The best and worst funds, sectors and shares of 2019
It’s been a bumper year for tech and fashion stocks, but banks and other lenders have not fared so well.
A rush to safe havens in times of political turmoil has been good news for gold funds.
Ryan Hughes of AJ Bell says the LF Ruffer Gold fund has the biggest return since the start of the year, at 48.2 per cent, with HC Charteris Gold and Precious Metals fund on 40.2 per cent.
The strong performance of the US stock market is reflected in the appearance of two US smaller companies’ funds: T Rowe Price, which returned 34.1 per cent, and Brown Advisory, which grew by 33 per cent. Brown’s US Mid-Cap Growth fund also featured, with a return of 36 per cent.
The sector with the biggest average return, at 26.2 per cent, was North American smaller companies followed by technology and telecoms (25.6 per cent) and North America (23.3 per cent.). All the sectors in the top 10 are overseas sectors, showing how out of favour the UK is.
The sectors performing poorly are those traditionally regarded as safe havens or low risk. The two with the lowest capital growth are short-term money market funds, (which invest in debt securities such as US Treasury bills) with a return of 0.37 per cent, and standard money market funds, at 0.54 per cent. UK property was on 0.68 per cent and the Targeted Absolute Return sector on 3.16 per cent.
Hughes says: “There are three absolute return funds in the bottom ten, led by the Garraway Absolute Equity fund, which fell 62.5 per cent. Not surprisingly UK property funds have struggled, with the Brexit headwinds holding back returns, while Neil Woodford’s Equity Income fund suffered the fourth largest fall of 20.2 per cent.”
How are UK equity income funds performing?
UK equity income funds have become an unloved sector. Since 2016 investors have pulled more than £15 billion out of these funds.
When interest rates are high, deposit accounts and government bonds, or gilts, can offer a relatively attractive and stable source of income. Jamie Clark, a co-manager of the Liontrust Macro Equity Income fund, says that in 1995 the yield on ten-year UK gilts and UK deposit accounts was more than 8 per cent, meaning that, with inflation at less than 3 per cent, savers were getting a good real rate of return on their money. Today the average yield on these accounts is less than 0.5 per cent, well below the 1.7 per cent rate of inflation, so few savers are enjoying any real returns on their money.
A Liontrust study of UK stocks from 1975 to 2018 shows that those classified as high-yielding outperformed those rated low-yielding, returning 14.4 per cent annually against 11.8 per cent. At present the FTSE 100 index of leading shares is yielding 4.8 per cent — more than the markets in the US, Germany and France, which have yields ranging between 1.9 per cent and 3.3 per cent — with no fewer than 38 stocks yielding more than 5 per cent. Clark says: “This is unprecedented since the financial crash and more than twice the average number of high-yielding stocks in this period.” Income funds can tap into these high yielders.
You might have thought that very income-hungry investors would have piled into these high-yielding funds. Yet in July figures showed that investors had withdrawn a net £244 million from them, making UK equity income funds one of the worst-selling sectors.
Second Woodford fund is frozen
Investors are now trapped in both of Neil Woodford’s open-ended investment vehicles after he resigned as manager of his £253 million Income Focus Fund and it was frozen as a result.
Now that Income Focus is suspended, the only Woodford portfolio that investors are to free to exit is the Patient Capital Trust, which is listed on the stock exchange. Its shares, which have slumped from 76½p since the crisis began in June, fell a further 1¾p this morning, or 5.1 per cent, to 32¾p, a fresh record low.
The closure of Woodford Investment Management is a humbling end to Mr Woodford’s three-decade career and is expected to result in heavy losses for the hundreds of thousands of investors trapped in his funds. Mr Woodford, 59, and his business partner Craig Newman, chief executive of Woodford Investment Management, have received dividends totalling almost £100 million since starting the business.
Mr Woodford was once fêted as the UK’s most successful fund manager, having generated huge returns for investors during a 26-year career at Invesco, which he left in 2014 to start his own firm.
The Equity Income Fund was the centrepiece of his business, but its assets peaked at £10.2 billion in May 2017 and has since shrunk as the investments within it went wrong and investors pulled their cash.
City analysts have also speculated that the independent board of Patient Capital will decide to put the trust into run-off.
Thankfully, we are in a position to observe these developments from afar and with no direct impact on our clients' investments.
FTSE 100 to smash 8,000 in new year, says Citigroup
Clients of Citigroup, the investment bank, were told to plough into UK blue-chip stocks, which it says look “very cheap”. Despite all the goings-on on the markets of late, Citi analysts expect the FTSE 100 to pick up and break through the 8,000-point barrier for the first time by the end of next year.
Brexit fears are overdone, they argue, pointing to the fact that almost three quarters of the Footsie’s earnings come from overseas. The political uncertainty has still held back share prices and as a result Citi has now made the UK its “preferred value trade”.
The bank said in a wide-ranging research note: “UK equities appear very cheap; they have the highest dividend yield and free cashflow yield amongst major markets.
“Much negative sentiment seems to be priced in, as the equity risk premium is at an all-time high. We see valuation as a key support and target 8,100 for FTSE 100 at end-2020, implying 9 per cent upside.”
The analysts added that good value could be found in other markets as well, but “greater shareholder accountability” meant UK businesses were more likely to do something about their lowly valuations.
Four reasons why those who bet against Britain may be gambling too far
First, shares in UK companies are comparatively cheap. By our estimate, these are, as a collective, about 20 per cent undervalued compared with equivalent companies in the rest of the world. This discount has emerged since the European Union referendum in 2016. Typically, companies are valued on a ratio to their future earnings. Heading into 2016, companies in Britain and the rest of the world averaged about 14 times forecast earnings. This has fallen to 12 in the UK and has tipped up to 15 for the rest of the world. The last time that such a large gap existed was 1990. Investors can buy up shares in UK companies at a multi-decade discount.
Second, over time the costs and benefits of Brexit will emerge with greater clarity. This will make the present discount of 20 per cent less justifiable. Economic growth has been held up by the Brexit process; the UK economy is 2 per cent to 3 per cent smaller as result of the uncertainty of the past three years.
Third, many of the reasons that international investors want to own stakes in UK assets are not going to be directly affected by Brexit: favourable demographics; an attractive corporate tax environment; a reliable pipeline of intellectual property from the university sector; a flexible labour market; and an independent legal system. At the moment these advantages have become shrouded by the Brexit fog, meaning that fund managers who can choose to invest anywhere in the world have simply reduced their allocation to the UK. As the UK’s short-term uncertainties & distractions dissipate, these fundamental advantages are likely to re-emerge & be recognised once more.
Finally, the past decade has seen a slowdown in public sector spending. This has acted as a headwind to UK growth. After last month’s spending review and next month’s budget, this is set to become a growth tailwind. There will be significant parts of the UK economy where ten years of relatively austere conditions will ease. This will present new economic opportunities.
Rising debt levels ‘risk global crisis’
Britain and other advanced economies are sitting on a corporate debt timebomb that could trigger another global financial crisis, the International Monetary Fund has warned.
Companies would be unable to cover basic interest costs on $19 trillion of debt in the event of a material economic slowdown, raising the prospect of widescale defaults that could become the corporate equivalent of the subprime mortgage crisis.
This time the debt is not held by banks but in the shadow banking sector, which is made up of insurers, pension funds and asset managers that are beyond the regulatory reach of the central banks.
The IMF study underlines how vulnerable the world has become to the risks. For the amount of troubled debt to rise above levels seen in the crisis a decade ago, the economic slowdown would only need to be “half as severe as the global financial crisis”.
The IMF cut its global growth forecasts this week and warned that coordinated international action could be needed if the economy slows much faster. World growth this year is expected to be 3 per cent, the weakest performance since the crisis.
Sources: Information is included in this article has been obtained from a range of sources including seminars, webinars, industry publications and general media comments. This information was sourced from September 2019.
Disclaimer: This document represents the opinion of Reeves Independent only and is not intended as advice and no investment decisions should be made solely on the back of this email. Always seek independent financial advice before taking any action. Past performance is not a guide to future performance. All investments carry the risk that you will get back less than you put in.