The first three months of 2018 have been marked by a sharp uptick in volatility, which took many investors by surprise and left most parts of the market nursing losses. 
After a 2017 that saw decent returns coming with historically low levels of volatility, the new year witnessed turmoil returning to markets in force after investors were faced with two sell-offs – one of which appears to be ongoing.
Over the following charts, we look at the first quarter from a variety of viewpoints to find out how difficult conditions were for investors.
Asset classes
The below chart highlights just how challenging the opening three months of 2018 were, with most asset classes being hit with falls and volatility spiking sharply. Having sat at historic lows for much of the recent past, the return of volatility is something that investors will need to get used to.
Performance of indices over Q1 2018
Source: FE Analytics
Anthony Rayner, a manager in Miton’s multi-asset fund range, said the volatility uptick was down to factors such as tightening monetary policy, rising inflation and a move towards protectionism. He added: “Unsurprisingly, the combined effect of these forces is leading to a pickup in equity market volatility, reflecting a higher degree of uncertainty.
“This feels particularly volatile, coming as it does after a period of fairly black and white markets, characterised by an extended period of ‘lower for longer’, when interest rates and bond yields moved to multi-decade lows, before a rebound in growth and an inflation pickup signalled a ‘reflationary’ period.”
Geographies
UK investors were hardest hit during the first quarter with the FTSE All Share dropping 6.87 per cent over the three-month period. This continues the period of underperformance that started when the UK voted to leave the EU, but some investors argue this has been overdone.
Invesco Perpetual head of UK equities Mark Barnett, for example, has been tilting his portfolios towards UK companies with high domestic earnings and argued that the economy is not as weak as many fear.
Performance of indices over Q1 2018
Source: FE Analytics
“There is little evidence to substantiate this level of anxiety,” he said. “UK GDP growth may lag that of many countries but it is positive and the Office of Budget Responsibility has just raised its forecasts for 2018 – from 1.4 per cent to 1.5 per cent. It expects GDP to continue growing close to this level beyond 2022.”
Elsewhere, the S&P 500 dropped 4.43 per cent (in sterling terms) after US president Donald Trump moved the country towards a trade war and the tech sector was hit by the data scandal. Emerging markets held up best after falling 2.12 per cent during the quarter.
Investment style
Again, there were no winners when we look at how global equities performed according to investment style. Value came off worse with the MSCI AC World Value index dropping 6.09 per cent in the first quarter. MSCI AC World Growth fell 2.91 per cent and MSCI AC World Quality was down 3.50 per cent.
This continues the pattern of underperformance that has been seen for much of the post-financial crisis period: over the past 10 years, the value index has made a 117.34 per cent total return while MSCI AC World Growth is up 171.69 per cent and MSCI AC World Quality has made 221.32.
Performance of indices over Q1 2018
Source: FE Analytics
Rob Burnett, Neptune’s head of European equities and manager of the £446.8m Neptune European Opportunities fund, recently told FE Trustnet that he expects value to start outperforming: “Our strong conviction is that the conditions are in place for a sustainable period of value outperformance. The last time this happened… in 1999/2000 it was a historic entry point for value. What happened from the market peak in March 2000 through to 2007 was a phenomenal period of alpha for value.”
Industries
The only UK equity sector to make a (tiny) positive return in the first three months of the year was healthcare, with the FTSE All Share Healthcare index rising 0.55 per cent. This is in keeping with healthcare’s status as a defensive sector and investors may have turned to it as market conditions grew more difficult.
The financial services sector comes in second place with a fall of 4.42 per cent. The sector will have been supported by investors’ expectations of higher interest rates, as these allow banks to apply larger margins on lending and deposit rates.
Performance of indices over Q1 2018
Source: FE Analytics
At the bottom of the pile is the FTSE All Share Technology index, which was down 26.73 per cent. As well as the knock-on effect of the data scandal, the sector was dragged down by FTSE 100 software firm Micro Focus, where the share price has halved after a series of profit warnings and the departure of its chief executive.
Equity funds
Given what we’ve already seen, it should come as little surprise that all the major Investment Association equity sectors were in negative territory, on average, for the three months in question.
The IA China/Greater China sector came out on top, with the average fund making a loss of just 2.22 per cent. Some of the sector’s members made a positive return over the quarter: First State All China came in first place with a 3.84 per cent total return, while NB China Equity made 1.16 per cent and Matthews Asia China Small Companies was up 1.01 per cent.
Performance of sectors over Q1 2018
Source: FE Analytics
The largest average loss was from the IA Global Equity Income sector. Infrastructure-focused funds suffered the most in this peer group with LF Miton Global Infrastructure Income falling 10.28 per cent and Legg Mason IF RARE Global Infrastructure Income losing 9.89 per cent.
Bond funds
Turning to the Investment Association’s fixed income sectors and widespread losses were seen here as well.
The IA UK Gilts sector bucked the trend after its average member made a 0.41 per cent total return. The top performers here were all long-dated portfolios: Vanguard UK Long Duration Gilt Index (with a 1.51 per cent total return), iShares Over 15 Years Gilts Index (UK) (up 1.27 per cent), Aberdeen Sterling Long Dated Government Bond (up 0.81 per cent), Janus Henderson Inst Long Dated Gilt (up 0.80 per cent) and Newton Long Gilt (up 0.73 per cent).
Performance of sectors over Q1 2018
Source: FE Analytics
The quarter’s worst fixed income returns were from the IA Global Emerging Markets Bond sector, where the average fund lost 2.10 per cent. Fidelity Emerging Market Debt was down 9.73 per cent while Old Mutual Emerging Market Debt, Candriam Bonds Emerging Markets and L&G Emerging Markets Government Bond (US$) Index all lost around 6 per cent.
Multi-asset and specialist funds
With the Investment Association’s multi-asset and specialist sectors, it was absolute return funds that held up best in the first quarter – although the average IA Targeted Absolute Return member still ended the period in negative territory.
Its best performer was City Financial Absolute Equity, which made 6.73 per cent compared with a 0.39 per cent loss from its average peer. Another four funds made total returns of more than 5 per cent over the quarter: Natixis H2O MultiReturns, RWC Europe Absolute Alpha, GAM Star Keynes Quantitative Strategies and GAM Star (Lux) Emerging Alpha.
Performance of sectors over Q1 2018
Source: FE Analytics
The biggest loss from these sectors was seen in IA Mixed Investment 40-85% Shares, where the average fund was down 4.18 per cent. Jupiter Distribution and Growth made the biggest loss after dropping 9.73 per cent while BNY Mellon Dynamic Total Return and Scottish Friendly Managed Growth are also near the bottom of the table.