Most investors will be glad to see the back of 2008 after falling house
prices, plummeting stock markets and the lowest savings rates for more than
half a century wiped billions off the value of investment portfolios.
In what has been an “annus horribilis” for markets worldwide, the FTSE 100
index has plunged 35% since the start of the year as it has reacted to
shocks such as the collapse of Lehman Brothers and the £500 billion bailout
for British banks. It plunged to 3,861.4 on October 16 — its lowest close
since April 2003.
On Wednesday, the last trading day before Christmas, it had recovered to
4,217, having started the year at more than 6,400.
Despite the gloom some investments have shone, notably global bond funds,
which invest at least 80% of their assets in fixed-interest securities
outside the UK. They have returned an average of 13% in 2008, according to
data firm Lipper, and nine out of ten of the top-performing funds are in
global bonds.
European smaller companies and UK smaller companies funds were the worst
performers, with funds in these sectors falling 42% and 39% respectively, as
increasing numbers of businesses fell victim to the credit crunch.
Last year’s runaway winners, Chinese funds, also performed disappointingly
after a sharp correction that many analysts had predicted, proving that past
performance is certainly no guide to the future.
Here we look at how the various sectors have performed over the past year, and
what the outlook is for 2009.
UK
UK fund managers have had a terrible year, with the average UK All Companies
fund having plummeted 35%. The worst performer in this sector is the
Rathbone Special Situations fund, managed by Carl Stick, down 58% over the
year. Other big names caught out include George Luckraft at Axa Framlington,
whose Equity Income fund is down 48%, and Jamie Allsopp’s New Star Hidden
Value, down 57%.
The top-performing UK fund is the Skandia UK Strategic Best Ideas fund, which
is still down 14% over the year. The manager is able to short stocks with
20% of its portfolio — or make money even when share prices are falling.
However, analysts are generally hopeful that the stock market will start to
recover before the economy, with Fidelity’s Anthony Bolton among those
predicting a sharp rally in the new year (see below).
Experts therefore advise sitting tight so that you can benefit from any
recovery — although you should be prepared for things to get worse before
they get better. Those feeling particularly brave may want to take advantage
of potential buying opportunities by dripfeeding money in monthly, but only
if investing for the long term.
US
Funds investing in America have done relatively well this year, with the
average US fund down by only 22% — beating all developed-market equity
sectors except Japan.
The market has held up as the US Federal Reserve has slashed interest rates
ahead of other central banks. This month it cut them to an unprecedented
range of 0-0.25%, down from 1%, the lowest in the nation’s 232-year history.
Looking to 2009, this could be the year of the US. In a survey of fund
managers by the Association of Investment Companies, America was the most
commonly cited region to outperform in 2009 at 28%, followed by last year’s
favourite, the Far East excluding Japan (16%) and then equally by emerging
markets and the UK (12%).
Jeremy Tigue, fund manager of the Foreign & Colonial investment trust, said:
“One of the big positives for the US is the collapse in oil and other
commodity prices. US gasoline prices have fallen more than 50% in the past
six months compared with only 25% in the UK. This is a huge tax cut for
consumers. The US went into recession at the end of 2007, earlier than
anyone realised. By late 2009, hopefully there should be signs of recovery.”
The best US fund, GAM North American Growth, has returned 4% since the start
of the year.
OTHER OVERSEAS MARKETS
Chinese funds were 2007’s winners, with the Shanghai market far and away the
best performer. This year, however, the picture has changed significantly,
with Asian stock markets losing half their value since their peak in October
last year.
The Chinese government implemented measures to kickstart the economy last
month, culminating in an aggressive, 108-basis-point cut in interest rates.
Russia’s stock market has been especially hit by the credit crunch, losing 71%
of its value over the last year. However, some experts believe emerging
markets will come out stronger than developed ones.
Bryan Collings, managing partner of Hexam Capital, said: “From a global
perspective, emerging markets still exhibit the best fundamentals from
almost every angle. Corporate health is good and balance sheets are
generally robust, significantly more so than in developed markets."
Japan has been a relative bright spot this year, with the average fund down
just 8%. The Neptune Japan Opportunities fund is the best-performing fund
across all sectors in 2008, returning an impressive 78%.
Darius McDermott, managing director of Chelsea Financial Services, said:
“There are two reasons why this fund has done so fantastically well in 2008.
The first is that it has a large weighting in cash which has helped to
protect it from stock-market downturns in Japan, and the second is that the
fund manager Chris Taylor has been ‘shorting the market’. This means the
fund has profited from falling returns.”
The average European fund was down 32% and is likely to face a bumpy ride next
year, too, although Richard Pease of the New Star European Growth fund
suggests reasons for optimism. He said: “European stock markets and the
economy were divorced on the way down in the summer of 2007, well before the
data confirmed the recession. It is possible that stock markets could
recover in late 2009 even if economic recovery is still a year away.”
COMMODITIES
Commodities have taken a hammering this year, leaving many investors facing
substantial losses. Last week the price of oil fell to $38 a barrel, down
from a peak of $147 earlier this year. Metals have also been hard hit, with
copper, lead and zinc down by more than 60% since the summer.
The Marlborough Exchange Traded Fund (ETF) Commodity fund was the top-
performing commodity fund this year, returning 5%. However, most funds were
down — the popular JPM Natural Resources fund plummeted by nearly 57% and
the worst-performing commodity fund, the CF Oceanic Australian Natural
Resources fund, fell in value by a huge 66%.
The picture isn’t looking much brighter for next year. Investment bank UBS
last month cut its forecasts for commodity prices in 2009 by an average of
37%.
Meanwhile, demand for gold has soared — reaching an all-time quarterly record
of $32 billion between July and September, according to the World Gold
Council.
Mark Harris of New Star said: “Overall, stock markets are likely to remain
highly volatile, perhaps even re-testing lows in the short term. Gold should
remain a useful portfolio diversifier.”
BONDS
Global bonds have been the runaway winners in 2008, with nine out of the ten
top-performing funds belonging to this sector.
The top-performing global bond fund is the Renfield US Government Bond fund,
which grew by 48% in 2008, closely followed by the M&G International
Sovereign Bond fund, up 45%. Other top performers in this sector include the
Scottish Widows Overseas Fixed Interest Tracker fund, the SWIP Global Bond
fund and the Baillie Gifford Overseas Bond fund. The average fund yield is
an impressive 5.1%.
Experts claim that government bonds could continue to be an appealing
investment option into next year as central banks continue to slash rates.
However, there is a danger that the sector could become overvalued as
investors pile in — stockbroker Killik & Co thinks US Treasuries and
conventional UK gilts could be 2009’s bubble.
For more adventurous income-seeking investors corporate bonds look attractive.
Yields are high compared with those on risk-free government bonds, although
investors will have to brace themselves for a significant rise in corporate
defaults.
Chris Bowie, head of credit at Ignis Asset Management, said: “Investment-grade
credit has never been better value. Bonds are not risk-free, of course, and
the default risk is undoubtedly higher than in recent years.”
Current yields on corporate-bond funds are typically between 5% and 8%.
PROPERTY
Property funds continued to suffer in 2008 and are facing a gloomy 2009. In
October alone, commercial-property prices dropped by a record 4.3% compared
with September, with the market overall falling by a staggering 28% from a
June 2007 peak.
There is little doubt that the UK commercial-property bull run is over, but
redeeming your fund now could mean getting out at the very worst time.
