Funds investing in UK small-caps, tech stocks and emerging market equities are among those that have tended to lead the pack at the start of a new year, FE data shows.
With 2019 not too far away, FE Trustnet has looked back at the past 20 Januarys to find out which Investment Association peer groups have historically had a strong month at the very start of the year.
In order to do this, we worked out the rankings for 32 Investment Association sectors starting with 1999 and ending at 2018. We then determined how many times each peer group had been among the 10 best-performing sectors in these successive Januarys.
However, it must be kept in mind that past performance is no guide to future returns and our research shows that there are no clear-cut winners for delivering outperformance in January, especially as this research looks at a sector level and the performance of funds within them will vary.
Source: FE Analytics
Sitting at the top of our research is the IA UK Smaller Companies sector, which has been among the 10 highest returning peer groups in 12 of the past 20 Januarys.
What’s more, the average January total return over the period in question has been 1.49 per cent – the highest of the 32 sectors we reviewed. The highest January return came in 2004, when the average IA UK Smaller Companies fund made 6.78 per cent; however, the lowest was in 2008, with an 8.17 per cent loss in a month.
As part of this study, we also checked how many times each peer group has been among the lowest-returning sectors at the start of a new year. IA UK Smaller Companies only did this in three of 20 months looked at.
Of course, this does not mean that the sector is good bet for outperformance next month. After all, with the UK’s plans to depart the EU looking more uncertain by the day, there seems to be little reason for an immediate rebound in the domestic stock market – especially those so linked with the domestic economy.
Smaller companies sectors are relatively well-represented in this research, with IA European Smaller Companies appearing in second place and IA Japanese Smaller Companies in fourth.
The IA European Smaller Companies peer group was in top-10 sectors in 12 of the 20 Januarys we reviewed and in the bottom 10 on five occasions; the average return for the month stands at 1.16 per cent. However, while the maximum made stands at 11.52 per cent, there was one month where the average member of the sector lost 11.99 per cent.
Source: FE Analytics
With the IA Japanese Smaller Companies, its average fund was ranked in the top 10 highest returning sectors during 11 of the past 20 Januarys and was among the bottom 10 on just two occasions. The average January return was 0.59 per cent, with 7.48 per cent being made in the best month and 7.89 per cent lost in the worst.
However, sentiment towards these three smaller companies sectors is downbeat.
FE Analytics shows that IA Japanese Smaller Companies has lost 5.66 per cent, on average, this year, ranking it 21 out of the 32 peer groups we looked at. IA European Smaller Companies is the worst performer from the Investment Association universe with a 12.13 per cent average loss, followed by IA UK Smaller Companies which is down 10.71 per cent.
There’s a similar story when we look at the other peer groups that have historically made strong relative returns in January.
The IA Technology & Telecommunications sector is in third place in this research as it has been in the top 10 highest returning peer groups in 11 of the past 20 Januarys, posting an average gain of 1.09 per cent in the month. It made 14.49 per cent in its best January but lost 11.78 per cent in its worst.
But the tech space is the one that has led the recent market sell-off, as its strong performance over the past decade has seen it reach valuations that many consider to be stretched. IA Technology & Telecommunications has made 8.21 per cent this year, the highest in the Investment Association universe, but has gone through a strong correction in recent months.
Performance of sector in 2018
Source: FE Analytics
Emerging market equities have also performed well in this research. The IA Global Emerging Markets and IA China/Greater China sectors have both been among the leading peer groups in 10 of the 20 Januarys we examined.
However, on some of their poorer showings, the sectors have made double-digit monthly losses for investors. IA China/Greater China has the worst January of the past 20 years, when its average member fell 16.62 per cent in 2008.
It must also be noted that emerging markets have significantly underperformed the developed world for much of 2018 and many are dubious of if this will turn around in the near term.
Our research also looked at which Investment Association sectors have been among the 10 highest returners for the fewest of the past 20 Januarys.
IA Mixed Investment 40-85% Shares and IA UK Equity & Bond Income came in last place as they have never been among the top 10 while IA Mixed Investment 20-60% Shares, IA Flexible Investment and IA UK Equity Income have done it on one occasion and IA UK All Companies and IA Global on two.