Multi-assetApr 29 2016

Fund Selector: Shining bright in tough times

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Fund Selector: Shining bright in tough times

Out of curiosity I recently looked into which funds would have been the best performers for an investor taking out an Isa at the start of the last tax year.

The period was a challenging one with markets making little ground overall, but at times displaying considerable volatility – not least in relation to big moves in the oil price and oscillating opinion over the likely path of the US interest rate.

When you look at fund performance over a short period, there normally tends to be certain sectors or sub-sectors that dominate. Indeed, most of the worst performers in the 2015-16 tax year were in the China, energy and commodities complex, or else specialist funds in areas where sentiment waned, such as biotechnology or Africa.

Yet the top performers were more interesting – a disparate bunch of sectors were represented, including those where you wouldn’t expect to see top-performing funds.

However, two main themes united almost all of the outperformers: pockets of growth in an otherwise low-growth world and a quest for safety.

The first theme is chiefly evidenced by smaller company funds. Although the Chelverton UK Equity Growth vehicle is in the Investment Association (IA) UK All Companies sector, it is strongly orientated towards small- and medium-sized firms, and some decent stockpicking helped deliver a return of 21.4 per cent.

Similarly, the Amati UK Smaller Companies fund fared well, up 17.5 per cent, and the emerging growth focus of MFM Techinvest Special Situations returned 30.1 per cent over the year.

Increasing numbers of investors appear to be looking to smaller companies as a means of diversification, with many of the important sectors in the FTSE 100 index seemingly structurally challenged.

Although it can be argued there is value on offer in such areas, investors are wary of the risks and perhaps more inclined to move down the market-cap spectrum in search of more favourable prospects. With economic growth a recurring worry, exchanging reliance on GDP numbers for esoteric risks in smaller companies looks appealing to many.

Repeating the theme was top fund Legg Mason Japan Equity, rising 48.6 per cent in spite of turgid performance across the IA Japan sector.

The largely small- and mid-cap vehicle is heavily exposed to higher-growth areas such as healthcare and technology. The fund has historically been highly volatile, but it is interesting it enjoyed such a strong return in this difficult period.

Investors’ preference for good-quality firms grinding out steady but predictable returns was also very much in evidence in the past 12 months. Terry Smith’s Fundsmith Equity fund was in the top 10; a fine achievement for a global equity portfolio primarily invested in larger firms.

Elsewhere, while wider resources funds struggled, gold equity products staged a strong recovery in the first quarter on the back of a resurgent gold price; sufficient for Ruffer Gold and MFM Junior Gold to make a late push into the top 10 for the tax year.

Gold’s role as a hedge against financial instability and currency weakness has recently regained traction with investors seeking to protect themselves with genuine portfolio diversification, again evidence of a more cautious stance.

Rob Morgan is an investment analyst at Charles Stanley