January was a difficult month for the world’s stock markets, with weaker economic data in China, the US and the UK casting doubt on the strength of the global recovery. This prompted further intervention by the central banks, with the Bank of Japan adopting negative interest rates on the excess reserves deposited by financial institutions, and Mario Draghi suggesting that there could be additional stimulus in the Eurozone.
Weaker economic growth could mean that interest rates are going to stay lower for longer, which would be beneficial for bonds. These instruments pay a fixed coupon and become more attractive when interest rates go up by less than anticipated with buyers forcing the prices higher until the yields fall back into equilibrium.
Only five of the Investment Association’s 37 open-ended fund sectors produced a positive average return in January, and they all invest in different parts of the bond market. The best performance came from the UK Index Linked Gilt funds with an increase of 4%. This was just ahead of the 3.3% average rise in UK Gilt funds, with both sectors benefiting from their safe haven status away from the turmoil on the equity markets.
As you would expect, there was a lot of variation within these categories, with the performance in the Targeted Absolute Return sector ranging between the 5.9% increase in the Jupiter Absolute Return fund and the 2.8% decline in BlackRock Dynamic Return Strategy.
The worst area for investors was the China/Greater China sector where the 36 funds fell by an average of 10.1%, taking their loss for the last 12 months to 13.5%. It was the Guinness China & Hong Kong and GAM Star China Equity funds that were the most badly affected, with one month declines of 17% and 16.4% respectively. The best performer was Templeton China with a loss of 5.6%.
The more surprising casualty was the Technology and Telecoms sector, with a decline of 6.9%. There are 14 of these specialist funds and they have built up a good track record over the last few years largely because of the strength of Facebook, Amazon, Netflix and Alphabet (formerly Google), which have become known as the FANG stocks.
In 2015 these four shares produced an average return of 83% and were responsible for most of the US stock market’s positive performance, but the start of 2016 has been a lot more challenging. Over the course of January the FANG stocks returned 7.2%, -13.2%, -19.7% and -2.1% respectively, and this will have had a significant impact on many of the Technology funds.
It has been a poor start to the year for investors, and even those with well diversified portfolios of managed funds will have seen significant swings in the value of their holdings. The best way to deal with this sort of uncertainty is to stay calm and to focus on your long-term objectives. It would only be worth changing things if you are uncomfortable with the heightened volatility or brave enough to buy on the dips.