Index beats multi-asset funds' best year since crisis

Over the course of 2016, the 100 largest companies in the UK – which make up the FTSE 100 index – saw their combined returns climb 17 per cent.

By comparison, figures from Royal London Asset Management indicate a balanced multi-asset fund would have returned around 12 per cent over the year -  before charges had been deducted - with all of the major asset classes making some sort of return.

A low-cost index fund tracking the FTSE 100 would have benefited from it hitting an all-time high last year, reaching 7,142 points, despite the index suffering losses during 2014 and 2015.

Around 80 per cent of the profits of these companies come from overseas, meaning they were able to benefit from the weak pound.

Trevor Greetham, who heads up the multi-asset team at RLAM, said this was the best year for multi-asset returns since 2009, when the markets started to bounce back from the financial crisis.

He said the two political shocks of the year, the Brexit vote and Donald Trump’s victory as the next US president, turned out positively in sterling terms, as a big devaluation in the pound against the US dollar post-Brexit raised the value of overseas equities and commodities.

 In most years you would expect stock markets to out-perform a multi-asset approach Patrick Connolly

Gilts also rallied sharply on the Brexit vote as the Bank of England eased monetary policy, although Mr Greetham pointed out that much of that rally has since unravelled.

Meanwhile, emerging market equities and commodities were the best performing asset class of 2016, scooping up 35.3 per cent and 33.3 per cent respectively. 

The worst performers for the year were UK commercial property and cash, returning 1.4 per cent and 0.4 per cent.

Mr Greetham said he expects the positive investment backdrop to continue this year, with global growth strengthening and interest rates remaining below the level of inflation. 

“That said, political shocks are likely to create volatility with an unpredictable populist in the White House and a crowded electoral calendar in Europe,” he added.

Patrick Connolly, certified financial planner at Chase de Vere, said: “In most years you would expect stock markets to out-perform a multi-asset approach.

“However, with the extra growth potential of equities comes more risk, more volatility and more chance of suffering bigger losses.”

He said an approach which is focused solely on equities might be suitable for a young investor contributing regular premiums into their pension or Isa.

However, Mr Connolly added: “For most other people a multi-asset approach is preferred as it gives opportunities for growth while also providing some downside protection.”