Last year proved to be a surprising one for investors, as many of the worries that dominated their thinking in its earlier months eased and paved the way for some decent gains.
While 2016 was a challenging one for fund managers with events such as the Brexit result and Donald Trump’s election catching many out, 2017 saw active managers regain some ground and, on average, make higher returns than the index.
FE Analytics shows the average IA UK All Companies fund made 13.99 per cent last year and beat the FTSE All Share, while the IA Global’s 13.98 per cent gain was also higher than the MSCI World’s 11.80 per cent.
In the following article, we looked at how 2017 panned out from several viewpoints and examine what drove asset classes, geographies, investment styles and fund sectors throughout the year.
Asset classes
Despite overhanging issues such as the presidency of Donald Trump and the UK’s decision to leave the European Union, 2017 ended up being a fairly good year for stock markets. FE Analytics shows that the MSCI AC World index posted a 13.24 per cent total return, in sterling, over the course of the year.
Returns were harder to come by elsewhere. Government bonds and corporate bonds, as measured by Bloomberg Barclays indices, ended the year in negative territory although high yield bonds did manage to make some gains.
Total returns of asset classes during 2017
Source: FE Analytics
The big investment story of the year, however, was the sharp drop in volatility. The VIX measured of implied volatility – often known as Wall Street’s fear gauge – fell throughout 2017 and reached a historic low in the latter months of the year.
Niall Gallagher, portfolio manager for European equities at GAM, said investors need to watch out for a return to ‘normal’ volatility in 2018: “We have witnessed very low levels of overall equity market volatility during the last 12 months, with investors seemingly unfazed by global events that would have previously caused short-term volatility or rotation within equity markets.
“What will trigger a return to more normalised levels of volatility? We cannot know for certain, but the impending unwinding of the US Federal Reserve’s balance sheet would seem to offer a real test, particularly to the ‘bond proxy’ equities.”
Geographies
Looking at various stock markets around the globe, emerging markets had a strong year thanks to rebounding investor sentiment and a more benign economic growth outlook. China and India performed especially well in 2017.
Europe has also seen a turnaround in fortunes this year, having been unloved by investors for some time. The region has benefitted from a string of positive economic numbers, loose monetary policy and relatively attractive valuations. These factors have also buoyed Japanese equities.
Total returns of country/region indices during 2017
Source: FE Analytics
In this chart, the US has underperformed the UK but that’s only down to foreign exchange movements. In dollar terms, the S&P 500 rose 21.10 per cent compared with the 13.10 per cent sterling return from the FTSE All Share, as investors stuck with the world’s largest economy and the market rallied on the back of Trump’s tax reforms.
The UK managed a year of double-digit returns despite ongoing uncertainty created by the Brexit negotiations and the unstable political situation, but was still a laggard on the global stage. Some have argued that the home market could be a pocket of value in 2018 if meaningful progress is made in the Brexit talks.
Investment style
Last year was another when the growth style of investing solidly outperformed value. While value had staged something of a recovery in the latter half of 2016, this rally petered out in the opening months of 2017.
Performance of investment style during 2017
Source: FE Analytics
Over the 10 years to the end of 2017, the MSCI AC World Value index has made a 110.14 per cent total return, lagging the 204.35 per cent made by the global index and the 154.46 per cent from the growth index.
While many investors have argued that value stocks are primed for a comeback, others point out that relatively low economic growth does not make this likely in the near future. Rathbones head of multi-asset investments David Coombs said: “One thing that should continue [in 2018] is the outperformance of growth stocks compared with value stocks. When growth is scarce, investors tend to pay up for companies that offer it – and the higher quality the earnings, the more they are willing to pay.”
Equity funds
With emerging markets putting in a strong showing in 2017, it’s no surprise that the IA China/Greater China sector was the best performing peer group in the Investment Association universe. The MSCI China index made a return of just over 40 per cent last year but the best fund – NB China Equity – was up more than 50 per cent.
In keeping with this, the IA Asia Pacific Excluding Japan and IA Global Emerging Markets sectors posted average returns of around 25 per cent for 2017. Funds that had a strong year from these peer groups include Baillie Gifford Pacific (up 42.37 per cent), JPM Asia Growth (up 42.27 per cent) and Baillie Gifford Emerging Markets Growth (up 39.76 per cent).
Performance of equity sectors during 2017
Source: FE Analytics
The IA UK Smaller Companies sector was another of the best performers of the year, with its average member making 27.18 per cent – around double the IA UK Equity Income’s 11.32 per cent and IA UK All Companies’ 13.99 per cent. Old Mutual UK Smaller Companies Focus was the best performer here, up 50.71 per cent.
Bond funds
While the Bloomberg Barclays fixed income indices showed that bonds had a challenging year, owing to central banks starting to tighten their ultra-loose monetary policy and inflation ticking up in many parts of the world, the average bond fund had a decent year.
Performance of bond sectors during 2017
Source: FE Analytics
The IA Sterling High Yield sector was the best performer on average, reflecting the ongoing hunt for yield and stronger investment sentiment. Schroder High Yield Opportunities was the highest returner of the year, up 9.92 per cent, followed by T. Rowe Price Global High Income Bond and Invesco Perpetual High Yield.
Strategic bond funds also had a good year as managers took advantage of their flexible mandates to dip into high yield bonds. The peer group’s best performers – Tideway GBP Hybrid Capital, GAM Star Credit Opportunities GBP and Royal London Sterling Extra Yield Bond – all have exposure to this part of the market.
Multi-asset and specialist funds
The standout performer from this mixed bag of peer groups was the IA Technology and Telecommunications sector, where the average fund made a total return of close to 24 per cent. T. Rowe Price Global Technology Equity tops the table with a 34.97 per cent return, followed by Polar Capital Global Technology (up 34.71 per cent) and Janus Henderson Global Technology (up 32.03 per cent).
Not all are convinced that the strong run in tech stocks can continue, given the vast gains that have been made in recent years. Tilney Group managing director Jason Hollands said: “2017 was a truly extraordinary year for returns on technology and new media stocks. Valuations on these companies are undoubtedly rich, with share prices propelled higher on momentum including the wall of cash that is now invested indiscriminately through passive funds.
Performance of multi-asset and specialist sectors during 2017
Source: FE Analytics
“Tech and new media stocks are exhibiting some of the worrying characteristic last seen in the ‘dot com’ bubble in the late nineties. This surge in stocks where valuations appear to be predicated on extrapolations of future growth i.e. hope, is, I believe a part by-product of years of ultra-accommodative monetary policy fuelling excessive risk taking.”
Across the multi-asset sectors, things were exactly how they should have been given the performance of asset classes over the year. The IA Flexible Investment sector – where funds have scope to move entirely into equities if they wish – posted the highest return while IA Mixed Investment 0-35% Shares – which has the largest allocation to bonds – saw the lowest.
Industries
Looking at things on an index sector shows that basic materials companies were the best performers in the FSTE All Share, owing to continued bullishness on the sector. The FTSE All Share Basic Materials index was up 29.33 per cent last year after making 88.80 per cent in 2016; these bull years followed negative returns in 2013, 2014 and 2015 as investors worried about falling commodity prices.
The FTSE All Share Technology index comes in second place with a 26.32 per cent total return, reflecting the vast sums of money that have flowed into this part of the market. Last year was the third in a row when this index posted double-digit gains.
Performance of FTSE industry indices during 2017
Source: FE Analytics
Only two of the FTSE All Share sub-indices made a loss over the year – FTSE All Share Utilities, which was down 10.52 per cent, and FTSE All Share Healthcare, which lost 0.23 per cent.