No funds did that well, but some did less well than others. Jody Clarke assesses the damage and looks ahead to the best bets for the year to come.
It didn’t pay to take risks in 2008. Unless you invested in Tunisia. As of 17 December it is one of the best-performing markets of this year, up 11%. Almost everywhere else has been a disaster. The S&P 500 is down 38%, Shanghai 61% and Russia a whopping 67%.
It’ll be no surprise to hear that equity funds have had an awful year. Every one of the equity sectors tracked by the Investment Management Association (IMA) is down over the past 12 months. The UK smaller companies and global emerging markets sectors, down 41.6% and 38.9% respectively, were the worst performers, followed closely by European smaller companies and Asia Pacific excluding Japan. In fact, of 30 fund sectors in the IMA, only four are up, with global bonds and UK gilts the pick of the best. They’ve risen 15.6% and 13% each this year, as interest rates have fallen and investors sought refuge in the perceived save haven of sovereign debt. But the rest of the funds picture is messy – retail investors have pulled a net £500m from equity funds so far this year. That represents a 30% drop in funds under management, according to the IMA. Here are some of 2008’s “highlights”.
Commercial property
We have been bearish for over two years and see little reason to change tack. Commercial property fund values have fallen 32.2% from their June 2007 peak, according to advisory firm CB Richard Ellis. However, the Royal Institution of Chartered Surveyors is forecasting a 50% drop in property values from trough to peak. Meanwhile, the share prices of London-listed property companies have already fallen on average by 44% just this year. That suggests that commercial property funds may have a lot further to fall yet.
The large M&G Property Fund illustrates today’s woes. It’s down 24.6% over one year, according to Morningstar. And last month it was forced to put a 90-month notice period on redemptions. In other words, if you wanted to sell your investment in the fund, you had to wait three months for your stake to be valued and the cash released. And with the fund sitting on lots of prime London office space, prices are likely to fall further as rents (down 13.1% this year) and values drop. Investors cashing out will be hit harder than the one-year performance figure suggests.
Then there are the troubles at Aviva and New Star Asset Management. They were respectively forced to close their European Property Fund and International Property Fund as investors pulled £117m from the commercial property sector last month. “Will we see more closures? I don’t know,” said Richard Jones, managing director of UK property at Aviva in the FT. “But it’s fair to say a lot of the cash that fund managers set aside to meet new redemptions has gone.” So the sector remains a sell.
Emerging markets and commodities
“When investors started to rush to the safe havens and out of anything remotely risky”, emerging markets were hit hard, Nigel Randall, senior emerging-markets strategist at RBC Capital Markets told the FT. As long-term bulls on the growth potential of many developing parts of the world, we still believe there is a case for investing there. But timing is everything and right now “every indicator” points towards further falls in Asia, says Feras Al-Chalabi of CF Odey Asset Management. “The number of airmiles travelled in China has turned negative while electricity demand has also turned negative for the first time.” As such, “the dramatic slowdown in Asia has been underestimated”. So we’ll be staying clear for now. However, keep an eye in the New Year on Aberdeen Emerging Markets. Sure, it’s down 27% for the year. But that’s against a 44% drop for the MSCI Emerging Markets Index, which puts it ahead of both emerging and developed markets this year. The fund also boasts one of the most experienced management teams in the area. In the meantime, a big drop in global demand for raw materials, particularly from China, means that commodity funds will continue to suffer for now. The Reuters-Jefferies CRB index, a global commodities benchmark, is down 33.6% this year.
So where were the winners in 2008?
Down just 8.09% for the year, Japan has been by far the best equity market in the IMA universe this year. Neptune’s Japan Opportunities fund stands out. It’s up 81.5%, although that’s largely because the fund manager, Chris Taylor, bearishly sold short the Topix this year. And in yen terms, says Meera Patel at Hargreaves Lansdown, the fund is only up 10%, “with his long term track record a bit patchy”. So to benefit from any further strengthening in the yen, we favour an index fund such as the iShare MSCI Japan index (LN IJPN).
And the best bets this year, and probably next too? Gilts and bonds. As Darius McDermott of Chelsea Financial Services tells The Times: “Falling interest rates and falling inflation will be good for bonds and are likely to send prices higher. Investors could benefit from both decent income and a rise in the capital value of their investments. He tips M&G Optimal Income, yielding 6.5%, and the Henderson Strategic Bond fund, yielding 7.5%.