2017 started off shrouded in uncertainty. With a new US president, the triggering of Article 50, economic growth in China slowing, Asia Pacific trade agreements in the air, and elections in the UK and France in the offing, there were plenty of unknowns and potential market shocks.
First-half surprises
Despite that, the first half of the year was generally a rewarding one for UK investors. Of the 50-odd asset class indices* we monitor, only 15 were in negative territory and, in the main, only by a percentage point or less. Most of these were bonds (loans to governments or companies), where small capital losses were incurred on the back of central bankers hinting at interest rate rises. US treasuries and treasury inflation-linked bonds fared the worst, with falls of 3-4%.
When it came to equity indices, the Brics (Brazil, Russia, India and China) had mixed results. Brazil was down 2% and Russia an eye-watering 18%, in no small part due to falling oil prices. However, they were the only two equity indices to fall. China was the best performer, up almost 19%, and India was up more than 14%. They were only separated by the European smaller companies sector, which returned just shy of 16%.
Commodities did badly, losing almost 10%, while property was very region dependent, with Europe (10.3% up) and the UK (3.7% up) doing better than the US (3.7 down) and global Reits (0.13 down).
| Top 10 funds in the first half of 2017 | ||
|---|---|---|
| Fund | Six-month performance* | |
| 1 | Old Mutual UK Smaller Companies Focus | 31.70% |
| 2 | Baillie Gifford Greater China | 26.50% |
| 3 | NB China Equity | 25.70% |
| 4 | Henderson European Smaller Companies | 24.10% |
| 5 | Baillie Gifford Pacific | 24.00% |
| 6 | JPM Asia | 23.60% |
| 7 | T Rowe Price European Smaller Companies Equity | 23.40% |
| 8 | JPM Turkey Equity | 23.40% |
| 9 | Polar capital UK Absolute Equity | 23.10% |
| 10 | GSAM India Equity Portfolio | 23.10% |
| Note: Total returns in sterling, 1 January 2017 to 30 June 2017. Source: FE Analytics | ||
European renaissance
Having lagged its developed market peers – the US, the UK and Japan – in recent years, Europe is enjoying something of a renaissance, and its equity markets have been making up lost ground in recent months.
On 26 July, it was five years since Mario Draghi, president of the European Central Bank, said he would do “whatever it takes” to keep the euro currency alive and the European economy afloat. It hasn’t been an easy five years, but we can finally say Europe is heading in the right direction.
Having suffered from deflation in the wake of the sovereign crisis, inflation is now in positive territory, employment numbers are improving and the European economy is growing. Importantly, corporate earnings growth and revenue estimates are also looking strong.
As always, there was an outperformer. In this instance, it was the Old Mutual UK Smaller Companies Focus fund, which turned in the best performance of all the 3,500-plus funds available to UK investors over the first half of 2017. It has risen 31.7% , despite worries about Brexit.
More of the same or a game of two halves?
While some of the worries of the first half of the year have been resolved, others haven’t. China is still a concern, and it seems only a matter of time before the US loses patience with North Korea’s shenanigans. We still have a German election to navigate (and possibly another one in the UK). Frankly, very few asset classes look appealing now. Picking winners in the next six months won’t be easy.
With this in mind, investors looking to invest new money without the guesswork may like to consider a multi-asset fund and let a professional choose the underlying funds and asset classes for them.
I like F&C MM Navigator Distribution, which has two fund managers at the helm who have been together for 20 years, longer than most married couples. Most of the fund’s returns are generated by stock selection rather than asset allocation. The fund has a 4.4% yield.
Another option is Investec Cautious Managed. If we get more interest rate rises, bonds and bond proxies may suffer, and we could see value styles come back into favour, in which case this fund could do very well.
Darius McDermott is managing director at Chelsea Financial Services and FundCalibre. Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott’s views are his own and do not constitute financial advice.
*Indices used are from MSCI and FTSE.
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