The third quarter of 2019 saw markets beset by more nervousness as a range of macro and geopolitical worries continued to put investors off risk.

The laundry list of worries that contributed to the quarter’s uncertain environment included lacklustre global growth, the Saudi drone attack, the escalating trade war between the US and China, Brexit and political instability in the UK.

In the following article, we put the quarter under the spotlight from a range of viewpoints including asset class, investment style and the Investment Association fund sectors.

Asset classes

The bar chart below highlights just how challenging the past three months have been for markets, with implied volatility (represented here by the VIX index) seeing an 11.22 per cent jump.

However, volatility got much higher than this within the quarter. In August, the VIX – which is known as Wall Street’s ‘fear gauge’ – was up more than 70 per cent.

Performance of asset classes over Q3 2019

Source: FE Analytics

A 7.22 per cent rise in the gold price also reflects the uncertain market backdrop as investors piled into the ‘safe haven’ during the three-month period. Likewise, bonds outperformed equities.

Oil ended up being the quarter’s worst-performing asset with a loss of 2.52 per cent, despite the temporary spike that followed the drone attack on the state-owned Saudi Aramco oil processing facilities in eastern Saudi Arabia.

Geographies

When looking at the quarter’s performance from a geographic point of view, Japan was the clear winner with the Topix rising by around 6.5 per cent (in sterling terms).

Japan continues to benefit from super-easy monetary policy, which has been welcomed by investors and has supported its economy and markets over the past six or so years. The agreement of an initial trade deal between the US and Japan focused on agriculture and digital products.

Performance of geographies over Q3 2019

Source: FE Analytics

The US also had another strong quarter, despite issues such as the country’s growing trade war with China and challenges to the presidency of Donald Trump. The interest rate cut by the Federal Reserve will have also supported sentiment.

The FTSE All Share was up 1.27 per cent, recovering from a loss halfway through the quarter as the risk of a ‘no deal’ Brexit appeared to recede, while investors in emerging markets were down 1.11 per cent.

Investment style

Given the uncertain market climate, it should be little surprise that quality was the strongest investment style during 2019’s third quarter.

The MSCI AC World Quality index posted a total return of around 4.3 per cent during the three-month period as investors looked to areas of perceived safety with global stock markets.

Performance of investment style over Q3 2019

Source: FE Analytics

The value style was the quarter’s worst performer as investors worried about the health of the global economy. Value tends to underperform styles such as growth and quality in more challenging economic conditions.

FTSE industries

Drilling down into the individual industries in the FTSE All Share index, telecommunications was the best performing area thanks to a 15 per cent rise.

This was driven by the 25.27 per cent gain in Vodafone Group. The FTSE 100 company rallied hard in July after its first quarter results showed improving revenue trends while revealing finalised plans to separate its towers assets and create a separately managed new business.

Performance by FTSE industry over Q3 2019

Source: FE Analytics

The worst performance came from more cyclical industries that falter in times of economic uncertainty, with the basic material and oil & gas industries ending the quarter down.

Technology stocks fell about 15 per cent, making it the biggest loser of the period. Micro Focus International, which was a FTSE 100 member for much of the third quarter but dropped into the FTSE 250 in September, saw its share shed 42 per cent.

Equity funds

In keeping with the returns seen at a geographic level, IA Japan was the best performing Investment Association equity fund sector during the third quarter of 2019, with an average total return of 7 per cent.

First State Japan Focus was the highest returning member of the peer group with a 12.99 per cent total return, following RWC Nissay Japan Focus (11.17 per cent), Pictet Japanese Equity Selection (9.45 per cent) and Lazard Japanese Strategic Equity (9.12 per cent).

Performance of equity fund sectors over Q3 2019

Source: FE Analytics

IA North America came in second place, led by BlackRock US Opportunities (7.33 per cent), Quilter Investors US Equity Income (7.02 per cent) and Seilern America (6.94 per cent). The IA Global and IA Global Equity Income peer groups also had a relatively good quarter.

The lowest average return came from IA UK Smaller Companies. While Aberforth UK Small Companies was the strongest performer with a 3.80 per cent return, heavy losses were made by the likes of LF Miton UK Smaller Companies (down 13.24 per cent), Elite Webb Capital Smaller Companies Income & Growth (down 9.22 per cent) and MI Downing UK Micro-Cap Growth (down 7.56 per cent).

Bond funds

Over in the fixed income world, returns were more robust in 2019’s third quarter.

Given the level of nervousness in the market, safe havens such as government bonds had a decent three months, with the IA UK Index Linked Gilts and IA UK Gilts sectors posting the highest total returns by a decent margin.

Performance of bond fund sectors over Q3 2019

Source: FE Analytics

From these two sectors, the best returns came from long-dated strategies as investors bet that bond yields would fall.

Vanguard UK Long Duration Gilt Index made 11.13 per cent, followed by Janus Henderson Inst Long Dated Gilt (10.46 per cent), iShares Over 15 Years Gilts Index (UK) (10.41 per cent), ASI Sterling Long Dated Government Bond (10.11 per cent) and BNY Mellon Long Gilt (9.86 per cent).

The quarter’s weakest bond sector was IA Sterling High Yield. Two funds here made a loss – Schroder High Yield Opportunities (down 0.71 per cent) and Lord Abbett Global High Yield (down 0.19 per cent).

Multi-asset and specialist funds

Finally, IA Property Other funds were the clear winners in the specialist space last quarter after the sector made an average return of 6.5 per cent.

NB US Real Estate Securities’ 12.18 per cent return was the highest posted in the sector during the quarter, while First State Global Property Securities was up 9.23 per cent and Janus Henderson Horizon Global Property Equities made 9.16 per cent.

Performance of multi-asset and specialist fund sectors over Q3 2019

Source: FE Analytics

Although technology was the worst performer in the FTSE’s industries, the IA Technology & Telecommunications sector had a strong quarter driven by the likes of Wellington Asia Technology (up 9.38 per cent), Fidelity Global Technology (7.78 per cent) and L&G Global Technology Index Trust (6.86 per cent).

But while ‘other’ property funds have a strong month, the worst sector in this category of strategies was the IA UK Direct Property peer group, which was broadly flat. Quarterly returns here ranged from a 1.28 per cent gain from MGTS St Johns Property Authorised Trust to a 5.83 per cent loss from BMO UK Property.