over value – and when this trade might start to unwind. In the three years before 2016, the MSCI ACWI Quality index made a 49.25 per cent total return while MSCI ACWI Growth was up 45.53 per cent; in contrast, MSCI ACWI Value returned just 30.17 per cent. However, speculation mounted over 2016 about when the valuation gap between expensive ‘bond proxies’ and cheaper, more cyclical stocks would become so wide that investors rotated back into value. This seems to have started happening over the final months of 2016 and many investors are convinced that this rotation is set to continue in the future – which could have a significant impact on funds that have performed well through the quality-growth theme.
Equity funds
Source: FE Analytics
As we saw earlier, emerging markets were one of the best areas of the market for UK investors and the IA Global Emerging Markets sector tops the equity fund performance rankings with an average return of 30.75 per cent. The sector's best performers were FP Henderson Rowe FTSE RAFI Emerging Markets, Lazard Emerging Markets and GAM Star North of South EM Equity. Coming in last place is the IA UK Smaller Companies sector, which suffered from the UK’s vote to leave the European Union and made just 34 basis points on average. The worst returns came from SF Webb Capital Smaller Companies Growth, Kames UK Smaller Companies and L&G UK Smaller Companies Trust, all of which made losses.
Bond funds
Source: FE Analytics
Linkers had another strong year and this led to the IA UK Index Linked Gilts sector being the best performing bond peer group of 2016 on the back of a 25.41 per cent average rise (IA Global Emerging Market Bond was close behind with a 24.80 per cent return). The sector’s best performer was BlackRock Index Linked Gilt Tracker, followed by Baillie Gifford Active Index-Linked Gilt Plus and F&C Institutional Active Index Linked. The IA Sterling Strategic Bond sector sits at the bottom after its average member made 7.33 per cent. One member of the sector - L&G Dynamic Bond Trust – was in negative territory for the year after losing 1.08 per cent.
Multi-asset and specialist funds
Source: FE Analytics
Although by its very nature the IA Specialist sector is a very mixed bag of funds, it is the best performer in this category after making an average return of 26.17 per cent. WAY Charteris Gold & Precious Metals was the best performer after making 133.95 per cent (in fact, this makes the fund the best performer of the entire Investment Association universe). Other IA Specialist funds like Pictet Russian Equities, MFM Junior Gold, HSBC GIF Russia Equity and BNY Mellon Brazil Equity made some of the open-ended fund space’s highest returns last year. The worst performing peer group was IA Targeted Absolute Return, up just 1.06 per cent. FP Argonaut Absolute Return, its worst performer, fell 25.63 per cent and made the Investment Association universe’s biggest loss last year; it is joined at the bottom of the table by CF Odey Absolute Return and GAM Star (Lux) European Alpha.
UK market-cap
Source: FE Analytics
For UK investors, the biggest event of last year was the country’s decision to quit the European Union. Sterling and UK equities plummeted on the news. However, the large-cap market soon started to bounce back as investors saw that its international-facing members would benefit from the weaker pound. The FTSE 100 made a 19.07 per cent total return over 2016. The FTSE 250, which is home to companies more exposed to the domestic economy, struggled because of Brexit and only rose 6.66 per cent last year. The underperformance of mid-caps is one of the reasons why many UK active managers suffered in 2016 as many had built their portfolios around this part of the market.
UK industries
Source: FE Analytics
As the chart shows, the standout winner last year was the FTSE All Share Basic Materials index with its 88.80 per cent total return. On the first slide we saw how commodities had a strong year – the S&P GSCI index, which covers 24 energy, industrial metal, agricultural, livestock and precious metal commodities, made close to 33 per cent. This boosted sentiment towards materials firms and reversed several years of underperformance. The jump in the oil price also aided the FTSE All Share Oil & Gas industry grouping, which came in second place. The only industry to make a loss was FTSE All Share Telecommunications, down 11.31 per cent. This was largely on the back of a 20 per cent fall by BT, owing to a combination of the EU referendum, its growing pension deficit and the company’s battle over its Openreach infrastructure unit damaged investor sentiment.