Investors who are panicking after seeing the coronavirus-related sell-off wipe out a large chunk of their savings may take a crumb of comfort from the financial crisis, when the worst performers in the market crash were also among the best performers when it recovered.
Three of the five worst-performing sectors in the year-to-date – IA UK Smaller Companies, IA UK All Companies and IA European Smaller Companies – were also on the list of five worst-performing sectors from the time the market peaked in October 2007 to when it bottomed out in March 2009.
Worst performing sectors
Source: FE Analytics
However, these three were also on the list of five best-performing sectors in the five years after the market reached its lowest point.
Best performing sectors 3yrs & 5yrs after market bottomed out
Source: FE Analytics
IA Global Emerging Markets has just about avoided the list of worst laggards this time around, its losses of 19.83 per cent making it the eighth worst-performing sector so far this year. Again though, while it was the fifth-worst performing sector from peak to trough in the financial crisis, after losing 43.96 per cent, it was the third-best performing sector in the three years after the market bottomed out, with gains of 101.07 per cent.
It failed to make the list of best performers over five years however, after it was hit by the taper tantrum of 2013 when the US announced it would cut its quantitative easing programme. This led to concerns over how a strengthening dollar would impact a sector where much of its debt was denominated in this currency.
The only one of the five worst-performing sectors in the run-up to the financial crisis that failed to rebound convincingly after the market bottomed out was IA Property Other, which was 22nd out of 39 over both the next three and five years. This is unsurprising given the global remit of the sector and the fact the crisis originated in the US property market.
One outlier here is NB US Real Estate Securities: the fund, which owns REITs, fell 54.02 per cent in the crash on the indiscriminate sell-off in its sector. However, it quickly rebounded after the focus switched to fundamentals and the managers’ decision to avoid indebted companies proved to be the correct one. It was the fifth best performer in the IA universe in the three years after the market bottomed out, with gains of 190.17 per cent.
In terms of individual funds, just one appears on the lists of 10 worst performers on the way down in the financial crisis and 10 best performers in the subsequent rebound: SVM UK Opportunities. Neil Veitch’s special situations strategy was the seventh worst performer in the IA universe from the peak to trough over this period, with losses of 65.54 per cent, but then turned it around to become the 10th best performer in the entire IA universe over the next three and five years, with gains of 179.99 and 328.95 per cent, respectively.
Best performing funds 3yrs & 5yrs after market bottomed out
Source: FE Analytics
Veitch described his experience during the financial crisis as “chastening”. He subsequently increased his exposure to large-cap stocks and added a short component to the portfolio to help dampen volatility in future.
Four of the worst performers in the market crash of the financial crisis were focused on eastern Europe, dominated by Russia. The region suffered heavily in this period due to its reliance on oil, which fell by 75 per cent in dollar terms as cash-strapped countries refused to cut production despite the drop in demand that resulted from the crisis. These funds were able to rebound in line with the oil price and Pictet Russian Equities was the fourth best-performer in the IA universe in the three years after the market bottomed out.
Many of the worst-performing funds so far this year have a high exposure to the energy sector. However this has been blamed more on the oil-price war between Saudi Arabia and Russia than the coronavirus panic. This part of the market is unlikely to rebound until the dispute is settled.
This also helps to explain why IA UK Equity Income is the second-worst performing sector this year, with losses of 28.85 per cent. Of the 85 funds in the sector, 46 hold BP in their top-10 and the same number hold Royal Dutch Shell.
The overriding lesson appears to be that you will need to put up with high volatility if you want to make the most of the market recovery when it eventually arrives. Of the best performing funds over three and five years from the point the market bottomed out in 2009, 10 of the 12 funds with a track record of sufficient length fell by more 40 per cent from peak to trough.
Best performers 3 & 5yrs after market bottom - how they fared in the crash
Source: FE Analytics
One more, Aberdeen Standard SICAV I Emerging Markets Smaller Companies, lost 37.88 per cent. Candriam Equities L Biotechnology was the only one to come through the financial crisis relatively unscathed – it fell just 10.29 per cent peak-to-trough, before making 336.62 per cent in the next five years, the seventh highest amount in the IA universe.
However, in a previous article published on Trustnet, numerous fund managers and analysts warned that the recovery from the current market crash will look different to the one that marked the end of the financial crisis.