The first quarter of the year has been dominated by funds exposed to energy and Latin America, according to data from FE Analytics.
This year started off with high volatility as investors raised their inflation expectations, causing bonds to sell-off – pushing yields higher and equity valuations lower.
But the price of crude oil bucked the trend, surging by 36% during the first quarter of the year. Prices were already rising due to tight supplies, but the Russian invasion of Ukraine caused the price to take off.
As a result, when it comes to individual top performing funds year-to-date, the majority were those that are invested in energy stocks – which directly benefit from higher oil prices.
Source: FE Analytics
The top-three performing funds for the quarter were passive exchange-traded-funds (ETFs) tracking various US energy indices.
The SSGA SPDR S&P U.S. Energy Select Sector UCITS ETF, iShares S&P 500 Energy Sector UCITS ETF and Xtrackers MSCI USA Energy UCITS ETF all benefited from the rise in oil prices, which feeds directly into the bottom-line of energy companies.
Although the indices that these funds track have caps to ensure diversification, they have benefited from concentration in the two largest US-listed energy firms.
Global energy giants Exxon Mobil and Chevron make up more than 40% of the index that these funds track. Their share prices are up 30% and 36% respectively.
Brazilian funds also featured in the list of top-performers because the index is heavily weighted towards commodities. It also has a large allocation to financials, which have gained on the back of rising interest rates as this typically results in a wider profit margin for financial services companies lending out money.
Several passive Brazilian ETFs tracking the MSCI Brazil Index featured. Like the energy trackers, these funds benefited from heavy concentration amongst its biggest holdings. Brazilian energy firm Petrobras – which makes up 15% of the Brazilian index – is up 35% year-to-date on the back of rising oil prices.
However, it was Brazilian miner Vale S.A – which makes up almost 20% of the entire index – that truly moved the needle for the overall index performance year-to-date.
Vale is the largest producer of iron ore and nickel in the world: the price of the latter has surged, causing mayhem in commodities markets.
The London Metals Exchange closed trading in nickel contracts in March after an unprecedented short squeeze that took the price of nickel from $25,400 per tonne to more than $100,000 per tonne before it was cancelled.
Despite falling since the squeeze in prices, nickel is still up roughly 70% since the year began and the price of iron ore is up roughly 40% over the same period – a direct boost to the bottom-line of Vale which is up 42% since the start of the year.
When it comes to the quarter’s worst performers, Russian and growth funds suffered the most.
Source: FE Analytics
Liontrust Russia – which had its assets suspended by the investment manager when the Russian military invaded Ukraine – was down 63.9% before it stopped pricing and withdrawals to protect investors.
Russian authorities closed the Moscow Stock Exchange after the Ruble – its local currency – began to collapse in value against the US dollar and Russian stock prices took a nasty tumble.
Funds exposed to Russia and the rest of emerging Europe make up a large bulk of the worst performers year-to-date. It is worth noting however that all the funds above with substantial exposure to Russian assets have been suspended from trading as of writing.
Aside from the funds exposed to Russia, there were a number of funds exposed to certain areas of technology that were also amongst the worst performers for the quarter.
The HAN Global Online Retail UCITS ETF – which tracks companies involved in the e-commerce market – was one of the worst performers, down 35.9% year-to-date.
Some of its holdings, which are valued heavily based on the future earnings, bore the worst of the sell-off at the start of the year as investors re-evaluated their inflation and interest expectations.
Elsewhere in the table, Baillie Gifford American fund and Baillie Gifford European were amongst the worst performers of the quarter, dragged down by the broader market write-down of highly valued growth stocks.
Looking at the broader Investment Association universe sectors, due to the surge in energy stocks and Brazilian stocks, the IA Latin America sector and IA Commodity/Natural Resources sector were the top-two performers by a wide margin.
Latin American funds are heavily exposed to Brazilian firms which saw a strong quarter as laid out above.
Source: FE Analytics
The worst performing sectors at the smaller end of the market. IA UK Smaller Companies, IA European Smaller Companies and IA Japanese Smaller Companies made up three of the worst five performing sectors year-to-date.
Smaller companies tend to get hit hard by broader risk-off market volatility, which was prevalent throughout the quarter.
Smaller companies are also typically more growth-orientated and so thus hurt by rising inflation and interest rate expectations of investors.
The IA China/Greater China sector was also amongst the worst hit as Chinese stocks have yet to recover from a market decline that started in early 2021 when the Chinese authorities began a clampdown on technology companies.
Bonds also had a poor quarter as investors started to price in higher interest rates going forward. UK Gilts was one of the worst performing sectors year-to-date, as well as Global Emerging Markets Bonds.