With the benign environment of low volatility and globally synchronised growth in 2017 giving way to a more challenging 2018, it was hard for funds of any stripe to deliver positive returns last year.
In 2017, the best performers had been more growth-orientated strategies – especially those with a focus on emerging markets and China in particular – with very strong double-digit gains.
However, last year saw a very different investment environment develop as concerns over the Federal Reserve’s rate hiking emerged and relations between the world’s two largest economies – the US and China – deteriorated over trade.
Such conditions made it a more difficult environment for fund managers to outperform.
In addition, just 14 of the universe’s 3,764 funds were up by more than 10 per cent.
Funds focusing on individual sectors – such as technology and healthcare – as well as US and Brazilian equities were among those founds at the top of the performance table last year.
Given the very different conditions experienced by markets, it’s little surprise to learn that 2017’s best performers struggled last year.
The best performer of 2017 was the five FE Crown-rated Merian UK Smaller Companies Focus fund, which delivered a total return of 50.71 per cent.
However, the £1.2bn fund managed by Nick Williamson failed to record a gain last year after making a loss of 17.38 per cent.
Performance of fund vs sector & benchmark in 2018
Source: FE Analytics
The fund also failed to outperform both its average peer in the IA UK Smaller Companies sector (which lost by 11.7 per cent) and the Numis Smaller Companies Excluding Investment Companies (down by 15.35 per cent), as the above chart shows.
In stark contrast to last year, 2017 had been a good year for Chinese equity strategies but escalating trade tensions with the US made it far more challenging 12 months for the funds focused on the world’s second largest economy.
Six of the top-10 strategies from 2017 were located in the IA China/Greater China sector, which delivered strong double-digit returns. However, these all saw double-digit losses last year as the concerns over China’s relations with the US intensified during the year.
As the below chart shows, the MSCI China index fell by 13.83 per cent – in sterling terms – with the average IA China/Greater China sector fund down by 14.18 per cent.
Performance of indices in 2018
Source: FE Analytics
The second-best performer of 2017 – NB China Equity with a gain of 49.28 per cent – recorded a loss of 18.1 per cent last year.
The fund’s managers – Frank Yao and Lihui Tang – said economic indicators during the final quarter of the year had pointed to the “continued softening of economic growth in China” during 2018.
However, they highlighted the potential for further structural reforms in China this year as well as some de-escalation of the trade tensions along the lines discussed at November’s G20 meeting.
“Given current equity market valuations, a shift towards a more constructive economic environment may potentially lead to mean reversion amongst certain deeply discounted names,” they noted.
Other top-performing China funds of 2017 included Baillie Gifford Greater China (2017: 49.19 per cent, 2018: -18.57 per cent), Matthews China (2017: 43.82 per cent, 2018: -15.4 per cent), and Matthews China Small Companies (2017: 42.92 per cent, 2018: -13.74 per cent).
The worst return of a Chinese equity strategy included in the 2017 top-10 was by JPM Greater China, which made a loss of 19.13 per cent, having delivered a 42.32 per cent gain a year earlier.
The impact of the US-China trade war was also felt by a number of other funds focused on Asia, with next two of 2017’s best performers also registering significantly lower returns last year.
The Barclays GlobalAccess Asia Pacific (ex-Japan) fund generated a total return of 43.69 per cent in 2017. Yet, during 2018 it could only manage a 17.1 per cent loss.
Meanwhile, another 2017 top-10 performer (up by 42.37 per cent) from the sector was the four FE Crown-rated Baillie Gifford Pacific fund and it fared slightly better falling by just 12.86 per cent. In comparison, the MSCI AC Asia ex Japan index was down by just 9.05 per cent last year.
"It has been a difficult year for Asian equities amid concerns of weak global growth, trade wars and collapsing currencies, but we’re actually very upbeat,” said Roderick Snell – co-manager alongside Ewan Markson-Brown.
"Despite the negative newsflow, and weak share prices, Asia is booming: regional GDP is set to grow by about $2trn this year, exports are still very strong, growing 10 per cent year-on-year.”
Source: FE Analytics
While all of 2017’s top performers made losses last year, there was one fund which stood out from the others.
The Polar Capital UK Absolute Equity fund – overseen by FE Alpha Manager Guy Rushton – delivered a 47.51 per cent total return during 2017.
Despite the challenging backdrop for UK equities amid ongoing Brexit uncertainty, the UK equities-focused fund was down by just 0.87 per cent during a year when the FTSE All Share index fell by 9.47 per cent. (It should be noted that the fund is not benchmarked against the FTSE All Share index.)
The multi-cap UK equity fund – which can take both long and short positions – aims to achieve a positive absolute return fund on a 12-month rolling basis and typically holds 40-100 stocks particularly companies where the market has materially misunderstood the medium-term earnings.