Japanese equities, UK smaller companies and funds investing in Chinese stocks would have been the best one-year options for ISA investors last year, according to the latest study by FE Trustnet.
The past 12 months have been an interesting one for investors, with volatility picking up towards the end of the period but extraordinarily low volatility and grinding gains for the most part.
Elections in Europe, ongoing Brexit uncertainty and the first year of the Donald Trump administration in the US – which saw both market-friendly tax reforms and spats with North Korea – certainly made the year a difficult one to navigate.
Despite the recent correction, however, all major market indices are higher than they were 12 months ago, although none have produced supernormal returns as seen in previous years.
Indeed, during the 2016-17 ISA year all markets returned more than 22 per cent, with the MSCI Emerging Markets index the highest with an impressive 37.16 per cent.
The same index has been the best performer since last year’s ISA deadline, although returns have been more muted, with a total return of 8.2 per cent. The S&P 500 was the worst performer, gaining just 39 basis points.
Performance of indices over 12 months
Source: FE Analytics
Notwithstanding the lack of returns at an index level – the Nikkei 225 made 3.91 per cent last year for investors – Japanese equities funds dominate the top 20 best-performing funds over the last 12 months.
The top overall performing fund was the high-volatility Legg Mason IF Japan Equity managed by Hideo Shiozumi, which made 40.6 per cent for investors.
The five FE Crown-rated fund is run with a bottom-up, growth-orientated approach that tends to focus on smaller companies that are linked with the ‘new’ Japanese consumer.
Shiozumi, who has more than 30 years of experience in running Japanese equities focuses on exploiting the investment potential created by the belief that Japan is in the process of two structural changes to its economy from regulated to deregulated and from manufacturing-orientated to service-orientated.
It is one of seven Japanese funds in the top 20 with fellow IA Japan constituents First State Japan Focus, RWC Nissay Japan Focus and Lindsell Train Japanese Equity returning 25.3, 23.6 and 22.9 per cent respectively.
Meanwhile, there were three other Japan-focused funds from the IA Japanese Smaller Companies sector that made the list.
Table of best performing funds over 12 months
Source: FE Analytics
The top performer of the trio was Baillie Gifford Japanese Smaller Companies, which was third-placed making a return of 35.5 per cent.
The four FE Crown-rated fund has been headed up by Praveen Kumar and Felicia Hjertman over the period. They joined the fund in December 2015 and January 2017 respectively, with Kumar taking over from previous manager John McDougall.
The £690m portfolio’s process remains the same following the change of manager, and will be following the same style that Baillie Gifford replicates across different regions.
“The fund could suit an investor seeking aggressive equity exposure in Japan, and who is looking to capture the huge growth potential in early-stage tech and online companies,” the analysts at FE Invest said in a research note.
However, like the Legg Mason fund above, large price swings are common as the fund buys stocks for the long run and is willing to hold them through periods of underperformance.
Invesco Perpetual Japanese Smaller Companies was just behind the Baillie Gifford fund, returning 35.2 per cent, while the BNY Mellon Japan Small Cap Equity Focus was also in the top 10 portfolios overall, up 31.3 per cent.
It is clear with hindsight that investors would have been much better taking a risk-on approach last year with areas such as UK smaller companies also outperforming.
Indeed, three funds from the IA UK Smaller Companies sector - Jupiter UK Smaller Companies, Elite Webb Capital Smaller Companies Income & Growth and TM Cavendish AIM all cracked the top 20.
MI Chelverton UK Equity Growth, which resides in the IA UK All Companies sector, is the only one from the peer group in the top 10 although it too employs a small-cap strategy.
Elsewhere, Chinese equities funds performed well driven by three key factors, signs of economic growth stabilising, improving earnings and liquidity support.
Indeed, the MSCI China index was up by 19.21 per cent over the period, more than double the wider MSCI Emerging Markets index.
Performance of indices over 12 months
Source: FE Analytics
NB China Equity was the seventh-best performing fund in the entire Investment Association universe last year, returning 31.6 per cent.
Meanwhile, Matthews Asia China and Matthews Asia China Small Companies made the list, gaining 24.3 and 24.1 per cent respectively.
Somewhat surprisingly, there are also two absolute return strategies among the top 20 IA funds of the last ISA year.
The five FE Crown-rated Polar Capital UK Absolute Equity fund run by FE Alpha Manager Guy Rushton was the second-best performer over the period, up 36.1 per cent.
The £529m portfolio focuses on UK equities and aims to generate positive absolute returns over rolling 12-month periods using a long/short strategy.
Similarly, the £55m FP Argonaut Absolute Return fund headed up by FE Alpha Manager Barry Norris and deputy manager Greg Bennett also made the list.
The long/short fund has had a fairly lumpy return profile, making more than double digit gains in four of the past five calendar years while making a more than 25 per cent loss in 2016.
Had investors bought into the fund at the buzzer of last year’s ISA season however, they would have made a 24.7 per cent return from the portfolio.