The past few weeks have been a chastening experience for many in financial services, as the spread of the coronavirus continues to wreak havoc on global markets.
It is more than a decade since markets have seen such a sell-off, with global equities currently down more than 25 per cent.
In fact, it is probably the first time for many investors – and even some financial advisers and fund managers – that they have witnessed such an unforgiving investment climate, with so much uncertainty and volatility.
In hindsight, it is interesting to consider how quickly the world has changed.
In January 2020, many of us were looking to find pockets of value in a late-cycle investment world, having seen most global markets record strong, double-digit returns in 2019.
Key points
- Global equities have fallen 25 per cent
- Government bonds have done best in the current scenario
- Multi-asset funds have held up well
Fast forward a couple of months and we all seem to be running for cover, as we look for signs this pandemic is coming to an end.
Bonds have been the natural safe haven in this sell-off, with the asset class comprising six of the top 12 best-performing Investment Association sectors between February 20 and March 23 2020.
Government bonds tend to do best in this scenario, even when yields are expensive to start with – which they were.
It does not mean they cannot get more expensive, as people flock to safe havens and that is what the IA UK Gilts sector has been.
The only other sectors with any form of positive returns have been cash.
One thing we have to consider in this period is that sterling has depreciated to even lower levels, and when the pound falls, it is good for your overseas holdings, such as global bonds – provided they are not hedged back to sterling.
Many of the best-performing global bonds are government bonds, such as the MFS Meridian US Government Bond (14.1 per cent), the iShares Overseas Government Bond index fund (12.8 per cent) and the Vanguard Japan Government Bond index fund (11.6 per cent).
Debt funds in the very short duration segment do not see much volatility in their returns on account of the short maturity of the papers they hold.
Seven of the top 10 performers in the IA Corporate Bond sector during the downturn are also short-duration vehicles, boosting performance in this sector.
They include the ASI Short Dated Sterling Corporate Bond Tracker (-2.7 per cent), the EdenTree Amity Short Dated Bond (-2.8 per cent) and the AXA Sterling Credit Short Duration Bond (-3.4 per cent).
With global markets down 25 per cent – and UK equities down more than 30 per cent – the fact that the average fund in the IA Targeted Absolute Return sector is down 8 per cent is reasonably good.
But what we have learned in the past is that there is significant dispersion in this sector, given it is anything but like-for-like.
For starters, there are long-only, long/short, UK-centric, global, fixed interest, and numerous other types of funds all mixed together in the peer group.
There has been dispersion on the performance front during this downturn as well – with the best performer up 11 per cent (Wellington Global Total Return) and the worst performer falling 36.7 per cent (Natixis H20 Multi-Returns).
What I would say is that many of the traditional funds are living up to their billing, such as the Artemis US Absolute Return (-0.3 per cent).
Solid performers like the Janus Henderson UK Absolute Return (-3.4 per cent) and the Church House Tenax Absolute Return Strategies (-6.5 per cent) have all recorded low to medium single-digit losses during this period.
The other equity market that has held up well is China.
Despite Covid-19 originating there, the Chinese government’s way of tackling the coronavirus appears to have worked, and markets are reflecting that.
Top performers include the likes of Matthews China Small Companies (6.7 per cent) and Invesco China Equity (-6.83 per cent).
The multi-asset nature of many funds in the IA Mixed Investment sectors has also seen them hold up better than most of the market.
The Mixed Investment 0-35% Shares sector has seen the smallest average loss, as you would expect, (down 12 per cent), while the Mixed Investment 40-85% Shares sector has seen an average loss of 20.9 per cent.
However, like the Targeted Absolute Return sector, there is quite a mix of funds that can lead to dispersion of performance.
As we talked about earlier, the depreciation of sterling also goes some way to explaining why the three major UK sectors – namely UK Smaller Companies (-36.5 per cent), UK Equity Income (-35.6 per cent) and the UK All Companies (-34.9 per cent) – have been the poorest performers since markets began to sell-off.
Not only does the UK have the uncertainty of Brexit hanging over the economy, but I also wonder if we are being punished for being tardy in following some of our counterparts in closing the country down – in terms of events and introducing social distancing – in a bid to tackle the spread of the coronavirus.
Value funds are also suffering compared to those investing in quality companies.
This is because quality companies, such as Reckitt Benckiser and Unilever, are still delivering the consumer staples that everyone needs, even in this UK lockdown scenario.
What we do not need is the likes of petrol or other discretionary spends.
Value often comes with companies that are more indebted, and anything with leverage has been hit hard.
Quality businesses that have the ability to continue to have good pricing power and compound their earnings have again come out stronger, while low interest rates have also helped these bond-proxy type businesses.
That is why the likes of the TB Evenlode Income (-28.6 per cent) and Liontrust Special Situations (-29.6 per cent) have been better performers in the UK All Companies sector during the sell-off, compared to a number of value, recovery or special situations funds, many of which have seen losses in excess of 40 per cent.
Darius McDermott is managing director at Chelsea Financial Services and FundCalibre
