Dewi John: The best and worst of times in 2021

In my final piece of 2021, I looked at what trends had shaped the old year and could well stamp their mark on the new. There is, however, no immediate or necessary connection between macroeconomic trends – in this instance, ESG and inflation – and where the returns have been made. And it is to this aspect – the most positive and the most negative – that we are going to look now.

The Investment Association (IA) launched six new sectors in September 2021, with India/Indian Subcontinent being one of them. That proved quite prescient because, as the Table 1 below shows, the newborn delivered the top returns over the first 11 months of the year.

Table 1: Best-performing IA sectors, January-November 2021

Source: Refinitiv Lipper

Strong domestic and foreign direct investment has supported the Indian market over the year, and there has been something of an IPO boom – particularly with tech – to attract investors. That said, the market is not cheap, with analysts noting India’s price/earnings premium to other emerging markets is at a multi-decade high.

Oil and water

Three further sectors illustrate how 2021 was something of a year of extremes: the rebound of Commodities & Natural Resources shows that, despite the popularity of ESG, the game is far from over for old economy stocks – not least those held by the sector leader iShares Oil & Gas Exploration & Prod UCITS ETF USD A.

This fund returned a whopping 69.4% to the end of November 2021, as rebounding economic activity met with supply bottlenecks to send demand and prices for the sector’s products soaring – something we are reminded of every time we cast a horrified eye over our gas and electricity bills, or watch the digits on the petrol pumps whizz past at dizzying speeds.

That is also reflected in the top-performing North American fund share class: the SPDR S&P US Energy Select Sector UCITS ETF Acc, returning 53% to the end of November 2021, and with its top two holdings, Exxon Mobil and Chevron, representing more than 40% of the portfolio as of the end of October. On the other hand, new economy and ESG funds, such as the Xtrackers MSCI USA Information Tech UCITS ETF and Xtrackers MSCI USA ESG UCITS ETF, both returning more than 32%, have also driven sector outperformance over 2021.

This bleeds into the next sector, which has a strong US tilt. Over 2020, Technology & Telecoms was the top-performing sector, and 2021 saw it return a healthy 19.5% to leave it in fourth place over the first 11 months.

In and of itself, that is not massively surprising. What is perhaps a surprise, however, is that the sector’s top-performing funds over that time were all passive vehicles, with four of these exchange-traded funds (ETFs), as Table 2 below shows. The incorporation of these vehicles into IA sectors from September will have highlighted their potential and, in this instance, done those who have taken them up proud.

Table 2: Passive triumph: Best-performing tech funds, January-November 2021

Source: Refinitiv Lipper

The year’s losers

At the other end of the scale, as Table 3 shows, it has been a disappointing year – again – for Latin American funds, with the sector losing 13.6% to the end of November. The previous year was similarly miserable, with a loss of 15.8%. The continent has been hit hard by COVID and with its largest economy, Brazil, heading into presidential elections in 2022, it would be a bold investor who hopes for a rebound from the region this year –especially in a rising rate environment.

Table 3: Poorest-performing IA sectors, January-November 2021

Source: Refinitiv Lipper

Next comes China, the second-placed sector in 2020, which saw losses of 8.2% to the end of November. This seems an area where active management has been wrong-footed, with the MSCI China index up more than 5% to that point, yet with returns running from almost negative 20% to more than 7%, and the top-returning fund being the Lyxor Hwabao WP MSCI China A (DR) UCITS ETF – Acc.

After a very strong 2020, the following year saw Xi Jinping tighten the leash on China’s tech firms, while the country has struggled with the shockwaves from its bloated property sector. It is conceivable that both are digested in 2022, but the current emphasis on ‘common prosperity’ means holders of Chinese financial assets – especially foreign ones – will need to tread warily.

Bumper year for ETFs

If there is one theme that shines through over the year just gone, it is that the IA was right to include ETFs within its sectors. Intuitively, you might expect ETFs to be coasting along the middle of each group, cheaply and relatively cheerfully.

As the above analysis shows, however, these funds have often dominated sector performance, whether at the top end, as with Natural Resources or North America, or at the bottom, as with China. The proliferation of ever-more specific indices makes this ever-more likely – and that is before you consider the potential growth of active ETFs, something my colleague Detlef Glow has highlighted here.

Active managers make the often-compelling argument that they can orientate portfolios to take advantage of tailwinds and mitigate headwinds, thus optimising returns. As 2021 has illustrated, though, the evolving nature of passive management is raising the bar.

Dewi John is head of research UK & Ireland at Refinitiv Lipper