Table Toppers vs. Duds: The Best and Worst of 2018

Fri 21 Dec 2018

By Brian Dennehy

Access Level | public

Market commentary


It’s not that there have been horrible falls in markets of one kind or another (although there have been some individual horror shows in selected markets or things like Bitcoin) – there haven’t. 
It is just that nothing has gone up, or not by any consequential amount.
In the week ended 14th December was the first week since 1969 when cash showed positive returns while stock markets, corporate bonds and government bonds all suffered negative returns.
But it wasn’t a single week phenomenon.
For example, Ned Davis’ Research in the US tracks the eight big asset classes – including equities and bonds and commodities. 
None will make returns higher than 5%.
Last time that happened? 1972.
2018 is all but unique in history. 
We are coming to the end of a great experiment that started in 2008.  Central bankers started buying government bonds (and corporate bonds in some cases) in massive scale.
The result?
An extraordinary global inflation, from bonds and equities to art and wine. 
That central bank support is now reversing.
If you believe all this to be true, then you must also believe that when central bank policy is reversed, these assets, all of them, must turn down. 
And that is what is now happening…clearly happening now.
Let’s look at the funds and sectors that are in our universe – the ones you and I are typically buying.  
Top and Bottom sectors
Table 1 shows the top 10 sectors – year to date.
We’ve highlighted the global vulnerability, illustrated by the Ned Davis research mentioned earlier.   But the averages for some sectors have still poked into positive territory.
Some of the technology shares – the FAANGs – have been given a good kicking in recent months but the Technology sector is still up 4.7% for the year.  Even though it’s down 13% from its peak, which shows how high it was earlier in the year.
If we look at the bottom 10 sectors (table 2) it’s quite a mixture. Asia, Europe and the UK feature – showing the global vulnerability that I’ve already mentioned.  
But there were also little local difficulties in some areas that have brought some sectors down a little more – it’s never just about the global vulnerability of central bank action. Each area has its own peculiarities.
Top and Bottom funds
There is a lot of variety but it’s helpful to focus on a few sectors to illustrate the range of possible returns by looking at the top and bottom funds in four sectors: North America, UK Smaller Companies, UK All Companies and Japan.
Table 3 shows the top and bottom funds for those sectors. The huge variety of returns is hidden by the sector averages (tables 1 & 2), which don’t tell you even half the story.
Baillie Gifford has been a big favourite of many people, not just Baillie Gifford American but also the fund house. And with good reason. The differential between the top and bottom funds in the North American sector year to date is 24%!
It’s a similar story in UK Smaller Companies and UK All Companies: 23% and 31% difference between the top and bottom funds. Just in one year.
Momentum advantage
This does illustrate exactly why we apply momentum. It’s very difficult to know the funds more likely than not to do best in any sector, particularly in uptrends. Momentum works superbly in uptrends and you get these differences occurring year after year. It’s these differentials within a sector that we exploit with our momentum-style Dynamic Fund Ratings.
Now let’s turn to the best and worst individual funds across sectors.  Table 4 shows the top 10 funds across all sectors. Again, it is North America that dominates. Although pharmaceuticals, technology and healthcare feature they are first and foremost funds focussed on North America.
There are two targeted absolute return funds that appear here. They have done extremely well to show up here but there is no way that funds from that sector should be appearing, at least not from that sector.  They are in the wrong sector and are not what I would think of as absolute return funds.
The bottom 10 funds are shown in table 5.  Looking back to table 2, there were quite a few sectors shown in the bottom 10 sectors across Asia, Europe and Emerging Markets.  But the worst funds from the totality of funds are clearly from the UK and there are some ugly performance figures there with the worst fund from the UK All Companies sector down nearly 30%.
It's always darkest before the dawn
We’ve talked a lot about what’s fallen, about 2008 and the low for the stock market in March 2009. But with these sharp falls came great opportunities. On the advised side, Dennehy Weller & Co clients were rapidly making 50-70% buying beaten up corporate bond funds from those lows.
These opportunities will come up again. We’re going to tiptoe through this wobbly period and then the opportunities coming out the other side will be extraordinary. 
They are the type of opportunities that only come up a couple of times in your investing life!


Table 1: Top 10 sectors

Year to date %
Technology & Telecommunications
UK Direct Property
UK Index Linked Gilts
North America
UK Gilts
Money Market
Short Term Money Market
North American Smaller Companies
Property Other
Global Bonds

Table 2: Bottom 10 sectors

Year to date %
European Smaller Companies
UK Smaller Companies
China/Greater China
Global Emerging Markets
Europe Excluding UK
UK All Companies
UK Equity Income
Europe Including UK
Japanese Smaller Companies

Table 3: Top and Bottom funds

North America  
  Fund Year to date %
Top Baillie Gifford American 17.08
Bottom SLI American Equity Unconstrained -7.87
Range   24.95
UK Smaller Companies  
  Fund Year to date %
Top Marlborough Nano Cap Growth  1.27
Bottom Majedie UK Smaller Companies  -22.19
Range   23.46
UK All Companies  
  Fund Year to date %
Top Aviva Inv UK Equity MoM 1 1.66
Bottom Quilter Investors UK Equity Income II -29.97
Range   31.63
  Fund Year to date %
Top Baillie Gifford Japanese Income Growth -3.16
Bottom Neptune Japan Opportunities -21.61
Range   18.45

Table 4: Top 10 funds

Year to date %
Baillie Gifford American
North America
L&G Global Health & Pharma Index Trust
Schroder Global Healthcare
LF Blue Whale Growth
Thesis TM Sanditon European Select
Targeted Absolute Return
Artemis US Smaller Companies
North American Smaller Cos
Thesis Eldon
North America
Investec American Franchise
North America
Natixis H2O MultiReturns
Targeted Absolute Return
Morgan Stanley US Advantage
North America

Table 5: Bottom 10 funds

Year to date %
Quilter Investors UK Equity Income II
UK All Companies
L&G UK Alpha Trust
UK All Companies
Quilter Investors Equity 1
UK All Companies
Omnis Income & Growth
UK Equity Income
SLI UK Equity Unconstrained
UK All Companies
Majedie UK Smaller Companies
UK Smaller Cos
Merian UK Mid Cap
UK All Companies
M&G Pan European Select Smaller Cos
European Smaller Cos
Jupiter Global Emerging Markets
Global Emerging Markets
LF Woodford Income Focus

Performance data: 1/1/18 - 19/12/18


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