Table Toppers vs. Duds: The Best and Worst of 2018

If we just look at the main asset classes it’s not been a great year for investing – in fact it’s been a shocker in one key regard.

 

 

It is just that nothing has gone up, or not by any consequential amount.

 

In the week ended 14^th December was the first week since 1969 when cash showed positive returns while stock markets, corporate bonds and government bonds all suffered negative returns.

 

But it wasn’t a single week phenomenon.

 

For example, Ned Davis’ Research in the US tracks the eight big asset classes – including equities and bonds and commodities. 

 

None will make returns higher than 5%.

 

Last time that happened? 1972.

 

2018 is all but unique in history. 

 

We are coming to the end of a great experiment that started in 2008.  Central bankers started buying government bonds (and corporate bonds in some cases) in massive scale.

 

An extraordinary global inflation, from bonds and equities to art and wine. 

 

If you believe all this to be true, then you must also believe that when central bank policy is reversed, these assets, all of them, must turn down. 

 

And that is what is now happening…clearly happening now.

 

Let’s look at the funds and sectors that are in our universe – the ones you and I are typically buying.  

 

 

Table 1 shows the top 10 sectors – year to date.

 

We’ve highlighted the global vulnerability, illustrated by the Ned Davis research mentioned earlier.   But the averages for some sectors have still poked into positive territory.

 

Some of the technology shares – the FAANGs – have been given a good kicking in recent months but the Technology sector is still up 4.7% for the year.  Even though it’s down 13% from its peak, which shows how high it was earlier in the year.

 

If we look at the bottom 10 sectors (table 2) it’s quite a mixture. Asia, Europe and the UK feature – showing the global vulnerability that I’ve already mentioned.  

 

But there were also little local difficulties in some areas that have brought some sectors down a little more – it’s never just about the global vulnerability of central bank action. Each area has its own peculiarities.

 

 

There is a lot of variety but it’s helpful to focus on a few sectors to illustrate the range of possible returns by looking at the top and bottom funds in four sectors: North America, UK Smaller Companies, UK All Companies and Japan.

 

Table 3 shows the top and bottom funds for those sectors. The huge variety of returns is hidden by the sector averages (tables 1 & 2), which don’t tell you even half the story.

 

Baillie Gifford has been a big favourite of many people, not just Baillie Gifford American but also the fund house. And with good reason. The differential between the top and bottom funds in the North American sector year to date is 24%!

 

It’s a similar story in UK Smaller Companies and UK All Companies: 23% and 31% difference between the top and bottom funds. Just in one year.

 

 

This does illustrate exactly why we apply momentum. It’s very difficult to know the funds more likely than not to do best in any sector, particularly in uptrends. Momentum works superbly in uptrends and you get these differences occurring year after year. It’s these differentials within a sector that we exploit with our momentum-style Dynamic Fund Ratings.

 

Now let’s turn to the best and worst individual funds across sectors.  Table 4 shows the top 10 funds across all sectors. Again, it is North America that dominates. Although pharmaceuticals, technology and healthcare feature they are first and foremost funds focussed on North America.

 

There are two targeted absolute return funds that appear here. They have done extremely well to show up here but there is no way that funds from that sector should be appearing, at least not from that sector.  They are in the wrong sector and are not what I would think of as absolute return funds.

 

The bottom 10 funds are shown in table 5.  Looking back to table 2, there were quite a few sectors shown in the bottom 10 sectors across Asia, Europe and Emerging Markets.  But the worst funds from the totality of funds are clearly from the UK and there are some ugly performance figures there with the worst fund from the UK All Companies sector down nearly 30%.

 

 

We’ve talked a lot about what’s fallen, about 2008 and the low for the stock market in March 2009. But with these sharp falls came great opportunities. On the advised side, Dennehy Weller & Co clients were rapidly making 50-70% buying beaten up corporate bond funds from those lows.

 

These opportunities will come up again. We’re going to tiptoe through this wobbly period and then the opportunities coming out the other side will be extraordinary. 

 

They are the type of opportunities that only come up a couple of times in your investing life!