The difference between the best and worst performing funds of last year – an oil and gas ETF and Neil Woodford’s former equity income fund – was a staggering 106%, but what can the winners and losers tell us about the year ahead?
If you look at the list of top performing open-ended funds on FE Trustnet it is clear that most of them are either energy-related or single country mandates that invest in India. Both of these areas bounced back strongly last year after being badly affected by the early stages of the pandemic.
The former includes funds such as the iShares Oil & Gas Exploration & Production UCITS ETF, the iShares S&P 500 Energy Sector UCITS ETF, Schroder ISF Global Energy and TB Guinness Global Energy with one year returns of between 70.8% and 45.7%, although over five years they have all made a loss.
Some of the most profitable Indian funds were Nomura Indian Equity, Alquity Indian Subcontinent, GS India Equity Portfolio and Liontrust India with gains of 36.6% to 45.6%. These were helped by a successful vaccination program that enabled investors to refocus on the long-term growth potential of the economy.
Pockets of value
Some of the top performing areas were amongst the worst hit the year before, so it might be worth looking at 2021’s laggards to identify pockets of value with the potential to recover. The key when doing this is to focus on the broader asset classes rather than the individual funds as these can be down to manager specific issues.
Looking at last year’s biggest losers the most obvious feature is the large number of Chinese funds with products from GAM, Fidelity, HSBC, xtrackers and Templeton falling by 20% to 26%. All of these portfolios were badly affected by the more interventionist policy adopted by the communist party that undermined a number of different sectors including many of the big tech names.
Some people believe that the giant Chinese tech stocks like Alibaba and Tencent and the funds that invest in them now offer exceptional value, but others are more cautious as it is impossible to know where this sort of interventionist policy will go next. Perhaps the safest way to gain exposure is to look for a global mandate with a decent representation in this area like the Scottish Mortgage investment trust (LON: SMT) where the managers can adjust the weightings as events unfold.
Other possible opportunities
Amongst the other laggards are several funds that invest in Turkey, but that would be a step too far for most retail investors. Gold is probably the more interesting option as there are a number of the gold and silver mining funds down near the foot of the table with one year losses of around 20%.
The precious metal finished 2021 a few dollars lower than where it started the year, despite inflation in the US and UK hitting decade highs and forecast to increase further. Gold tends to act as an inflation hedge when measured over long time periods, but the two can diverge quite significantly over shorter timeframes.
It is possible that investors think that inflation will naturally start to wane or that interest rates will rise and add to the opportunity cost of holding gold, or it might just be that they are too bullish on risk assets to want to invest in it. Either way, some form of exposure like a physically backed ETF such as Wisdom Tree Physical Gold (LON: PHAU) or the gold mining investment trust Golden Prospect Precious Metals (LON: GPM) that is trading on a 19% discount to NAV might be a sensible way to diversify.