The best and worst fund and investment trust sectors in 2020

We reveal the top 10 fund and trust sectors of the year, and run through the worst performers.

The year 2020 served as a reminder that holding your nerve and thinking long term are two key ingredients of successful investing.

Over a four-week period in late February and most of March, global stock markets plummeted in response to the Covid-19 pandemic. The MSCI World index declined 15.7% in the first quarter of 2020, while the FTSE All-Share index lost 25.1%.

Investors who panicked and crystallised their losses by selling, will have missed out on the big stock-market recovery that has taken place since the end of March.

Almost all fund and investment trust sectors have bounced back to deliver a positive return to investors year-to-date, according to figures from FE Analytics.

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Fund winners 

Just under a third of fund sectors (12 out of 39) have recorded gains of 10% plus from 1 January 2020 to 21 December 2020. In a normal year, this would be an impressive feat, but given the heavy sell-off in the first quarter this is even more noteworthy.

While firms across many industries were forced to turn off the lights as part of a collective effort to halt the spread of Covid-19, some businesses thrived. The standout winners of the working-from-home trend were technology businesses or firms with a strong online presence.  It is therefore no surprise to see technology funds as the top-performing Investment Association (IA) sector, with an average return of 45.3%. In terms of individual gongs, most of the top 10 performing funds of 2020 have sizeable weightings to tech shares.

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The second-best performing sector was IA China/Greater China, with the average fund returning 32%. China was first-in, first-out of the Covid-19 pandemic, with the country largely keeping new cases under control. As a result, China’s economy  recovered much quicker, which meant a buoyant stock market from the end of March.

The third-best sector in 2020 was IA Asia Pacific Including Japan (up 26.5%), followed by IA North American Smaller Companies (up 25.3%), and IA Asia Pacific Excluding Japan (19.3%).

Top 10 fund sectors in 2020 

Source: FE Analytics. Date from 1 January 2020 to 21 December 2020. Note: IA stands for Investment Association. 

Ben Yearsley, a director at Shore Financial Planning, cited the US and Japan as the two standout equity markets of 2020. The broader IA North America fund sector, with an average return of 17.4%, was also in the top 10 alongside IA North American Smaller Companies. Japan also had its two fund sectors in the top 10; IA Japanese Smaller Companies (up 14.2%) and IA Japan (up 14.1%).

Yearsley says: “US markets have done well due to some clear winners from enforced lockdowns and working from home: Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Zoom (NASDAQ:ZM), the list goes on. Many of these companies started the year on an expensive rating and are even higher now. The US markets reached new all-time highs during November, [while] UK markets are 20% off their highs and in no danger of record-breaking anytime soon.

“The other major winner from an equity perspective has been Japan. Unlike the US, it has had a good pandemic with cases contained despite the elderly population. It has also benefited from a flight to safety for the yen that often happens. However, probably the key reason for the performance is down to the quality and strength of corporate Japan.”

Fund losers 

Just five fund sectors are in the red, with four containing UK in their sector name.

At the bottom of the table is IA UK Equity Income, with the average fund down 13.3%, due to the dividend drought that played out in 2020. Nearly 500 companies listed on the London Stock Exchange cancelled, cut, or suspended dividend payments to shore up balance sheets in response to the pandemic. The research, by GraniteShares, an ETF provider, highlights the dividend black hole that emerged in 2020.

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Bottom five fund sectors in 2020

Source: FE Analytics. Date from 1 January 2020 to 21 December 2020. Note: IA stands for Investment Association. 

Investment trust winners 

The technology trend also played out for investment trusts, with Technology & Media taking second place in the sector rankings and returning 33.4%, while North America also featured in the top 10, with an average return of 19.2%.

But Asia Pacific topped the charts, with an average return of 37.3%. While Asian markets had a good year, the 100% plus return of Pacific Horizon (LSE: PHI) inflated the average return for the sector, which would otherwise have appeared lower down the top 10, as it contains only seven constituents. Pacific Horizon was the overall best-performing investment trust of 2020, benefiting from the extra growth potential of technology and online services in developing markets. 

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Top 10 trust sectors in 2020

Source: FE Analytics. Date from 1 January 2020 to 21 December 2020. Please note that Venture Capital Trust sectors were excluded. 

In terms of the worst performers, it is notable that property-focused investment trusts produced steeper losses than open-ended funds. This was due to the fact that investment trust discounts slumped notably during the first quarter sell-off, as investors rushed for the exit amid concerns over the economic impact of Covid-19. The share price falls were in excess of the decline in the value of the underlying holdings held by property trusts - the net asset value (NAV). 

The upshot with open-ended commercial property funds is that while investors cannot access their money during periods of market stress (some property funds put suspensions in place in 2020), panic-selling is a comparable problem for investment trusts. Investment trusts, due to their structure of having a fixed pool of assets, are not forced to sell property to return money to investors, but the market may take a dim view of the outlook and force investment trust share prices down, which happened in 2020.

Bottom five trust sectors in 2020

The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this data may not be suitable for all investors and, if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website.