Last year saw money being made in every asset class as volatility sat at some of the lowest levels in investors’ memories, according to the latest FE Trustnet study.
While the current bull run is often described by market commentators as the ‘most hated in history’, last year was a particularly good 12 months for investors.
Every sector in the Investment Association universe made a positive return on average, according to FE Analytics, while they also saw lower volatility than both in 2016 and over their 10-year annualised average, as the below chart shows.
Table of sector volatility in 2016, 2017 and over 10yrs
Source: FE Analytics
Architas investment director Adrian Lowcock said: “2017 was quite unique in its lack of volatility and was the first year when there were no big financial scares to set markets tumbling. Even so political uncertainty and posturing from North Korea would normally have at least caused a stir in markets, but they just took it in their stride.
“The reason 2017 lacked volatility was because we had global growth, no major recessions and fallout from the global financial crisis. It was the first year where it looked like the world could put the global financial crisis behind it.”
The peer group with that had the lowest volatility relative to its 10-year average was the IA North American Smaller Companies sector, our research shows.
Despite the Federal Reserve’s monetary tightening cycle carrying on throughout the year, the interest rate hiking pace was slower than some had expected while potential policies from president Donald Trump to boost domestic US companies were also priced in, boosting smaller companies.
However, returns were underwhelming, with the sector making an average gain of 7.11 per cent – the lowest of the equity-only sectors in the Investment Association universe.
Within the sector, the £106m JPM US Smaller Companies was the fund that saw its volatility fall the most last year – though all funds within the sector were less volatile in 2017 than in the previous 12 months.
In 2016 the fund, run by Eytan Shapiro and Timothy Parton, experienced 22.19 per cent volatility while returning 27.81 per cent to investors – both bottom quartile in the sector.
Performance of fund vs sector and benchmark in 2017 and 2016
Source: FE Analytics
Last year it returned 28.26 per cent to investors with volatility of 4.04 per cent – both the best figures in the sector – while its maximum monthly drawdown was the lowest in the sector at just 13 basis points.
Both the IA Europe ex UK and IA European Smaller Companies sectors were also less volatile in 2017 than they were in 2016 and when compared to their 10-year average.
Potential pitfalls such as the Dutch, French and German elections were largely brushed aside by the market as the results were perceived as market-friendly while economic growth has improved and earnings have picked up.
Architas’ Lowcock noted: “The IA North American Smaller Companies and IA Europe ex UK sectors were supported by stronger political landscape.
“In the US the potential for tax reform was supportive of US smaller companies and corporate earnings growth remained positive while in Europe the political landscape was fairly stable once investors realised the status quo would largely be maintained and most importantly GDP growth had returned and deflationary threat had receded.”
Like the IA North American Smaller Companies sector, all funds in the IA European Smaller Companies sector were less volatile in 2017 than they were in 2016.
The fund with that saw the most dramatic fall was Mirabaud Equities Europe Ex-UK Small and Mid, which saw volatility of 15.85 per cent in 2016 but just 6.25 per cent in 2017 – the lowest in the sector.
The only portfolio in the IA Europe ex UK that was more volatile in 2017 than 2016 was the five FE crown-rated Man GLG Continental European Growth fund.
At the other end of the spectrum, Neptune European Opportunities saw its volatility fall from 23.44 per cent in 2016 to 8.14 per cent in 2017 – a difference of 15.3 percentage points. 
Run by FE Alpha Manager Rob Burnett, the £447m fund has a strong value tilt with 33.7 per cent invested in financials and 23.3 per cent in materials stocks.
It has been the second best performer in the sector over the last two years, returning 57.05 per cent since the start of 2016, though it has been the most volatile in the sector.
Elsewhere, the IA China/Greater China and IA Europe ex UK sectors were the only others to experience more than 10 percentage points less volatility in 2017 than their 10-year average.
The only sector with double digit volatility in 2017 was the IA Technology & Telecommunications sector (10.15 per cent), though this is still lower than in 2016 and its 10-year average.
“The IA Technology & Telecommunications sector was more volatile for good reasons. Volatility goes both ways so rising share prices also increase volatility and this sector was a beneficiary of strong themes including AI, robotics and distruptive tech led by the FANGs. Tech was the sector in the limelight in 2017,” Lowcock highlighted.
Yet in comparison to 2016, when 22 sectors experienced more than double-digit volatility with the IA Japanese Smaller Companies seeing 23.23 per cent volatility, it remains pretty low.
The sector with the largest monthly maximum drawdown was the IA UK Index Linked Gilts sector (4.79 per cent) though this is some way off the IA Japan’s maximum drawdown in 2016 of 12.53 per cent – showing how little movement there was last year.
However, this year investors should not expect the same level of low-risk gains, and should be prepared for a switch in mood across financial markets in 2018, with the “straight line” gains achieved this year by equities unlikely to be repeated, Kames Capital’s chief investment officer Stephen Jones said.
“Headwinds from rising interest rates, geopolitical events and even the threat of nuclear war have failed to deter markets in 2017. Every risk has been shrugged off as cheap money and unexpectedly strong growth, not to mention stable inflation, have powered equities higher amid improvements in corporate profitability,” he added.
“However, next year could well be very different with a further surprise to the upside from corporate profits unlikely.”