Half-time Report: Smaller company canaries, Trump dumped

The year so far has been profitable, despite some stocks being VERY expensive, and swirling political risks. Yet many did not participate in the chunkier returns.

There are two main reasons:

1. Behavioural biases from which we all suffer…
2. …and investor inertia

The split between the top and bottom sectors is again very obvious. Sectors focussing on equities are on top while typically lower risk bond and absolute return funds populate the bottom. UK and European Smaller Companies both sit at the top. But there are notable exceptions to the continuing charge of equities.  For example, US smaller companies have slumped from the top of the table last time to the very bottom on this occasion. The UK (Sterling) bond sectors also all cluster near the bottom.

The table shows the sector average return across the most popular sectors, sorted best to worst on performance, along with the best and worst fund returns.

Smaller company canaries

Smaller company performance is a good indicator of future growth expectations. Good performance by European and UK smaller companies indicates a positive outlook (up 18.21% and 16.98% respectively). However, continued uncertainty thanks to the failure of the Conservatives to get a parliamentary majority in the general election suggests we should keep a close eye on UK smaller companies – they can quickly move from heroes to villains, on which note…

Trump dumped

North American Smaller Companies (down -0.26%) have slumped from the top to the bottom of this table. The narrow difference between best and worst performers last time round indicated little discrimination as investors piled in. But the Trump jump has stalled as, so far, he has failed to match talk with action. Over-valuation is a concern across all US equities - they can trend higher, but we are pushing extremes.

China confidence

China has made good progress despite the naysayers. The sector is rising high again, ignoring worries over the growing debt pile. The 19th National Congress of the Communist Party is due to be held in the autumn, so expect stability to continue at least until then (failing an external shock). 

Sunrise in the East

The eclectic Specialist sector presents a myriad of opportunities. India – one of our Trades of the Decade - is back on form. Nonetheless investors need to take care in this sector as it contains a mix of funds following very different strategies, reflected in the huge 38% difference between best and worst.

The more generalist sectors have also done well, Asia Pacific (excluding Japan) and Asia dominated Global Emerging Markets. In both cases even the worst funds are up in excess of 6% since the start of the year. Going forward we will keep a close eye on the extent to which these sectors are tied to the fortunes of the US economy and markets.

Japan still attractive

Japan has cooled slightly after a good run, while Japanese Smaller Companies, which we have continually highlighted as cheap, have jumped up the table. There are opportunities in this small sector – the other one of our Trades of the Decade – with the best fund up 16%.

Global opportunities

The Global sector’s 7.68% looks unremarkable but it has the second largest differential between best and worst funds, as the underlying funds range across infrastructure and pharmaceuticals as well as more conventional growth funds.  Global smaller companies are prominent amongst the good performers in this sector. 

FURTHER READING

• Vanguard fans risk huge losses
• Happy Anniversary India, and many happy profits, too.
• Asia for income: land of opportunity

Table 1: Half-time table