Few stars twinkle in dark universe

Most IMA sectors posted negative results in a year beset by volatility and crisis, with equities suffering from sluggish global growth and a flight to the relative safety of fixed income.

I doubt that many investors will have found 2011 a particularly profitable year. It has been possible to make money, but a lot easier to lose it. Only five of the IMA’s 33 sectors recorded a positive return, even after including reinvested income. And all of those were in bond or cash funds.

The fact that the two best performing sectors were invested in British government bonds serves to demonstrate just what a “risk-off” type of a year it was. Indeed, just as the arguably riskier sectors were at the top of the tree this time last year, so we have seen a complete reversal of fortune for 2011. The worst performing sector – China/Greater China – did not exist a year ago, but it is not unreasonable to lump it in with Global Emerging Markets, which happens to be the second worst performing sector so far this year. As we approached the end of 2010, this sector ranked fifth, rising by nearly 16%.

Similarly, the bond sectors were all languishing near the bottom of the table last year – not because they had lost money, but rather as performance from areas such as smaller companies – both Britain and North America – Asia Pacific, Technology & Telecoms and Global Emerging Markets had done so well. Indeed, only one sector lost investors money during the first eleven months of 2010 – Europe excluding UK.

Europe has seen sentiment turn against it this year. The continuing sovereign debt crisis has resulted in shares taking a battering, with the German Dax 30 index down over 12% and the French market falling by even more. The near 17% average fall in the Europe ex UK IMA sector indicates how tough managers have found it. (Trends continues below)

None of the funds delivered a positive return, with the best, Threadneedle European Select, down by nearly 8% and the worst performer having a quarter of its value wiped out.

Indeed, averages have not looked too appealing when compared with the indices against which they are benchmarked. The FTSE 100 index generated a total return of -3.4% during the 11 months to the end of November. The equivalent figure for the average in the UK All Companies sector was a fall of 8.8% – more than double the drop. However, a handful of funds managed a positive return, led by Liontrust Special Situations, returning close to 4%.

While bond markets have held up well this year (the FTSE British Government All Stocks index is up by 13.6% on a total return basis), equity markets have found the going altogether tougher. However, the American market, as measured by the S&P 500, crept into positive territory, providing a total return of 0.6%. This was enough to allow the sector to at least remain in the top half of the table. But the individual funds that go to make up this sector struggled as much as anywhere, with performances ranging from 3% up to 18% down.

The 17.6% fall in the MSCI Emerging Market index demonstrates how difficult a time those markets perceived as risky have had. The near 20% average fall in the Global Emerging Markets sector encompasses performances between individual funds that vary from 6% down in value to a loss of nearly a third. The much smaller – and newer – China/Greater China sector, which includes just 19 funds, saw performance range from a loss of 14% to one of nearly 30%.

As for individual funds, all of the top 10 in performance terms are fixed income funds, mainly invested in British government bonds. The overall leader is Insight’s UK Government Long Maturities, which produced a return just shy of 26%. The highest equity fund is more of a surprise. Legg Mason Japan Equity delivered a creditable 22.3% to secure 12th place. No other equity fund makes it into the top 20.

There are more than 2,350 funds in the IMA universe. The overall average performance comes in at a little below -7.5%, better than might have been expected, but two funds did lose investors more than 40%. HSBC’s GIF Indian Equity fund is down 40.6%, while Junior Oils, managed by Sector Investment Management Limited, of which Jim Slater is a shareholder, lost nearly 43% during the first 11 months of this year. 2011 has truly been a tough year for equity investors.

”There are more than 2,350 funds in the IMA universe. The overall average performance comes in at a little below -7.5%”

So, what of the prospects for 2012? With the crisis in the eurozone still far from solved and markets buffeted by potential debt problems and uncertainty, it would be a brave investor that called the turn in the market. But it seems unlikely that government bonds can continue their record-breaking run, while equities appear cheap, both from an historical perspective and in comparison with fixed interest securities.

Next year could see a return to form for equity funds, but in the short term continued nervousness seems likely to lead to periods of volatility. The divergence between the behaviour of government bond and equity funds cannot persist in the longer term, but for the near future it is hard to see investors forsaking the relative safety of gilts. Next year will doubtless bring its own set of challenges, but perhaps riskier assets will eventually return to favour.