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Emerging winners

In my final column for 2007, I thought I would look back over the year.

One group that has had fantastic performance is Neptune. You will see one of its funds in the top quartile or top decile in many of the unit trust sectors.

It has been helped by strong growth in emerging markets, where it has a number of funds. China, Russia and India have all scored extremely well for Neptune. Some might argue that it has simply gambled and won but this would be unfair to Robin Geffen and his team. Through their macro and sector analysis, they have long felt – even through the corrections – that emerging markets are the place to be.

In the case of Russia, price/earnings ratios of around 10 must make this one of the cheapest markets in the world today.

Neptune also has the capacity to excel in developed markets, as Felix Wintle’s US opportunities fund shows. It is the top performer in its sector this year and has been a very consistent fund over the last three years in a sector where consistency is hard to find.

Neptune has also been underweight in financials, which means it missed a lot of the torpedoes in 2007.

What have been the topperforming unit trusts this year? No prizes for guessing that China funds lead the way. In first place as I write is Gartmore China opportunities, which is up by around 75 per cent. Its blue-chip orientated portfolio has really pushed on over the last few months, overtaking Philip Ehrmann’s Jupiter China fund, which lies third.

The top 20 places are dominated by Asia and emerging markets, with commodities represented by First State global resources at number six.

Who are the losers? Well, there is a mix of smaller companies funds from the UK and Japan at the foot of the charts. Until November, the UK small-cap sector was performing relatively well but in that month it lost around 10 per cent.

The other struggling sector has been property, with bricks and mortar and equity funds showing significant losses. It was perhaps unsurprising that property shares were going to have a tough time, given that this was one of the top sectors in 2006.

There is an old adage in the stockmarket that it is better to travel than arrive. The arrival of real estate investment trusts in January was somewhat of a damp squib. The real point of Reits is to get a good income but with yields under 3.5 per cent, they did not look enticing compared with the higher yields available on gilts.

The big question is when to buy back into the sector? Discounts are around 40 to 45 per cent but that number rather depends on whether the net asset values can hold up. Given uncertainty over credit and world banking problems, I think it is too early to call this one, especially after a long bull market, but if Reits keep falling they will inevitably start to look attractive again at some stage.

UK equity income struggled in 2007. However, after almost six years of tremendous returns, it was perhaps due a tough year. Generally speaking, the funds that held up the best are those that avoided the financial sector, so full marks go to Neil Woodford at Invesco Perpetual, Greg Bennett at Marlborough and what looks like a rejuvenated Threadneedle team under Leigh Harrison.

By the way, I notice that Neptune’s name appears a couple of times near the top of this sector.

What is the forecast for 2008? Frankly, I do not think it has ever been so uncertain. I would not be surprised to see the FTSE 100 end next year over 7,000 but I can make an equally strong argument for it being under 5,000. Much depends on whether central banks can reliquefy the markets. If they can, it is possible that we will be off to the races again although this could store up problems for 2009.

I think we can be confident of considerably lower interest rates in the UK and the US. This should release some liquidity, which I expect to flow East and fuel further growth in emerging markets.

For the third year in a row, my market tip for next year is Russia but, as I said earlier, I have never known it so hard to guess what markets will do.

Without doubt, this is a time for advisers to hold their clients’ hands. Communication becomes more important than ever. I wish you all the very best for 2008.

Mark Dampier is head of research at Hargreaves Lansdown


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