Only one in five funds produced a positive return last year, according to figures from Morningstar, as markets reacted to social, political and economic concerns.
The flight to safety saw gilt funds dominating the top performers. It was a difficult year for more aggressive investors. For example, five of the 10 worst-performing funds came from India while the Investment Management Association China and Greater China sector was the worst performer on average, with the average fund losing 21.7 per cent.
With eurozone sovereign debt concerns rife, it is little surprise to see UK gilts and index-linked gilts outperform. Gilt funds differ from corporate bond funds by investing purely in high quality low-risk debt, mainly government securities. What would have surprised many investors were the equity-like returns from the sector, with the average UK gilt fund rising by 21 per cent last year.
Hargreaves Lansdown investment manager Ben Yearsley says many people got it wrong with gilts in 2011 and the fear is repeating the mistake and steering clear again. He says: “There is still strong demand for UK gilts and interest rates are not going up. The impression is that the gilt outlook looks stable for 2012”
But Skerritt Consultants head of investments Andy Merricks says the value in gilts is no longer there. He says: “If you grade the risk of losing money from where they are now to making money, that does not look like a good trade-off. Yields can only go lower if capital values rise. In the short term, they may make some capital but when it turns it will turn quickly and you can lose capital.”
Merricks says the European banking crisis is likely to reach a conclusion in the near future and the result should be a bout of quantitative easing by the European Central Bank. He says if investors go in at that point, the FTSE will be closer to 5,000 and they may well end up by 20 per cent up by the end of 2012.
He says: “If I were to pick an area now, it would be high-yield bonds. If you look back at 2008, the world didn’t end then and with interest rates where they are and gilt yields remaining tight, then 7.5-8 per cent from some high-yield bond funds looks very attractive. They will make capital and income.”
Merricks points to the likes of the JP Morgan global high-yield fund, Invesco Perpetual monthly income plus and Newton global high-yield bond as interesting offerings.
Yearsley agrees that a bout of quantitative easing in Europe would dramatically change the investment outlook. He says a number of emerging regions are now trading at very attractive valuations, while Europe is also at historic lows.
He says: “There are so many cheap markets at the present time. If I were to tip one, it would be Russia, which is trading at five times price to earnings. At that level, it does not look right, it is simply too cheap. India and China also look attractive. Even Europe looks incredibly cheap but if the euro implodes, things will get a whole lot worse before they get better.”
Yearsley says for the average investor you would look at a fund like Troy Trojan or Invesco Perpetual income. He says: “They will want defensive, large companies and high-yielding firms will continue to do well.”
Chelsea Financial Services managing director Darius McDermott says the firm has a two-toned equity view. One is the likes of defensive, large-cap, high-dividend funds such as Invesco Perpetual higher income, M&G global dividends and Newton global higher income.
He says: “The big macro worries are still there and will continue to be a concern, so good, old fashioned equity income, global and UK, will continue to be a popular choice for us.”
McDermott tipped gold in 2011 and says there is no reason why that cannot be a popular choice again. He says: “Gold prices went up by 20 per cent in 2011 and gold equities fell by 20 per cent, so the valuation anomaly that many thought was there last year is even greater this year, so despite being oversold in 2011, we still like resources funds, such as JP Morgan natural resources. The dislocation between gold equities and the gold spot price is almost at record levels historically. Either the gold price has to come down or gold equities rise and if there is any form of bull market, gold equities will be strong.”