Fears of a renewed trade war with the US saw equity funds struggle in May, while some of the best performing strategies were found in the UK inflation-linked gilt sector as investors started to prepare for greater political uncertainty.
Equity strategies struggled last month after US president Donald Trump announced he would be raising existing tariffs on $200bn of Chinese goods, sparking a reaction from Chinese authorities.
The impact on Chinese equity funds was particularly strong, while other more risk-on areas such as emerging markets and technology strategies were also struck.
In the UK, prime minister Theresa May announced that she would be stepping down in June after failing to negotiate a deal acceptable to parliamentarians on both sides of the Brexit divide. As such, a leadership contest will take place to appoint a new Conservative party leader – and prime minister – as the UK government remains in limbo.
This was good news for the best-performing sector: IA UK Index Linked Gilts, which was up by 6.04 per cent in May. Its sister sector IA UK Gilts was the second-best performer with a return of 3.17 per cent over the month.
The two sectors were April’s worst performers but have seen performance turn around this month as investors seek more protection against further political upheaval.
Bond strategies broadly dominated the top-10 sectors with IA Global Emerging Markets Bond, IA Global Bonds, IA Sterling Corporate Bond and IA Sterling Strategic Bond all rising to the top.
Source: FE Analytics
Somewhat predictably given the market backdrop, the IA China/Greater China sector was at the other end of the table, falling by 7.65 per cent. This was followed by the IA Technology & Telecommunications peer group, which was down by 5.15 per cent.
As well as Chinese equity strategies, emerging markets-focused funds also struggled last month, with the IA Asia Pacific ex Japan and IA Global Emerging Markets peer group averages also milling around the bottom of the table.
While the latest UK political developments were good for gilt strategies, fresh uncertainty wasn’t so beneficial for domestic equities. The IA UK Equity Income sector fell hardest, down by 3.81 per cent, while the average IA UK All Companies fund dropped 3.1 per cent.
On an individual fund level, index-linked bond strategies dominated the top of the table, led by Fidelity Institutional UK Index Linked Bond, which was up by 7.03 per cent.
The £159.6m fund, managed by Timothy Foster and FE Alpha Manager Ian Fishwick, invests in UK and overseas government index-linked bonds.
In total there were six index-linked UK government bond strategies in the top-10 during May, including tracker fund iShares Index Linked Gilt Index (UK), Janus Henderson Index-linked Bond, BlackRock Institutional Bond Index Linked, Newton Index Linked Gilt and Insight UK Index Linked Bond.
Source: FE Analytics
“The inflation-linked bond or ‘linker’ market may seem like the slightly strange little cousin to the main gilt market – everyone knows it exists, but mostly ignores it until it does something outrageous,” said Kames Capital’s James Lynch. “At the moment it is screaming.”
Lynch said the asset class is being used as a political hedge against tail risks and expectations of how sterling will react to future political developments.
As such, investors are buying inflation-linked bonds due to their negative views on sterling.
“As they rush to buy ‘linkers’, they meet little resistance in the market – not many people are willing to take the other side of this argument at the moment,” he added.
“At current pricing, we think the inflation market should be done screaming here. It should take a little breather.”
More focused equity strategies made an appearance in the top-10, with the four FE Crown-rated JPM Brazil Equity fund, managed by Luis Carrillo and Sophia Bosch de Hood, emerging as the best non-index linked bond strategy, returning 6.9 per cent in May.
The $906.2m JPM India fund, managed by Rukhshad Shroff and Rajendra Nair, also took a place in the top-10, with a return of 6.89 per cent.
Vanguard Japan Government Bond Index was another strong performer, with a gain of 6.84 per cent, while Chris Rice’s European absolute return strategy TM Sanditon European Select returned 6.82 per cent.
Comgest Growth China was the worst performers last month, down by 10.94 per cent.
It was joined at the bottom by several peers from the IA China/Greater China sector, such as Guinness Best of China (down 9.8 per cent), GAM Multistock China Evolution Equity (9.77 per cent), Baillie Gifford China (9.61 per cent) and the Invesco PRC Equity fund (which was down by 9.38 per cent, but sits in the IA Unclassified sector).
Source: FE Analytics
Two of the worst-performing funds in May were overseen by one instantly recognisable name: Neil Woodford.
SJP UK High Income, which he manages for St James’ Place, and LF Woodford Equity Income, were both down by more than 9 per cent in May.
Ben Yearsley, director at Shore Financial Planning, said that Woodford’s funds were joined near the foot of the table by other more value-orientated and domestic-facing UK equity strategies.
“UK domestic stocks had a torrid month, making cheap stocks even cheaper,” he said. “When a rebound comes, it could be huge – however Brexit uncertainty has to subside for that to happen.”
Another UK equity strategy sitting at the bottom of the table was the £162.4m, four FE Crown-rated Standard Life Investments UK Equity Recovery fund, managed by Andrew Hunt, which recorded a double-digit loss of 10.08 per cent.
The bottom-10 was rounded out by two specialist funds: Schroders ISF Global Energy and AXA World Funds Framlington Robotech.
The former, a $370.5m fund which invests in a concentrated portfolio of companies linked to the energy sector, was down by 10.73 per cent – the second-worst loss of the month.
Meanwhile, AXA’s $807m Robotech fund, which invests in the companies operating in the robotics space, was down by 9.89 per cent.