Sector focus: Which funds came out stronger from the rollercoaster ride of 2016?

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There certainly was plenty of action during 2016. An unexpected result from the in/out referendum on Europe was followed by an equally unforeseen Trump victory in the US presidential election.

Yet markets remained remarkably sanguine after these arguably unsettling events. Indeed, trawling through the runners and riders of the funds universe for the year to the end of October suggests 2016 has been a year when a risk on approach has paid dividends. Interestingly, it is those funds at the bottom of the tables that have proved more interesting this year.

Unlike the same period in 2015, no sectors delivered negative returns, though the total returns at the bottom of the tables were pretty meagre.

Money market funds proved the least profitable sector in which to place your trust, while absolute return also disappointed. Indeed, the worst-performing individual funds were absolute return vehicles, underlining the fact that a cautious approach did not pay off this year.

There is a body of opinion that believes backing last year’s losers should pay dividends. Conversely, dumping the winners in a particular year should protect the investor from underperformance in the following year.

An examination of this year’s figures both supports and contradicts such an approach. Japanese smaller companies were ranked first for the 10 months to the end of October, rising more than 45 per cent.

They were placed fourth for the same period last year, though achieved a more modest 9 per cent rise. But then, 2015 was a difficult year, with the best-performing sector – UK smaller companies – only returning 12.6 per cent.

UK smaller companies trail this year, delivering just 2.6 per cent and lying fourth from bottom in the sector tables. You could argue this supports the contrarian approach outlined above, as does the performance of global emerging markets, finishing bottom but one last year, losing over 4 per cent, but proving the fifth best performing sector this year, with a rise of over 30 per cent.

Similarly, the Asia Pacific sectors did badly last year, but well this year. Clearly 2016 has rewarded those investors prepared to take a more aggressive stance on risk, despite voting upsets and continuing geopolitical concerns. Yet this hardly seems supported in the tables for individual fund performance. The top eight performing funds, all of which more than doubled in value on a total return basis, were gold related.

Gold is usually viewed as a safe haven investment, yet investors appear to have developed an appetite for risk, following a year which has proved difficult.

Ranked nine and 10 in the individual fund tables are two Latin American funds. All the top 10 performing funds fall within the specialist sector in the Investment Association tables, but this particular sector did not even make the top 10 in performance terms, coming in at number 11 with a return of 26.4 per cent.

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Looking at the worst-performing funds, perhaps the fact that the Pictet Biotech fund was in the bottom five supports the fact that some sectors are difficult to classify. This fund also sits in the specialist sector, so will have counterbalanced to some extent the outperformance of the gold funds. Interestingly, there are two property funds in the bottom 10 – Aberdeen and Charteris – ranked 10 and nine respectively. Both lost around 8 per cent – less than the two poorly-performing funds in UK all companies, run by Standard Life and Jupiter, which were down by around 9 per cent. Perhaps that is why the UK all companies sector was lacklustre overall, ret-urning an average performance of 7.6 per cent and falling just into the bottom quartile.

The problem with performance tables is that they quite clearly show you what you should have invested in, but not where to place your bets now.

Next year we will start to get a flavour of what a Trump administration might mean for markets, while Brexit negotiations will start in earnest – not that we should expect anything too detailed in the early months. Of more importance will be the elections in France and Germany, while the referendum in Italy could also provide a steer for how the electorate is viewing the political establishment. So far the indications are the disenchantment displayed in our referendum and in the US poll could spill out into other areas.

This makes the task of determining what might prove the most profitable area for inv-estors in 2017 even more difficult than usual. It is hard to imagine gold enjoying a second year of well above average returns, but equally the level of uncertainty faced by investors seems set to rise, rather than fall. While infrastructure spending on both sides of the Atlantic looks likely to receive a boost, this is hardly a basis for formulating a considered strategy for portfolio construction. Perhaps nimbleness should be the watchword for 2017.

Key Takeaway: With the US presidential election coming after these tables were compiled, the most important event of the year is not reflected in the performances displayed, though the initial reaction in London was muted. Perhaps the most telling statistic is that which demonstrates the failure of Absolute Return strategies to deliver. 2016 has been a year when a risk on approach has worked, but as is so often quoted, past performance is no guarantee of future returns.

The numbers

45%

Japanese smaller companies, the top-performing sector over the 10 months to the end of October.

0.8%

The worst-performing active sector over the 10 months to the end of October, targeted absolute return.

184%

Junior Gold, the top-performing fund over the 10 months to the end of October.

20.4%

Decline of the worst performing fund over the 10 months to the end of October, Argonaut Absolute Return.