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Fund tips 2018 review: one-year's progress

Concerns over economic growth and China have resulted in a rough ride for equity markets in 2018
January 3, 2019

Markets were volatile in 2018, and investor sentiment on risk assets such as equities shifted frequently. Areas that faced significant headwinds included China and emerging markets, which were among the five areas we thought would perform well during 2018.

As such, only one of the 10 funds we selected in our 2018 fund tips provided a positive return. However, volatile markets can provide a good opportunity to test active managers’ capabilities, as the best stocks should fall less than the market. And many of our choices did well relative to their peers and benchmarks, despite ending 2018 in the red. Active managers can't stop markets falling, but can limit downside.

 

Europe's surprising performance

Despite the volatile market environment, Jupiter European Fund (GB00B5STJW84) made a positive return of 3.34 per cent over the 12 months to 17 December 2018. The fund is managed by Alexander Darwall, and concentrated in large and mega-cap growth stocks with only around 30 to 40 holdings. This means it has significant weightings in some of its holdings, so that only one or two of them need to do well for the fund to outperform, which is exactly what happened. The fund beat MSCI Europe ex-UK index and the Investment Association (IA) Europe ex-UK sector average, which lost 7.87 per cent and 9.95 per cent respectively over the same period. Much of the outperformance was due to holdings in Wirecard (GER:WDIX) and Dassault Systemes (FR:DSY), whose share prices made double-digit increases in 2018 despite the wider market falling.

We also tipped Marlborough European Multi-Cap Fund (GB00B90VHJ34), run by David Walton, a much broader strategy that also buys small-and-mid-cap stocks. However, European smaller companies are a segment of the market that tends to be driven by sentiment rather than company fundamentals, so it goes up or down based on how investors feel about the overall European economy. Sentiment towards this area in 2018 was not as positive as in 2017, so over the year to 17 December 2018 this fund lost 9.04 per cent. This was more than MSCI Europe ex-UK index, but less than MSCI Europe ex UK Small Cap index, which fell 11.58 per cent. Small and mid-cap stocks are riskier than their larger peers and, while the fund can invest across the market cap spectrum, it tends to focus on smaller companies.

 

Europe ex UK

Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge (%)Rank in sector over one year
Jupiter European3.3440.2883.551.032/116
Marlborough European Multi-Cap-9.0450.2486.960.8662/116
MSCI Europe ex UK index-7.8728.1836.95  
MSCI Europe ex UK Small Cap index-11.5835.5960.31  
IA Europe Excluding UK sector average-9.9526.0937.43  

Source: FE Analytics, as at 17/12/2018

 

Turbulence in Japan

Another market that suffered due to poor investor sentiment in 2018 was Japan. This market was firing on all cylinders in 2017, but this came to an abrupt halt during the past year. The Topix index fell 4.39 per cent over the year to 17 December 2018 and the IA Japan sector average return was a loss of 8 per cent. One of our picks, Baillie Gifford Japanese Fund (GB0006011133), beat the Japan sector average but underperformed the Topix with a 6.18 per cent fall. The fund is relatively diversifiedo, with around 60 holdings, but substantial losses for some of its 10 largest holdings dragged performance down. The fund's growth strategy did well in 2017, but last year was not good for the type of stocks it invests in. This was especially the case for companies focused on trade with China as they suffered due to growing concerns over the Chinese economy and trade tensions.

Our other pick, Legg Mason IF Japan Equity (GB00B8JYLC77), is a high-octane growth fund that has been one of the best performers in its sector over recent years, albeit with substantial volatility. Its manager, Hideo Shiozumi, buys domestic-focused companies servicing what he calls ‘new Japan’, many of which are involved in healthcare and industrial technology. This means they are less exposed to global influences, unlike Baillie Gifford Japanese Fund's holdings. So Legg Mason IF Japan Equity only fell 3.39 per cent, beating the Topix and the IA Japan sector average.

The fund is reasonably concentrated with around 45 stocks and, although some of these experienced substantial share price falls, others such as MonotaRO (3064:TYO) and Fancl Corporation (4921:TYO) saw their prices rise by 50 per cent and 70 per cent respectively. These two account for over 5 per cent of the fund's assets and helped cushion it from the general market volatility over the past year.

 

Japan

Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge (%)Rank in sector over one year
Baillie Gifford Japanese-6.1858.2982.470.6338/77
Legg Mason IF Japan Equity-3.3978.99164.391.029/77
TSE Topix index-4.3939.2167.93  
IA Japan sector average-837.4358.77  

Source: FE Analytics, as at 17/12/2018

Legg Mason IF Japan top 10 holdings (%)
Nihon M&A Center7.15
Peptidream6.92
M35.9
Don Quijote Holdings5.83
GMO Payment Gateway4.73
Nintendo4.21
Zozo3.92
Welcia Holdings3.54
En-Japan3.46
Outsourcing3.37
Source: Legg Mason as at 30 November 2018

 

Chinese woes for Asia

Asia and the emerging markets within it were expected to have another good year in 2018, but did not do well for reasons including concerns over the Chinese economy and trade tensions. So MSCI AC Asia ex Japan index and the funds we tipped 12 months ago fell over the past year. Merian Asia Pacific Fund (GB00B1XG9607), formerly known as Old Mutual Asia Pacific, fell 8.73 per cent over the year to 17 December 2018, against a fall of 6.48 for MSCI AC Asia ex Japan index and the IA Asia Pacific ex Japan sector average fall of 6.7 per cent.

The fund, run by Amadeo Alentorn, Ian Heslop and Mike Servent, has around 30 per cent of its assets allocated to Chinese equities, which were a significant drag on performance, as was its exposure to other Asian emerging markets that rely on trade with China. The fund is well diversified, so no single stock had a notable effect on its performance. But its slight tilt to value stocks, and allocation of nearly 40 per cent to mining stocks and financials, were also reasons why it underperformed MSCI AC Asia ex Japan index and its sector average over the past year. However, if trade tensions abate, and the Chinese and global economic growth outlooks improve, a tilt to value stocks could be beneficial. 

 

Merian Asia Pacific geographic allocation (%)
China30.2
Australia15.5
Korea15.3
Hong Kong8.6
Taiwan8.6
India6.7
Indonesia4.2
Thailand3.4
Singapore2.7
Malaysia1.9
Philippines1.4
Other1.5
Source: Merian Global Investors as at 30 November 2018

 

Schoder Asian Alpha Plus Fund (GB00BDD27J12), our second Asian tip, fared slightly better over the past year, beating the sector average and the index. The fund is significantly more concentrated than Merian Asia Pacific and much more focused on growth stocks. Good performance for holdings such as Swire Pacific (HK:19) and HDFC Bank (IND:HDFCBANK) helped alleviate the substantial falls for broader markets.

 

Asia Pacific ex-Japan

Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge (%)Rank in sector over one year
Merian Asia Pacific*-8.7366.2879.76177/103
Schroder Asian Alpha Plus-5.1661.0376.240.8746/103
MSCI AC Asia ex Japan-6.4852.2559.66  
IA Asia Pacific ex Japan sector average-6.748.3254.38  

Source: FE Analytics, as at 17/12/2018

 

Emerging markets

Emerging markets struggled in 2018 due to concerns about a slowdown in global and Chinese economic growth, and Chinese trade tensions with the US. Emerging market fortunes are, in part, reliant on the success of the Chinese economy. Chinese consumers and the emerging market businesses exposed to them should be resilient to trade tensions with the US. However, the overall negative sentiment on any market associated with the Chinese economy has been substantial. The dollar, meanwhile, has been stronger which can act as a headwind to some emerging market businesses. And rising oil prices over much of 2018 had a detrimental effect on emerging market countries that import oil. These headwinds outstripped the tailwinds that benefited emerging markets in 2017.

Last year we tipped Baillie Gifford Emerging Markets Leading Companies Fund (GB00B06HZN29) based on its managers' ability to pick growth stocks. This fund has a heavy focus on megacap companies, meaning that tech stocks and financial services companies account for around 70 per cent of its assets, and neither of these sectors did well last year. The fund is also fairly concentrated, with 42 stocks, and this was a problem. Six of its 10 largest holdings – which account for over 30 per cent of its assets – experienced double-digit falls over the past year, although this was due to sentiment rather than fundamental problems. Even so, over the year to 17 December, the fund lost 7.17 per cent, while MSCI Emerging Markets index fell 6.4 per cent and the IA Global Emerging Markets sector average return was a fall of 8.82 per cent. 

 

Baillie Gifford Emerging Markets Leading Companies Fund top 10 holdings (%)
Taiwan Semiconductor Manufacturing Company8.7
Samsung Electronics7.6
Tencent6.3
Reliance Industries5.2
Ping An Insurance5.2
Alibaba4.9
ICICI Bank4.5
Naspers4.5
Sberbank3.9
CNOOC3.7
Source: Baillie Gifford as at 30 November 2018

 

Fidelity Emerging Markets Fund (GB00B9SMK778), run by Nick Price, was our other pick and fared worse than Baillie Gifford Emerging Markets Leading Companies, with a fall of 11.21 per cent over the year to 17 December 2018. Mr Price runs a similar strategy to the Baillie Gifford team, but has a lower allocation to technology stocks, more exposure to defensive consumer companies and less exposure to China. He holds more stocks – around 65 – but the 10 largest holdings account for about 45 per cent of the fund's assets. So, although some holdings did well, because the fund is well diversified in terms of sector and country exposure, they did not have a meaningful impact on overall performance. But the performance of the 10 largest holdings in the fund was driven by sentiment rather than fundamentals.

 

Emerging markets

Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge (%)Rank in sector over one year
Baillie Gifford Emerging Markets Leading Companies-7.1760.3859.620.7852/103
Fidelity Emerging Markets-11.2133.5340.680.9684/103
MSCI Emerging Markets index-6.453.2941.52  
IA Global Emerging Markets sector average-8.8246.6435.09  

Source: FE Analytics, as at 17/12/2018

 

Fidelity Emerging Markets Fund top 10 holdings (%)
AIA6.6
Naspers6.1
HDFC Bank5.6
Taiwan Semiconductor Manufacturing Company5
Housing Development Finance Corp4.7
Sberbank4.3
Bank Central Asia TBK3.4
China Mengniu Dairy3.2
Alibaba3
Lukoil3
Source: Fidelity as at 30 November 2018
Fidelity Emerging Markets Fund sector breakdown (%)
Financials39.1
IT 12.8
Consumer discretionary11.2
Consumer staples7.9
Communication services7.1
Materials5.1
Energy4.6
Industrials2.4
Health care1.7
Other8.1
Source: Fidelity as at 30 November 2018

 

Strategic bond funds
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge (%)Rank in sector over one year
Gam Star Credit Opportunities-6.6816.6937.041.191/93
Jupiter Strategic Bond-1.9310.0417.50.7337/93
IA Sterling Strategic Bond sector average-2.3110.1316.85  
Bloomberg Barclays Sterling Aggregate index-0.2512.7529.39  
Source: FE Analytics, as at 17/12/2018