In the black
The themes are similar to our review of the year from January. Over the 2016/17 tax year Japan has been the winner, with Japan and Japanese Smaller Companies taking spots 1, 2 and 4.
The rally for commodities has been long-awaited, following a multi-year bear market. Over-supply thanks in part to the China-driven boom has been steadily draining from the market and many of the surviving commodity companies are leaner and meaner. Gradually increasing global growth and inflation should be a benign environment for the sector.
Europe has its problems but there are opportunities. The region is relatively cheap with valuations still below the long run average, and it is generally under-owned by investors because of the very visible problems. 2017 could be a make or break year. Elections this year in key countries present the opportunity to change the future path for the Eurozone.
At a sector level, the story is more nuanced. Japan is present with both Smaller Companies and the main market appearing in the top 5. North American Smaller Companies has benefitted from the positive mood surrounding Trump's election as US president and confidence amongst business owners has been high. Time will tell whether Trump’s promises survive smouldering Democratic opposition.
Technology & Telecoms and China make up the top 5. China hasn’t imploded as many had feared. Cautious optimism may be the watch word. The 19th Party Congress is due in the autumn of 2017, so expect stability to be high on the agenda for this year. Technology & Telecoms tends to have a large US exposure and has been a beneficiary of the bounce accompanying the incoming US President.
On the ropes
Three absolute return funds are an unfortunately large component of the bottom 5 and the sector is the worst performing of all the sectors profiled (1). We’ve lamented the poor performance of Absolute Return funds in the past (see here).
Property funds are the other component of the poor performers. Brexit has had an impact here and we discussed this in detail at the time. Global REITs tend to be more connected with the stock market than with the performance of actual bricks-and-mortar property.
Targeted Absolute Returns and Property were the poorest sectors, followed by the “lower” risk fixed income sectors UK Gilts, Sterling Strategic Bonds and Global Bonds. The low single digit returns are more what investors should expect from these sectors. As the long bull run in bond markets draws to a close and interest rates around the world rise investors need to take care when selecting funds in these supposedly low risk sectors.
ACTION FOR INVESTORS
- Ensure your process for selecting funds is backed by evidence
- Make sure you have a process for investing
- Does it cover how you will respond when markets fall?
FURTHER READING
Table 1: Winners
|
Manager
|
Fund
|
Total return since 6/4/16
|
|
M&G
|
Japan Smaller Companies
|
60.17
|
|
M&G
|
Japan
|
59.61
|
|
JPM
|
Natural Resources
|
58.81
|
|
Man GLG
|
Japan Core Alpha
|
57.57
|
|
Neptune
|
European Opportunities
|
54.48
|
Table 2: Losers
|
Manager
|
Fund
|
Total return since 6/4/16
|
|
CF Odey
|
Absolute Return
|
-18.37
|
|
Argonaut
|
FP Argonaut Absolute Return
|
-17.76
|
|
M&G
|
Property Portfolio
|
-7.60
|
|
Standard Life Investments
|
Global REIT
|
-6.79
|
|
Threadneedle
|
Absolute Return Bond
|
-4.98
|
Table 3: Sector winners
|
Sector
|
Total return since 6/4/16
|
|
Japanese Smaller Companies
|
41.45
|
|
North American Smaller Companies
|
40.36
|
|
Japan
|
38.64
|
|
Technology & Telecoms
|
38.48
|
|
China/Greater China
|
35.42
|
Table 4: Sector losers
|
Sector
|
Total return since 6/4/16
|
|
Targeted Absolute Return
|
1.97
|
|
Property
|
4.26
|
|
UK Gilts
|
4.87
|
|
Sterling Strategic Bond
|
6.57
|
|
Global Bonds
|
7.16
|
Sectors excluded: Short Term Money Market, Money Market, Not Yet Assigned