Most fund sectors have clawed back Covid-19 losses

Thirty-three out of 39 fund sectors delivered a positive return to investors in 2020, despite the heavy first-quarter sell-off.

Since taking a battering during the February-March market rout, almost all fund sectors have bounced back to deliver a positive return to investors year-to-date. 

Looking across the Investment Association (IA) open-ended fund sectors, all but six out of 39 sectors have recorded a gain from the start of the year to 16 November, figures from FE Analytics show. 

Of the six that failed to do so, two are property sectors (IA UK Property Direct and IA Property Other), which have had their own woes to contend with this year with widespread fund suspensions. The other four are UK sectors – UK All Companies, UK Equity & Bond Income, UK Equity Income and UK Smaller Companies, which were also hardest hit during the first quarter with average falls of 20% to 30%. 

Topping the list of sectors that rebounded the most strongly was Technology & Telecoms, up 34.1% year-to-date after a 7.2% fall in the first quarter. China/Greater China returned 31% after a 6% first-quarter fall, while Asia Pacific including Japan completed the top three, notching up a 22% year-to-date return following a hefty 16% fall in the first quarter. 

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Morningstar’s head of manager selection Ruli Viljoen says it was black-box driven fund strategies, that is, computer algorithms, that drove the first-quarter sell-off. She adds that the sell-off happened too fast for most retail investors to panic sell. “People were probably more concerned about their health and well-being back in March than they were thinking about what was happening in markets. They didn’t have time to do anything because it all happened so very quickly,” she notes. 

Indiscriminate selling

The sell-off was indiscriminate, but it was the swift action of governments in dealing with the pandemic that helped things recover quickly, she suggests.

“There was no fundamental reason for certain parts of the market to sell off as aggressively as they did. The fact that they bounced back equally quickly, and the areas that bounced back, is a reflection of the speed at which governments around the world responded to the crisis and put mechanisms in place to provide support to the economy, which then gave support to businesses and the markets.” 

The fact that China, Asia Pacific, and tech stocks bounced back so dramatically points to “who will be the likely winners from this situation”, Viljoen says. Confidence returned to China because it was able to contain the virus better than other countries, while tech stocks benefited from the work-from-home trend across the world.

In contrast, the UK remains weak because of lingering Brexit uncertainty and the fact the market is made up of fewer growth stocks and more cyclical value stocks, including those hurt most by the crisis, such as travel and leisure companies. 

Golden rules proved right

The fund sector performance numbers prove the point of a couple of the golden rules of investing – diversification, and staying invested even in falling markets.

Matt Stanesby, managing director and head of the manager research team at Close Brothers Asset Management, says the data shows the importance of a balanced portfolio.

“It means you’re never going to be ‘top of the pops’, but you also should never be the bottom either. It allows you to stay invested for longer and that’s really what you need to be because it’s all about time in the markets, not timing the markets.” 

In his portfolios, Stanesby had begun to reduce risk ahead of the sell-off, raising his cash allocation to around 11%. By the end of March, concerned about what was going on in the markets, he stayed under-invested in equities over fears of a second wave. More recently, he has added some risk back in with the addition of more high-yield bonds. The challenge is finding the right balance between being defensive enough in tough markets without staying so defensive that you miss the bounce, he adds. 

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A good time to rebalance

The performance data shows that staying put and waiting for the recovery was the right thing to do. “The advice is the same as it’s always been, which is to take a long-term approach,” says Viljoen. No one can predict the future, so it also makes sense to have exposure to fund managers with different styles, market-cap biases and regional exposures. 

She suggests that investors take the opportunity to take some profits in areas that have held up well this year and put more into areas that have sold off.

“People should embrace the opportunities that are presented to us periodically by market dislocations because those are the times you can rebalance things and take advantage of what’s coming in future.” 

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.