The past year has been a lucrative but peculiar one for many equity-focused investors. Despite two major geopolitical shake-ups, world equity markets have bounded upwards, taking most of our 2016 award winners with them – but during that time something of a sea change in the global economic backdrop has kicked in, leaving several funds adrift from their sector peers.
After years of sluggish growth and low inflation, a more reflationary global environment has returned, helped by Donald Trump’s promises of huge spending and fiscal stimulus, but also by stronger prospects for emerging market and Asian economies. That trend has supported value investing – it saw a welcome return to form over the past 12 months after several years of underperformance since the financial crisis, as the ‘quality growth’ stocks so popular in recent years became increasingly pricey.
The upshot of these shifts is that a number of 2016 winners and highly commended funds, selected on the basis of their risk-adjusted returns over the previous three years, have slipped down the sector performance tables over the year – in many cases because their more value-oriented peers have had such an impressive year.
A look at the top of our 2016 award winners performance table (which uses data from FE Analytics) provides some insight into the sectors, regions and styles that fared best over the year to the start of April.
Unsurprisingly, both the winner and the runner-up North America funds feature in 2016’s top six performers. Highly commended Old Mutual North American Equity tops the one year performance ranking, having returned a steamy 40 per cent that put it eighth in the 90-strong IA North America sector, while award winner Fidelity American Special Situations returned 32 per cent. It’s a measure of just how little light there can be between North America funds in this highly efficient market that this modest 7 per cent differential in returns between the Fidelity fund and its Old Mutual peer pushed it down 52 slots, to 60th out of 90 in the sector.
Global growth spurt
Both the larger and the smaller global growth award winners, as well as the highly commended larger global growth fund, also featured among the top 10 performers, all returning between 30 and 40 per cent over the year. Both the larger fund choices – winner Fundsmith Equity and highly commended Ardevora Global Equity– are focused on big quality growth stocks. Many of these had had an impressive run, even before sterling’s fall in the aftermath of the UK’s vote to leave the EU, which boosted their international earnings when translated back into pounds.
But recent months have seen something of a turnaround, as this type of stock has been increasingly labelled expensive and a more ‘value’-oriented approach has gained popularity with investors. As a consequence, these two funds turned in mid-table performances over the year to 1 April, relative to their global peers.
In contrast, the more multi-cap and broader-based regional mandate of highly commended smaller fund T Rowe Price Global Focused Growth Equity helped keep it top quartile across all three periods, and second-best performer across the entire 2016 selection with a return of 39.4 per cent.
Winner JOHCM Global Opportunities, meanwhile, returned a relatively disappointing fourth-quartile 22.4 per cent. It was arguably held back by its focus on ‘not losing too much’ in difficult times, an approach that is likely to work against it when markets are in fine form.
Hermes Asia ex Japan Equity and Veritas Asian, respectively the winner and highly commended funds in the Asia Pacific category in 2016, ranked third and fourth in our performance table, returning about the same as each other over the year. Again, however, both were actually third quartile within the IA Asia Pacific ex Japan sector, despite ranking first and eighth respectively over three years.
Our two choices in the Japan category – both smaller companies funds, though Fidelity Japan Smaller Companies, the winner, is housed in the main Japan IA sector – are also in the top third of the performance table. Baillie Gifford’s Japan Smaller Companies fund is the open-ended sister to the renowned Shin Nippon investment trust. Manager Praveen Kumar runs both, and admits that 2016 was a tough year as investors in Japan, as in the UK and US, began to rotate from growth into value and lower-quality stocks. The fund came bottom of the small IA sector it sits in over the year to 1 April.
The winning UK-focused equity funds had mixed fortunes. The best performer was Old Mutual UK Dynamic Equity, highly commended in the UK growth larger fund category, which ranked eighth among the 225 funds of the UK all companies sector. It invests mainly in mid-cap and smaller firms and was hard hit by the Brexit vote, but it rebounded over the summer in 2016 and powered ahead of the sector from the start of 2017 onwards to return 27 per cent over the year to 1 April.
TB Amati UK Smaller Companies, winner of the UK smaller companies best smaller fund category, also performed well relative to its IA sector, gaining 25 per cent and ranking ninth out of 42.
Income funds squeezed
In stark contrast, the highly commended larger UK equity income fund, Mark Barnett’s Invesco Perpetual UK Strategic Income, returned just 7 per cent as the quality large caps on which it focuses underperformed. Indeed, equity income funds in general tended to be held back because of their focus on large-cap dividend payers.
Evenlode Income, winner of the UK equity income larger fund category, did best with a 20 per cent return that placed it 80th in the IA all companies sector, where it is housed despite its income focus. However, in the arguably more meaningful context of the IA UK equity income sector, it would have scored highly, meriting a slot in the top 10.
What about the fixed-interest contingent among our 2016 winners? The stand-out candidate is GAM Star Credit Opportunities USD, which produced a meaty 30 per cent return over the year on the back of sterling’s weakness. At the other end of the table, the two global bond choices, F&C Global Bond and JPM Global ex UK Bond, just about broke even.
The very bottom place is occupied by last year’s physical property fund award winner, M&G Property Portfolio. It lost 7 per cent over the year, having had to suspend trading in the wake of the Brexit vote, fearing a run of redemptions by panicky investors.
Overall it has been a challenging year for many of our funds in terms of short-term performance relative to their peers, as investors’ focus has shifted. In some cases we expect to see a return to form, but in others, this structural shift will keep them on the back foot for a while until the manager’s style comes back into fashion.