Emerging markets funds – especially those focusing on China – and smaller companies remits generated some of the best returns from the Investment Association universe over 2017, according to data from FE Analytics.
While there were plenty of opportunities for markets to hit a rough patch last year – not least because of the UK’s ongoing negotiations to depart the European Union (EU) and the nuclear tension between the US and North Korea – risk assets have just gone through a relatively strong period.
FE Analytics shows that the MSCI AC World index – which includes both developed world and emerging market stocks – posted a 13.24 per cent total return in sterling across 2017. This is down from the 28.66 per cent gain made in 2016, but ahead of the 3.29 per cent and 10.64 per cent made in 2015 and 2014 respectively.
It was the emerging markets that led the year’s gain after the MSCI Emerging Markets index was up 25.40 per cent. Within this, China and India had an especially strong 12 months with the MSCI China index making just over 40 per cent.
Performance of indices over 2017
Source: FE Analytics
US equities, which have been one of the strongest performers of the post-financial crisis rally, made a 10.62 per cent total return in sterling terms and reached numerous record highs, despite interest rate hikes and moves to shrink the Federal Reserve’s balance sheet.
The FTSE All Share was also up 13.10 per cent, even though sentiment towards the UK remains low among both private and professional investors due to the uncertainty created by the vote to leave the EU.
Bonds were the weakest performers of the year. The Bloomberg Barclays Global Aggregate index was down 1.90 per cent over the period, a stark reversal from the 21.77 per cent return (in sterling) made in 2016.
Looking at the Investment Association fund sectors and, as would be expected, the results broadly follow what was seen at the market level.
As the table below shows, the IA China/Greater China was the best performing peer group of 2017, on average, after making a 35.87 per cent total return. While many investors remain concerned by a potential debt bubble in China, the country performed well last year on the back of bullish sentiment and a move back into emerging markets.
This is also reflected in the fact that the average IA Asia Pacific Excluding Japan and IA Global Emerging Markets funds posted a return of around 25 per cent for 2017. Many fund pickers continue to tip these areas of the market for the coming 12 months.
Despite uncertainty around the Brexit process and the UK economy, renewed bullishness by investors meant that the IA UK Smaller Companies sector had a strong 2017. This is in contrast to 2016, when these concerns meant the peer group was one of the weakest performers of the Investment Association universe.
Source: FE Analytics
Looking at the bottom of the table and it’s the bond peer groups that generated last year’s lowest average returns. The average fund in the IA UK Gilts sector made just 1.72 per cent in 2017, while returns stood at 2.03 per cent for IA Global Bonds and 2.16 per cent for IA UK Index Linked Gilts.
The IA Targeted Absolute Return sector, which has been very popular with investors for a number of years, is also at the bottom end of the returns table after its average member made 3.39 per cent over the course of the year.
When it comes to individual funds, it should be of little surprise that China funds dominate the rankings with the top performer overall – Frank Yao and Lihui Tang’s $1.4bn NB China Equity fund – making more than 50 per cent.
That said, it’s a UK smaller companies fund that takes second place. Old Mutual UK Smaller Companies Focus, which was taken over by Nick Williamson at the start of 2016 and aims to outperform in all economic phases through a concentrated portfolio, was up 49.92 per cent.
An absolute return fund also stood out last year. Guy Rushton’s Polar Capital UK Absolute Equity, which is in fourth place overall after making 47.51 per cent, is a long/short equity fund. The portfolio’s largest net long positions are to the information technology and materials sectors, both of which have just had strong years.
Source: FE Analytics
Obviously, not all funds have had such a strong year. At the very bottom of the table is Manek Growth, which was down 23.03 per cent and recently announced that it will close. VT Craigshannoch Multi Strategy lost 22.20 per cent, while Schroder ISF Global Energy and Investec Global Energy were down 16.16 per cent and 13.05 per cent respectively.
On the whole 2017 ended up being a fairly good one for investors but, with many markets at record highs, warnings about the risk of a looming correction are common. Jason Hollands, managing director at Tilney Group, cautions investors against trying to predict such events and recommends maintaining diversified portfolios that aren’t too focused on identifying future winners and losers.
“The million-dollar question is of course how much longer the good times will roll-on? Each time a market index tests new highs, it provides a cue for perma-bears to warn of an impending crash,” he said.
“In reality, ‘corrections’ and ‘crashes’ are extremely difficult to predict with any accuracy and long-term investors should try not to get too distracted by such attempts at tea-leaf reading and instead focus on well diversified strategies that balance risk and opportunities.
“Bull markets don’t die of old age, they are typically stifled by either a deterioration in economic fundamentals, policy errors by central banks (either tightening too aggressively or allowing asset price bubbles to get out of control) or triggered by unforeseen shock events.”