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The charts showing what investors should have bought in Q2 2017

04 July 2017

FE Trustnet finds out what the second quarter of the year looked like for a variety of investment styles, geographical regions and fund sectors.

By Gary Jackson,

Editor, FE Trustnet

The second quarter of the year has proven to be a difficult one for investors, with returns being lacklustre or negative in many parts of the market.

While 2017 had been enjoying a relatively smooth run on the political front, with the Dutch and French elections ending with the results the market had been hoping for, uncertainty resurfaced in the UK after the snap election ended in a hung parliament and the Conservatives scrambling to come to a confidence and supply agreement with the Democratic Unionist Party.

Performance of VIX over 3 months

 

Source: FE Analytics

That said, the market’s reaction to the new political surprise was relatively muted and equities were able to grind higher over the quarter. In addition, the VIX – which is known as Wall Street’s fear gauge – remained at low levels and shows investors are largely confident that no stock market shocks are on the horizon.

Over the following pages, we round up the events of the past three months and find out what happened in markets when it comes to asset classes, geographical regions, investment styles, fund sectors, market capitalisation and FTSE industries.


Asset classes

 

Source: FE Analytics

It’s clear from the chart above that the second quarter was a pretty challenging one for most asset classes. Equities, represented here by the MSCI AC World, managed to generate a small return of 0.38 per cent but bonds and commodities ended the quarter in negative territory. Commodities lost the most ground, with the S&P GSCI index down 8.99 per cent and the price of Brent Crude dropping by almost 14 per cent. However, not all strategists are negative on commodities, as HSBC Private Banking noted: “We remain constructive on commodity prices given the synchronised global growth backdrop and our expectation of US dollar weakness. Oil price as measured by Brent crude and West Texas Intermediate crude (WTI), have both fallen sharply year-to-date, down circa 20 per cent. Some of the price decline is likely due to speculative position adjustment activity after the conclusion of the May OPEC meeting which to a large extent delivered expected results, with an agreement on production caps being extend to March 2018. We believe oil prices will stabilise and gradually recover towards $55-56 by year end. For the gold price, we expect a combination of factors to contribute to a climb higher, including growing central bank reserve demand, the global growth backdrop and a weaker US dollar. Our long-term gold price view remains mildly positive.”


Geographies

 

Source: FE Analytics

The clear winner on a geographic basis over the last three months has been Europe, as the Euro STOXX index gained 4.48 per cent over the second quarter. Confidence in once-unloved European equities continues to grow as economic data improves on a number of fronts and political risks recede; the latest Bank of America Merrill Lynch Global Fund Manager Survey shows allocations to eurozone equities are at close to two-year highs. What’s more, asset allocators responding to the closely watched survey maintain that European equities remain undervalued despite their strong recent run. Whitechurch Securities said: “From a valuations perspective it is hard to argue that in aggregate European markets are cheap. The MSCI Europe ex UK trades on a P/E of over 21.6x. However, in Europe there is scope for further earnings growth and the outlook for 2017 is positive. Profit margins are significantly below historic levels and those in the US market. Versus traditional benchmarks we have an overweight towards European equities, which has paid off well this year.”


Investment style

 

Source: FE Analytics

The growth style was the best performer over the second quarter, with the MSCI AC World Growth index gaining 1.77 per cent. The value index, which rallied in 2016 after several years of underperformance, made a loss of close to 1 per cent. A net 15 per cent of fund managers surveyed by Bank of America Merrill Lynch in June said they expect value will outperform growth over the next 12 months, but this was a fall from the net 22 per cent holding this view in the previous month.


Equity funds

 

Source: FE Analytics

When it comes to fund sectors, IA UK Smaller Companies made the highest returns of the quarter after the average fund posted a 6.49 per cent total return. Of these funds, Old Mutual UK Smaller Companies Focus sits at the top of the table with a 12.06 per cent return. It was followed by MFM Techinvest Special Situations (up 10.35 per cent) and Jupiter UK Smaller Companies (up 9.99 per cent). IA Europe Excluding UK comes in second place with an average total return of 6.32 per cent reflecting the overall strong performance of European equities over the three-month period. GAM Continental Growth & Value leads here (up 10.42 per cent), followed by CF Miton European Opportunities (10.21 per cent) and Artemis European Opportunities (9.56 per cent). The IA North America sector was the only peer group where the average fund made a loss over the quarter, falling 0.86 per cent.


Bond funds

 

Source: FE Analytics

The IA Sterling High Yield sector was the clear winner in terms of the bond peer groups with its average member making a 1.99 per cent total return. Invesco Perpetual High Yield’s 4.07 per cent return was the sector’s largest over the quarter and is significantly higher than the 2.90 per cent made by Baillie Gifford High Yield Bond, which was in second place. Strategic bond funds also had a relatively strong quarter, with the average fund in the sector rising 1.33 per cent. Legg Mason Western Asset Macro Opportunities Bond, GAM Star Credit Opportunities and Man GLG Strategic Bond were the strongest performers here. However, three bond sectors ended the quarter in negative territory - IA UK Index Linked Gilts (down 2.49 per cent), IA UK Gilts (down 1.52 per cent) and IA Global Emerging Markets Bond (down 0.70 per cent).


Multi-asset and specialist funds

 

Source: FE Analytics

Of the multi-asset sectors, IA Flexible Investment made the highest average return at 1.72 per cent. CF Odey Continental European’s 7.34 per cent total return was the highest in the sector over the quarter, followed by TB Wise Income’s 6.90 per cent and TB Wise Investment’s 6.36 per cent. In the specialist sectors, the average IA Technology & Telecommunications fund was up by 2.81 per cent – even though the sector sold off in June and the average fund lost 2.23 per cent. T. Rowe Price Global Technology Equity, Pictet Digital and Polar Capital Global Technology made the peer group’s highest return during the three months. The average IA Specialist fund lost 0.98 per cent over the quarter, on the back of heavy losses from energy funds and markets linked to the fortunes of commodities, such as Brazil and Russia.


UK market-cap

 

Source: FE Analytics

UK equities posted gains at all market caps but the strongest performance came from the FTSE AIM, which was up 4.32 per cent. Small- and mid-caps also outperformed the FTSE 100 by a decent argin over the quarter. However, sentiment towards the UK as a whole remains subdued. James Burns, co-manager of Smith & Williamson’s Managed Portfolio Service, recently cut exposure to UK equities in the firm’s model portfolios. The manager reduced exposure to iShares FTSE 100 and Man GLG Undervalued Assets, while adding to more defensive positions such as Invesco Perpetual UK Strategic Income. “With market valuations riding high and many looking relatively expensive, the team is now taking a slightly more defensive stance. These decisions were partly influenced by continuing uncertainty over the UK’s Brexit negotiations and the election result which produced a hung Parliament in June,” Burns said.


UK industries

 

Source: FE Analytics

On an industry level, the FTSE All Share Financial Services index was the standout performer in the second quarter – it made 7.94 per cent and posted a significant lead on FTSE All Share Technology, which is in second place with a 4.79 per cent return. Indeed, the two industries have been battling for attention over recent weeks with tech stocks selling off and investors moving over to financials. Kathleen Brooks, research director at City Index, said: “After last week’s stock market sell-off, we will be watching to see if the rotation out of tech and into financials is over and done with. We tend to think not. As tech comes increasingly under the spotlight of both media investigations and more costly political ones the sector may continue to suffer. As we know with financial stocks, the prospect of getting on the wrong side of the global regulators can impact the attractiveness of a sector, and we expect investors to be more restrained when it comes to tech stocks in H2, compared to H1. Of course, a good earnings season for the tech giants could change investors’ minds, but usually increased regulatory scrutiny limits both innovation and profit-making ability in a sector to the detriment of a stock price. It could be a long yet cold summer for tech.”

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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.