With a 31.5% return over the year to 1 December 2017 in sterling terms, the IA China/Greater China sector comfortably posted the strongest gain this year, with every fund in the 37-strong peer group registering a positive return according to FE Analytics.
The best performing fund in the sector, Baillie Gifford Greater China, was up 46.51%, while the ‘weakest’ return of 19.38% came from Aberdeen Global Chinese Equity.
Taking second spot in terms of the best sector gain so far in 2017, and one that may surprise many after outflows in the middle of the year, was the IA UK Smaller Companies sector which rose 23.63%.
"This year has been fascinating in terms of what has and hasn't performed well..."
Taking the accolade for the best performer within the sector is the Old Mutual UK Smaller Companies Fund, which gained 47.79% over the period. Just one fund produced a negative return, the Webb Capital Smaller Companies Growth Fund, which fell 0.41%.
Continuing the risk-on theme, and capturing one of the major trends of 2017, the third best performing sector through the year has been IA Technology and Telecommunications, where the average fund rose 22.78%.
The best performing of these was the Polar Capital Global Technology Fund which rose 36.12%, with again just one fund registering negative performance – Fidelity Global Telecommunications – which fell 2.0%.
Completing the top five performers of the year were the IA Japanese Smaller Companies and European Smaller Companies sectors, which gained 22.55% and 21.74% respectively.
“This year has been fascinating in terms of what has and hasn’t performed well,” says Ben Yearsley, a director at Shore Financial Planning. “Emerging markets have been the big success story driven by Chinese tech stocks,” he adds.
“Alibaba, Tencent and Baidu have had a phenomenal impact on returns in China, partly because of their near monopoly status, but also due to innovation. I’m not sure that level of performance can be repeated in 2018, however overall emerging markets and China still look reasonable value, when compared with developed markets.”
The surprise performer
Yearsley admits to being surprised by the strength of UK smaller company funds in 2017, although he notes they did take much longer to recover from the Brexit vote than the larger caps.
“The UK Small Cap sector is probably the surprise performer as the country’s economy has struggled with growth,” adds Adrian Lowcock, investment director at Architas. “However small caps have shrugged this off and are rallying following a couple of years of underperformance.”
One reason to explain the overall sector, adds Lowcock, is the IA universe is not the whole market. This, he says, means that some excellent stock selection will have helped drive the performance of the IA sector.
“In the UK we have some exceptional stock pickers and the small cap space is a good place for them to outperform as the sector is often under researched and under-owned by the large institutional investors,” he says. “To illustrate the difference we see IA UK Smaller Companies has delivered 23% compared with Numis Smaller Cos Ex IT which returned 14.8% – which is still very healthy but shows the added value of stockpickers.”
Meanwhile Lowcock says the performance of Japan in 2017 was the least surprising to him.
“The economy is very healthy and corporate earning a have grown strongly in 2017,” he says. “Economic data is positive and business and consumer confidence is high with the later finally spending again.”
Prospects for 2018
Looking to the prospects for fund returns next year, Lowcock does not expect this year’s winners to be the same in 2018.
“Rarely does it go that way,” he says. “However emerging markets and China should continue to perform as the sector is benefiting from cyclical recovery, whilst corporate earnings growth should support Japan. UK performance could be driven by progress on Brexit negotiations.”
Indeed with global growth appearing to be synchronised, Yearsley believes that 2018 could be another good year for markets.
“In addition if Trump gets his tax plans through that will provide another pick up to the US. However many developed markets do look expensive and at some point the party has to end,” he says.
“The UK is one area I am concerned about, not due to Brexit, but the worry about a Corbyn government. If the Tories implode, and Labour ends up in power, expect a run on the pound and a sharply falling stock market.”