Funds with a focus on a handful of emerging market countries, as well as those investing in smaller companies in the UK, Europe and Japan, produced some of the strongest returns of 2017’s third quarter.
Data from FE Analytics shows that, on a sector average basis, funds in the IA China/Greater China peer group generated the highest return of the three-month period after making 7.27 per cent.
At the start of the quarter, AXA Investment Managers senior emerging Asia economist Aidan Yao highlighted the attractions of the country: “Chinese equities are not unattractive from a valuation (Shanghai trades at 16 times P/E) and earnings growth perspective. With macro condition stable and renminbi actually appreciating lately, investing in Chinese stocks does not seem like a bad trade.”
However, the sector posted a 2.76 per cent loss in the final month of the quarter after lacklustre data suggested momentum is slowing in the world’s second largest economy.
Source: FE Analytics
Within the sector, the best-performing fund of the quarter was Mike Shiao and William Yuen’s $745.5m Invesco PRC Equity fund – which was up by 13.34 per cent. The fund, which focuses on quality sustainable growth companies, is top quartile over one and three years and in the second quartile over five years.
Four other IA China/Greater China funds generated a return of more than 10 per cent during the quarter: HSBC Chinese Equity, HSBC GIF Chinese Equity, Matthews Asia China Small Companies and Invesco Perpetual Hong Kong & China.
As the table above, smaller companies also had strong showing during the third quarter as second, third and fourth places were taken by the IA UK Smaller Companies, IA European Smaller Companies and IA Japanese Smaller Companies sectors respectively.
The idea that the quarter saw resilient investor sentiment, despite the war of words between the US and North Korea, is backed by the fact that the IA Global Emerging Markets sector was the period’s fifth highest returning peer group.
On an individual fund level, it was Latin American and Russian equity funds posting the largest total returns for the whole Investment Association universe.
The strong returns from Latin American stocks come as investors flock back to Brazilian equities. Factors such as the prospect of corporate profit growth and a more stable political environment have bolstered sentiment towards Brazil, while state-controlled oil company Petrobras saw strong gains on hint from a government minister that it could one day be fully privatised.
Russian equities also performed strongly, as the country emerged from recession and the oil price made some gains over the three-month period.
Source: FE Analytics
As the above table shows, Latin American – and more specifically Brazilian – equity funds dominated the list of the 30 strongest performers over the quarter. Some 13 of the 30 funds highlighted invest in these areas.
Aside from Chinese and Russian equity funds, those with a mandate to invest in mining companies are present on the list. This is down to the strengthening of commodity prices, especially industrial metals, over the quarter.
Four UK smaller companies funds have also made it onto the list of the 30 highest returning Investment Association funds for the period.
Turning to the bottom of the table, the worst performing sectors were IA UK Index Linked Gilts (down 4.36 per cent), followed by IA UK Gilts (down 2.79 per cent).
The third quarter was a challenging time for UK fixed income investors after higher inflation numbers and a more hawkish tone from the Bank of England prompted gilt yields to rise.
IA Global Bonds funds were also down as fixed income markets priced in the possibility of a December interest rate hike from the Federal Reserve and plans for the central bank to start unwinding its massive quantitative easing programme.
Source: FE Analytics
The above table shows the 30 worst performing funds of the quarter, with CF Eclectica Absolute Macro at the top with its 11.34 per cent loss. In September, Eclectica Asset Management announced that it will be closing its doors so the absolute return fund and the CF Eclectica Agriculture fund will be wound down.
The rest of the table is a mixed bag of funds. Manek Growth is a serial underperformer, Invesco Korean Equity was hampered by the tension between the US and North Korea, and gold mining funds lost money despite a rise in the yellow metal.
CF Woodford Equity Income was also the seventh worst performer from the Investment Association universe with a 5.75 per cent loss. The fund suffered from a number of stock-specific issues over the quarter, including sell-offs in large holdings such as Provident Financial, Allied Minds, AstraZeneca and AA.