Since the beginning of the year, the vast majority of investment funds have posted losses, with high-growth technology leading the charge.
According to research conducted by Quilter Cheviot, only 6% of Investment Association funds posted positive returns in the first half of the year.
The markets have been thrown into a tailspin by headwinds ranging from sky-high inflation to rapidly rising interest rates and Russia’s invasion of Ukraine.
Investors struggling to adapt to a new world of higher interest rates and inflation and fearing an impending recession have abandoned stocks, with US shares having their worst first half of a year in more than 50 years and the MSCI AC World index down 20% since January 1.
While fund managers may assert they can outperform the market, this has not been the case for the vast majority, as more than 95% have struggled to generate returns in this environment.
With a few exceptions, the combined impact of inflation, interest rates, and the invasion of Ukraine has damaged the majority of economic sectors.
Few foresaw Russia’s invasion of Ukraine, but those who did, or who remained committed to energy investments, have realized strong returns.
Energy and commodities have been spurred by supply/demand difficulties for raw materials and energy, and the top five places are occupied by funds with exposure.
Eight of the top ten performing funds are energy and commodity funds. Absolute return manager AQR occupied the remaining two positions.
BGF World Energy Fund, managed by Alastair Bishop and Mark Hume, had total gains of 39.47 percent during the six months, making it the top-performing fund.
The fund invests at least 70% of its total assets in energy companies, with Shell, ExxonMobil, and Chevron among its largest holdings.
Next in line was Schroder ISF Global Energy, which returned 34.64 percent throughout the same period.
The fund, managed by Mark Lacey, invests predominantly in energy businesses, with 73% of its assets invested in overseas shares.
Its top holdings consist of the Portuguese firm Galp, Shell, and Coterra Energy.
As a result of the invasion, Liontrust Russia topped the list of funds with the worst performance. When Russia invaded Ukraine and the country was hit with a series of sanctions, the IT portfolio plummeted as companies rushed to close or sell their Ukrainian operations and investors dumped Russia-related stocks.
The portfolio managed by Thomas Smith, which includes leading Russian companies such as Gazprom and Rosneft, is down 53.08 percent.
‘It came as no surprise to find Liontrust Russia propping up the table, as the fund has been suspended for obvious reasons. Similarly, the Fidelity Emerging Europe, Middle East, and Africa Fund had high exposure to Russia, according to Quilter Cheviot’s head of fund research, Nick Wood.
While the Liontrust fund has performed the poorest, the list is dominated by growth-oriented funds that have suffered from the market’s movement towards value.
Disruptive growth is impeded:
As interest rates rise, value equities tend to outperform growth stocks because they are less likely to be negatively affected by the discounted value of future earnings.
This has resulted in a sustained period of underperformance for so-called disruptive growth businesses and tech equities, with the tech-heavy Nasdaq index falling more than 25% in the six months leading up to the end of June.
Four Morgan Stanley funds, as well as funds managed by T. Rowe Price and Baillie Gifford, were included on the list of the worst-performing funds.
Cathie Wood, who manages the ARK funds in the United States, also appeared in the bottom 10 through a vehicle white labeled by Nikko Asset Management. Its overall returns were 52.08 percent negative.
Wood and her ARK funds have been frequently in the news due to their unpredictable performance. The ARK Innovation ETF, which tracks high-growth equities such as Tesla, has rebounded in recent weeks but is still down almost 50% for the year.
The disappointing performance of funds with a focus on technology and the resurgence of value companies have put pressure on stock pickers.
What are investors currently buying?
Interactive Investor, a do-it-yourself investment website, analyzed the top fund options for the month of June and found that Terry Smith’s Fundsmith Equity was the only ‘active’ name in the top 10, ranking first.
Seven of the top ten funds were passive funds, with only one fund, Vanguard FTSE UK Equity Index, having a UK focus.
At least for the time being, fund investors favor low-cost, emotionless passives. And considering that the impact of fees is amplified in volatile markets, this is not an unreasonable strategy,’ said Dzmitry Lipski, II’s head of funds research.
TB Guinness Global Energy Fund and FTF Clearbridge Global Infrastructure income fund are among the top 10 funds recommended by the Investment Company Institute as a hedge against inflation for investors.
