The top 10 fund-sector winners since the sell-off

Barring a couple of bad days, markets have generally moved higher since the end of March. Hannah Smith reveals the 10 best-performing fund sectors. 

Markets have bounced back from a painful sell-off during February and March that was driven by investor panic about the impact of coronavirus. Some fund sectors have rebounded more strongly than others, however, so investors may be wondering which will be the standout ones for the rest of the year.

We ran the numbers on FE Analytics to find out which fund sectors have held up best since the sell-off (from the end of March), and which have performed best year-to-date (up to 1 September).

Tech tops the table

Technology & Telecoms was the standout performer over both time periods, up 29% year-to-date, although note that these numbers were crunched before the recent tech rout, so performance might now be looking a little less stellar.

However, Tom Becket, chief investment officer at Punter Southall Wealth, says that, even taking into account the tech sell-off in the US over the past couple of trading sessions, the data would likely show similar trends.

“Since the sell-off and subsequent recession, it is obvious that nothing has really lagged in terms of a negative return, and the strength of the recovery talks in no small part to how weak things were in the first quarter,” says Becket. “You wouldn’t have expected Technology & Telecoms to be so strong leading up to the sell-off, but it points to the nature of the recovery, which is driven by those companies benefiting from the ‘stay at home’, ‘work from home’ trend.” 

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China: first in and first out

The second-best performing sector since the start of the year is China/Greater China, returning nearly 21% year-to-date, and 28% since March. This is more of a surprise, says Becket, given that China was the epicentre of the Covid-19 pandemic. “We have seen strong performance from the end of the first quarter to now because China and Asian equities more broadly were cheap on a relative basis compared to other markets,” he explains.  

Becket adds that the state is quite active in the equity market, for example, a state-owned publication in July encouraged investors to pile into the market. Therefore, Becket notes: “Its performance doesn’t necessarily represent equity market fundamentals.”

Alex Moore, head of collectives at Rathbones, notes that the Chinese authorities have done much better at containing the virus than some other nations, which has helped attract investor capital back to the region.

He says: “There was also a lot of encouragement by central government for Chinese locals to buy into Chinese equities, and there are many companies that are less reliant on exporting their services around the world - there is a lot of domestic demand for these companies and the products and services they provide,” says Moore. For example, the main Chinese stock market includes e-commerce giants such as Tencent (SEHK:700) and Alibaba (NYSE:BABA), which have done well in spite of Covid-19 as Chinese consumer spending holds steady.

Small companies bounce back

Another notable trend is that three smaller companies fund sectors appear among the 10 best performers since the end of March – UK, European and North American Smaller Companies. But they don’t feature among the 10 best performers since the start of the year. So what has driven their impressive comeback?

Moore explains that smaller companies tend to be more sensitive to the macroeconomic environment, so have benefited from economies tentatively reopening post-lockdown. “What we’ve seen since the end of March is the lockdown measures around world ease, a lot of central bank stimulus, there is a bit more clarity and a lot of companies are actually beating expectations in the second quarter. Because of that, those areas that sold off the most in the first quarter have generally rebounded fairly strongly in the second quarter.” US smaller companies in particular are more exposed to biotech, healthcare and technology - growth sectors that have been relative winners in the era of Covid-19.

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Gilts benefit from duration trade

UK Index Linked Gilts were the third-best performer year-to-date, up 8.5%, but returned just 3% between the end of March and 1 September. “That does look surprising given that we are seeing a big deflationary shock,” says Becket. “It is indicative that the gilt market has far less to do with inflation and more to do with duration. The duration of the index is very low so UK Index Linked has outperformed UK Gilts because it has longer duration. Pension funds need to have long duration assets in their portfolio so that’s why they have outperformed.”

He adds that UK Gilts have done well considering the current weakness in the UK economy.

Top 10 best-performing IA sectors
End of March 2020 to 1 September 2020

Top 10 best-performing IA sectors
1 January 2020 to 1 September 2020

Source: FE Analytics. Note: IA stands for Investment Association.

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.