Gold funds lead in 2016

Between 1 January 2016 and 1 January 2017 the top-performing index was the Brazilian Bovespa, which returned 104.2 per cent in sterling terms, according to research by WealthClub, in contrast to a fall of 38.4 per cent in 2015. The impeachment of president Dilma Rousseff midway through the year had a big impact on markets, with investors pouring in money on a wave of optimism about the potential for structural change.

But in local currency terms the index was only up 38.9 per cent due to the real also having had a strong run at the same time as Sterling weakness.

The top-performing open-ended funds over 2016 focus on shares in gold companies. Between 1 January 2016 and 1 January 2017 WAY Charteris Gold and Precious Metals (GB00B3PSGY57) returned 134 per cent, MFM Junior Gold (GB00BH57BR88) returned 104 per cent and Smith & Williamson Global Gold & Resources (GB00B3RJHY30) returned 91 per cent, according to WealthClub.

That was also a turnaround on the previous year, when these funds lost between 15 and 30 per cent. Investors flocked to the precious metal in 2016 in the run-up to the UK's vote to leave the European Union, and uncertainty over the UK's negotiations on Brexit could keep prices high.

Over three years WAY Charteris Gold and Precious Metals is up 42.1 per cent, but the journey has been volatile. Gold's rally in 2016 began at the start of the year after plummeting in December 2015.

In 2016 there was a rally across the natural resources and mining sectors. After starting the year mired in uncertainty over the future of their dividends, mining giants returned to strength after a rebound in the prices of coal, iron ore, oil and copper. The FTSE Industrial Metals and Mining sector returned 231 per cent between 1 January 2016 and 1 January 2017, followed by Mining with 106.3 per cent.

The rally in commodities and mining was largely unexpected, with most predicting further deflation in commodity prices throughout 2016. The cost reductions undertaken by the major miners had a big impact on the sector's return to health, as did a reduction in oversupply.

These trends were also reflected in the top five performing investment trust sectors over 2016. The Association of Investment Companies (AIC) Country Specialists: Latin America sector was the third-best performer with a return of 63.5 per cent, Sector Specialist: Commodities and Natural Resources was fourth with 61.8 per cent and Latin America was fifth with 51.9 per cent.

Ben Yearsley, investment director at WealthClub, said: "Many will forget that going into 2016 there was a high degree of volatility culminating in market lows in February, with uncertainty surrounding the ability of many mining and commodity companies to service their debt. Roll forward to the end of 2016 and those same companies topped the performance charts. The sharp collapse in Sterling after the Brexit vote in June had a huge impact on returns, with the Sterling return for global indices typically outstripping the local currency return."

Other strongly performing open-ended fund sectors in 2016 include North America, following the election of Donald Trump, and Global Emerging Markets. Investor sentiment on the latter turned sharply last year - this was the worst-performing market in 2015 but third-best in 2016.

In 2017 the factors determining fund and sector performance are likely to be inflation and interest rates. In December the US raised interest rates for only the second time since the financial crisis in 2008, while the UK cut them following the Brexit vote. However inflation is likely to continue rising in the UK due to the higher cost of importing goods.

"With interest rates at 0.25 per cent and the 10-year gilt trading at 1.23 per cent equities still remain a good long-term bet," says Mr Yearsley. "The FTSE 100 yields 3.76 per cent and trades on a forward PE ratio of 14 for 2017 and cyclically adjusted PE of 16 for 2016. The long-run average is closer to 20."

Top-performers in 2016

Source: WealthClub, as at 3 January 2017