Looking for ideas on where to put your money in 2008? Investors could do worse than to look at which funds and sectors have performed well in the recent past – and avoid going anywhere near them.
Take the UK property sector, for example. It’s been a reliable performer for some time, posting annual gains of 18%-19% a year in the past three years. But the past couple of months have been dreadful, with popular funds such as the New Star UK Property fund clocking up double-digit losses in the second half of the year.
As investors who piled into the market this year have discovered to their cost, when looking for good returns, you should never chase performance.
The Aberdeen Property Shares fund, up 34% in the 11 months to December 2006, has fallen 36% in the past 11, says Thisismoney.co.uk, with Premier Pan-European Property Share, SWIP European Real Estate and Snowdonia Property all recording similarly ugly twists of fortune.
“Property has had such a strong run, especially in 2005 and 2006, that it was bound to come off,” Ben Yearsley of Hargreaves Lansdown tells the news website.
But while that may seem obvious now, it can be very hard for investors to resist buying on the sight of a rising price chart, only to find that they’ve bought at the top of a trend. That’s expensive – both when prices fall and because of the investment opportunities missed while your money languishes in underperforming funds.
During the late 1990s tech boom, investors piled into dotcom stocks before the bubble burst in 2000. While the typical investor in technology funds has lost 3.5% a year over the past ten years, the average fund overall has returned 6.4% a year, as fund analyst Morningstar points out. “This suggests investors lost a whopping 10% a year through poorly timed decisions.”
This all bodes ill for emerging markets funds, which had a runaway 2007. Gartmore’s China Opportunities fund is the leader of the pack, delivering 72% to its investors so far this year, followed closely by Jupiter China and Invesco Perpetual Hong Kong & China, up 62% and 59% respectively. But as Warren Buffett once pointed out, “the investor of today does not profit from yesterday’s growth”.
And it’s important to remember that when such high-performing funds do run into tough times, they often crash badly. The Gartmore fund, and others like it, such as Threadneedle Latin American, have three-year standard deviations (a statistical measure of risk) of 20%-26%.
By that measure, these funds are two to three times as volatile as the FTSE All Share Index, which has a standard deviation of 8.55%. Accordingly, when these funds do eventually come back to earth, “it won’t likely be a soft landing”, says Morningstar.