The 12 fund sectors that have gained 20% plus since markets hit a bottom

Kyle Caldwell reports on the sectors that have delivered strong returns over a short time frame.

It may not have felt like it at the time, but 23 March marked the bottom of the five-week coronavirus sell-off that spelt the end of a decade long bull-market for equities.

Time will tell whether global markets’ upward trajectory over the past couple of months, with investors piling in to take advantage of shares falling to cheaper price tags, will prove to be a false dawn. A further market correction could turn out to be even more severe in the event of a second wave of coronavirus.

- The fund sector retail investors and professionals are selling

On this front, there is certainly no shortage of fearful investors. For example, a record amount of investor money has been pumped into gold exchange-traded funds (ETFs).

Moreover, various experienced investors are adopting a “glass half-full” stance, including Jupiter’s John Chatfeild-Roberts, head of strategy for independent funds at Jupiter, who cautioned in late March that throughout history bear markets “suck people in and then destroy their money”. 

Following the rally, Bruce Stout, manager of the Murray International investment trust, has cautioned that stock markets have moved too fast, too soon.

He says: “Markets have been driven by liquidity; the size of the stimulus packages has been absolutely huge in terms of the liquidity boost. We also know that investment managers have lots of cash and are fearful of missing out on the rally, and that self-fuels the rally as more cash comes into the market.

“There’s also a consensus-type view that the steeper a recession, the steeper a recovery, and this is borne out of the experiences of the global financial crisis when there was a ‘V’ shaped recovery. I think the consensus believes this will happen again and is therefore keen to drive stock prices higher.

“But we have no transparency on what sort of recovery is coming and it may take much longer than people think, so from that point of view markets are probably ahead of themselves relative to the fundamentals that have not really started improving.”  

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Nonetheless, bearing in mind the above caveats, those investors who bought into funds from late March will have seen some strong returns over that short period. Data from FE Analytics (23 March to 15 June) shows 12 sectors have notched up returns of 20%-plus. They are highlighted in the table below.

The top three sectors all invest in smaller companies, bouncing back from a low base having been among the hardest hit during the sell-off: Investment Association (IA) UK Smaller Companies (31.7%), IA North American Smaller Companies (31.4%) and IA European Smaller Companies (29.9%). As seasoned investors are well aware, over the very long term smaller companies have the upper hand over large businesses in producing superior performance.

- Why small is beautiful for investors

Other sectors that saw significant falls during the sell-off also feature among the 12 sectors that have returned 20%-plus from the time period examined: IA UK all companies (26.4%), IA Europe excluding UK (23.7%), IA UK equity income (23.4%) and IA Europe including UK (23.1%).

But one notable theme is that three equity sectors that managed to limit losses during the sell-off have also led the pack as markets have recovered: IA technology & telecommunications (29.1%), IA North America (25.2%) and IA global (22.9%). Interestingly, the IA Japanese smaller companies sector also held up well during the sell-off and also performed strongly during the rebound.

Regarding this trend, Ben Yearsley of Shore Financial Planning says: “As before the crisis, the US and tech seems to be leading markets now. Many fund managers I speak to think this is unsurprising as the lockdowns and restrictions have forced more people online and have simply accelerated the digitalisation process that was already happening.”

Source: FE Analytics

Overall, though, investors who bought ahead of the steep market declines (which started on 21 February) will be sitting on a loss. From 21 February to 15 June, only two of the above 12 sectors made a positive return: IA technology & telecommunications (up 3%) and IA Japanese smaller companies (up 2.6%). The next two best performing sectors out of the 12 are IA global and IA North America, which have both lost 6.9%.