It’s been a bumpy ride, but most equity funds up since Covid sell-off

Two and a half years on from the Covid-19 sell-off, most funds have staged a recovery despite 2022’s volatility throwing a spanner into the works.

It’s hard to believe, but it is now just over two and a half years since 19 February 2020, when the looming spectre of Covid-19 worldwide sparked the start of a global market implosion.

Since then, investors have had a full-on roller coaster ride. The short-term pain was acute: over the month to 20 March 2020, the FTSE 100 index fell 30%, while by 23 March the MSCI World and the S&P 500 had both lost 34%.

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That was followed by a lengthy bull market powered by growth stocks; but 2022 has seen further painful falls as the economic environment has shifted, inflation has taken hold and interest rates have risen.

Biggest fund sector winners since Covid-19 sell-off

It’s interesting, then, to see how the open-ended fund universe has fared and which sectors have been the real winners and losers over that 30-month period.

Using total returns data from FE Fundinfo between 21 Feb 2020 and 12 August 2022, we ranked all the top 10 and bottom 10 Investment Association (IA) sectors (see table).

Arguably the most important point to note is that every single equity fund sector has achieved positive returns over that time, with the exception of IA Latin America. It remains down 8.6%, despite the strength earlier in the year of the commodity markets on which it depends.

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“Equities have had a pretty impressive run overall since the onset of Covid-19, which is surprising in one sense as there are so many more challenges in the world now,” observes Ben Yearsley, investment director at Shore Financial Planning

Within the 39 sectors in positive territory, however, there is an enormous spread of returns - with some surprising presences at the top of the table.

Top 10 sector performers since Covid-19 market sell-off 

Data from 21 Feb 2020 to 12 Aug 2022. Source: FE Fundinfo. Past performance is not a guide to future performance.

One unsurprising one, leading the way by a country mile, is IA Commodities and Natural Resources. It’s up more than 50% on the back of the huge energy, metal and grain price rises that started as the global economy opened up again after the pandemic but have been dramatically exacerbated by the fallout from the Russian invasion of Ukraine.

The commodities sector is followed at a distance by India (up 38.3%). Says Yearsley: “India in second place is probably the sector I would highlight as the biggest surprise – especially given that if you wind the clock back, Covid was running rife there.” Moreover, he adds that India has not reacted well historically to high oil prices, given its heavy dependency on imported energy.

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Behind India are North America (up 33.4%), Technology (up 32.8%) and North American Smaller Companies (up 26.4%) - three big growth-focused sectors that saw huge gains from the lockdown bull market.

Also perhaps surprising is that those earlier gains have stood them in such good stead, despite the damage done by the profound market rotation out of growth stocks and into more defensive, value-oriented stocks since the end of 2021.

The fact is that most equity sectors have struggled in 2022, including other relatively strong contenders over the longer time period such as Healthcare, Global and Asia-Pacific including Japan. Indeed, IA India is one of only a couple to return modest gains this year. 

Global funds have outshone UK strategies

But the table makes clear that taking a long view can be the most sensible option in such circumstances. Quite apart from the difficulties inherent in trying to time any market, investors who decided to stick with these sectors on the grounds that sooner or later they will come back into favour have not done badly over what has been an exceptionally volatile period.

It also demonstrates the need for good diversification across different geographical and industrial sectors. Certainly, anyone who had doggedly stuck with a UK-focused equity portfolio over the past 30 months would be feeling pretty gloomy.

Despite the FTSE’s relative resilience this year – reflecting its weighting to banks, miners, oil companies and defensives such as tobacco – the IA UK Equity Income (up 6.4%), UK All Companies (up 3.2%) and UK Smaller Companies sectors (up 3.2%) have all managed only single-digit total returns over that time. “A weak pound hasn’t helped, although many managers [are] now saying the UK looks good value,” comments Yearsley. 

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Biggest fund sector losers since Covid-19 sell-off

In contrast, the geographically diverse IA Global sector returned over 20% and Global Equity Income almost 19% - not least because of their typically substantial exposure to the US market and the strong US dollar.

At the bottom of the table, most of IA Latin America’s 17 sector companions in negative territory, out of 57 sectors in total, are corporate, government and emerging market bond sectors, all of which have been hard hit by governments' tightening monetary policies.

“The bond sectors won’t recover in the same way as equities have done, as we are now in a different and rising interest rate environment,” says Yearsley. “But that doesn’t mean they don’t have a place in portfolios; it’s just that they have different drivers of returns.”

Bottom 10 sector performers since Covid-19 market sell-off 

Data from 21 Feb 2020 to 12 Aug 2022. Source: FE Fundinfo. Past performance is not a guide to future performance.