Which funds to put your money in for 2012
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Associate Editor
David Stevenson Jan 06, 2012
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For investors, 2011 was all about the old adage: ensuring the return of your capital, not the return on it, became the top priority. If your portfolio didn’t suffer some nasty hits, you did pretty well. As global growth stuttered, stockmarkets suffered. With overall economic prospects still looking dodgy, there aren’t many sectors to be bullish about in 2012.
Bonds beat all comers
When economies are struggling, the place to be – normally – is in government bonds. That’s because the fixed coupons these pay become more appealing as returns elsewhere drop. So more bond buyers pile in, which drives down yields and pushes up prices.
Last year, it paid to keep your money close to home. As the benchmark FTSE Actuaries All-Gilt index notched up a double-digit return, investors in UK gilt funds found themselves at the top of the tree.
Of the top ten performing funds in 2011, eight came from the UK gilts sector, as measured by the Investment Management Association (IMA). Top dog was the Henderson long-dated gilt fund, which climbed almost 26% over the 12-month period (see chart).
American ten-year Treasury bonds did almost as well for their backers. But being in sovereign bonds didn’t guarantee performance success last year. Investors must be confident that the interest payments will be made and that they’ll get their capital back when it’s due.
In debt-overburdened Europe, starting with the periphery and moving closer to the core by the day, confidence has been eroding. Despite benefiting from a strong performance by Germany, European sovereign debt investors struggled to achieve a positive overall return.
Stocks had a woeful 2011
Most investors in equities, though, would have been quite happy with that. In 2011 the total value of the world’s stockmarkets dropped by almost $6.3trn to $45.7trn, according to Bloomberg data. That’s a 12% decline, which reverses the gains made in 2010.
Markets got spooked at the start of August as America’s credit rating was cut and as the eurozone crisis spread beyond the region’s periphery. With American economic expansion sluggish, Britain struggling to grow at all and theeurozone heading back into recession, all hopes were pinned on China. But even here, investors are being disappointed as business surveys suggest factory output could start shrinking.
Of the major markets, only America managed to keep its head above water: measured in sterling, the S&P rose 0.5% over the year. The FTSE 100 gave up nearly 6% of its value. Things were even worse elsewhere. Again, gauged in pounds, Japan lost 13%, major European stocks shed some 19%, while the overall emerging-market indices fell almost 21%.
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Within the latter area, the IMA China and greater China sector saw a 24% drop, says Morningstar. Brazil’s Bovespa index plunged by 28% while the Indian market lost over a third of its value. The worst fund performance of all came from the HSBC GIF Indian equity fund, which plummeted by 46% between 1 January and 20 December 2011. It certainly proves that emerging markets can ‘decouple’ from Western markets – they can fall much further and faster when investors decide they want out.
China fears hit commodities
Nor has there been much respite for another of 2010’s top sectors, commodities. The CRB/Reuters All Commodities index gained more than 25% in 2010, but dipped by 6.5% insterling terms last year. The raw materials sub-sector saw a double-digit drop on fears of slowing Chinese demand.
One positive was gold. It rose 10% in sterling terms, despite proving volatile in the year’s second half. Yet even here, it was hardly plain sailing unless you bought the metal itself. SF t1ps Smaller Companies Gold Fund – the top-performing fund in 2010 – was the second-worst performer in 2011, with a 42% tumble.
Absolute return funds are supposed to make you money whatever the market conditions. That’s one reason they’ve become one of the biggest sellers in the independent financial advisor market. But most of them didn’t work out as planned in 2011. According to Morningstar, only 25 of the 65 funds in the IMA Absolute Return sector produced positive returns: just 40% of the total. This isn’t a sector we favour. After this performance, we see no reason to change our view.
What are the best bets for 2012?
Overall, less than one in six funds produced a positive return in 2011, compared to 97% of funds in the black in 2010. But history shows the worst performers in one year can do much better in the next. So what could the star funds be in 2012?
Again, there’s not much to get excited about. We’re still wary of the outlook for global growth. Europe’s debt problems remain unresolved. A sharper-than-expected Chinese slowdown could make matters much worse than the consensus currently expects. So despite last year’s better-than-average performance, America still looks like one of the better bets. With the dollar rally looking likely to continue, sterling investors in America should have no worries on the currency front.
Meanwhile, our long-term advice about sticking with defensive, high quality blue-chip stocks still holds good. As Mark Dampier of Hargreaves Lansdown notes, “encouragingly, Neil Woodford, manager of the Invesco Perpetual Income and High Income funds, is back at the top of the UK equity income sector. Many questioned his economic view, but his defensive portfolio has paid off recently.” Both funds give you a decent dividend stream – and both could be worth tucking away for 2012.
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