Fund tips 2019: one year's progress

Source: FE, as of 13 December 2019. Figures in sterling terms

Even though markets ultimately performed well, investors were nervous last year following the sell-off in 2018, and continued to back defensive assets. UK investors put nearly £10.5bn into bond funds on a net basis over the first 10 months of 2019 alone. And they withdrew £4.8bn from equity funds on a net basis over the same period. 

Our fund suggestions for 2019 have had mixed results.The UK and emerging markets performed strongly in absolute terms, but the latter lagged some other parts of the world at a time when the US continued to dominate. The defensive funds we suggested also had unexpected results. We suggested strategic bond funds as a way to withstand any continuation of 2018’s market volatility, but they were not necessary for their diversification benefits. However, they did make strong returns. And although many defensive assets' prices rose last year, the capital preservation funds we suggested, which try to be less correlated to assets such as equities, struggled in performance terms as the latter rose.

Five of the eight active funds we suggested outperformed relevant benchmarks. The passive fund we highlighted – iShares Core FTSE 100 UCITS ETF (ISF) – delivered good returns. But the FTSE 100 index's returns were lower than those enjoyed by other parts of the UK market.

UK equities

The Brexit uncertainty hanging over UK equities meant that this market looked particularly cheap a year ago, although investors were divided over whether it represented a bargain or an area to be avoided. The events that followed have been significant: Boris Johnson replaced Theresa May as UK prime minister, gained initial parliamentary approval for a Brexit deal and won a general election with a large majority in December. Sterling and some domestic-facing UK equities initially made big gains following the election, as investors assumed greater certainty around any Brexit deal and the fate of the economy. But just days later the UK government indicated that a no-deal Brexit was still a possibility, wiping out some of the earlier gains.

As such, UK assets remain subject to uncertainty on Brexit though have at least performed well in 2019.

The FTSE 100 index has done well: its 14.3 per cent year-to-date return at time of writing was good in its own right and puts it ahead of the returns of Asian and emerging market indices, in sterling terms. But domestic-facing companies in the UK, which have been particularly out of favour in recent years, have benefited more from rises in sterling and improving views on the UK outlook. So the FTSE 250 is well ahead with a 26.6 per cent rise.

This disparity is reflected in our second table. iShares Core FTSE 100 UCITS ETF, which we suggested as a cheap source of broad exposure to the UK market, made good returns over the year to mid December. But the FTSE 250 and FTSE All-Share indices outpaced it.

However, another of our suggestions, Merian UK Mid Cap (GB00B1XG8963), captured some of this upside. It did extremely well from the shift in sentiment, returning 24.1 per cent over the year to 13 December. The fund was slightly behind the FTSE 250 index over this period and only marginally outperforms it over three years. But this fund has tended to beat the market over the longer term and notably outstrips the FTSE 250 over five years.

Source: FE as of 13 December 2019

Strategic bond funds

Investors have historically bought bonds to diversify away from equities or as a source of yield. But in 2019 a rush for defensive assets meant bond prices shot up. And higher prices might make bonds more vulnerable to a sell-off and less attractive as an income play because price rises push yields down. However, last year it meant that our suggestions for 2019, Man GLG Strategic Bond (GB00B6Y0WT01) and Allianz Strategic Bond (GB00BYT2QW81), made very good returns.

Both funds have exposure to higher-quality bonds with defensive characteristics. Allianz Strategic Bond tends to focus on government bonds and Man GLG Strategic Bond has a hefty allocation to bonds with higher credit ratings. This fund had 22.4 per cent of assets in AAA rated bonds – the highest credit rating – at the end of October.

So both funds have outpaced their benchmarks and fund sector average. But the hefty gains made in fixed income last year mean you should consider how much of an allocation you have to this asset class, and why you have it.

Source: FE, as at 13 December 2019

Emerging markets

Emerging markets had a disappointing year. Although many analysts thought that they would be a likely source of outperformance in 2019, they have instead been buffeted by concerns on issues including slowing economic growth. MSCI Emerging Markets index trailed other major equity indices in 2019.

But the funds we suggested fared slightly better. Hermes Global Emerging Markets (IE00B3DJ5K90), which has even more exposure to large Chinese tech names such as Tencent (700:HKG) and Alibaba (BABA:NYQ) than MSCI Emerging Markets index, continued its long record of outperformance against this index and the Investment Association (IA) Global Emerging Markets sector average.

JPMorgan Global Emerging Markets Income Trust (JEMI) had a mixed year. Its share price total return was ahead of the Association of Investment Companies (AIC) Global Emerging Markets sector average and MSCI Emerging Markets index's return, and its prospective yield was 3.9 per cent at the end of October. But its share price, which was trading at around par relative to the trust’s net asset value (NAV) when we suggested it last year, was at a discount of nearly 6 per cent in mid-December 2019. However, if sentiment towards the region improves in the next year the trust's share price could go up.

Source: FE, as at 13 December 2019

Capital preservation

Of the funds that we suggested for 2019, the ones that made the lowest returns were the wealth preservation funds. Both equities and bonds rose after a volatile 2018, so funds that aim to be uncorrelated with traditional markets did not do relatively well in 2019.

Over the year to 13 December, JPM Global Macro Opportunities (GB00B563VJ35) made a one-year return of just 0.5 per cent, putting it well behind major markets and even slightly behind cash. But the fund has performed much more strongly over three and five-year periods.

It has undergone some big personnel changes. When we suggested it this time last year senior manager Talib Sheikh had recently left the team that ran it, but co-managers James Elliot and Shrenick Shah remained. However, since then Mr Elliot has also left.

JPM Global Macro Opportunities can invest in a broad range of assets including stocks, bonds, currencies and commodities. It can also use derivatives, enabling it to take short positions.

The complicated approach taken by funds like this can make it difficult to gauge what has driven performance. But a year ago we suggested this fund as it was positioned to do well in a bearish market. But with all major asset classes making big gains the fund had to deal with the opposite scenario.

Some of the themes the fund invests along give an indication of how things have changed. At the start of 2019, the fund had allocated 25 per cent of its assets to mitigating the risks of a maturing US economic cycle. This had fallen to 16.4 per cent by the end of October 2019, perhaps in recognition of rosier conditions in the US or difficulties in the fund’s positioning there. The fund also had short positions on equities at the end of October – something that can be detrimental to performance at a time when markets are rising, although this depends on the exact positions taken.

Jupiter Absolute Return (GB00B6Q84T67), our other suggestion for wealth preservation, lost 3.3 per cent over one year to 13 December, demonstrating the risks of investing defensively in a buoyant market.

The fund, which is mainly focused on long and short equity investments, has been positioned for difficult markets. Its largest holding at the end of October was a physical gold exchange traded fund, which accounted for 7 per cent of its assets. Short positions on the US equity market, a more contrarian move, accounted for nearly 60 per cent of the fund's assets. But shorting can be risky and result in significant losses if your target's price rises rather than falls.

The approach taken by Jupiter Absolute Return's manager, James Clunie, has paid off in difficult times. For example, during the sell-off in the last quarter of 2018 the fund made a 1.8 per cent gain, in stark contrast to the S&P 500 index's 12.2 per cent fall, in sterling terms. But with the bull market continuing, defensive funds like this can miss out on handsome returns or even make a loss.

Jupiter Absolute Return is down 8 per cent over three years but up by roughly the same amount over five years.

Source: FE, as at 13 December 2019