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Mar 20, 2019

Worst-performing funds of 2018 bounce back in 2019

Above-average loss in 2018 becomes higher-than-average gain in 2019, says Morningstar

The adage that what goes up must come down has been turned on its head with funds that suffered a decline in 2018 enjoying a rebound in early 2019.

The volatile nature of returns has seen 53.3 percent of funds that sat in the bottom quartile for performance during the fourth quarter of 2018 bounce back to the top quartile in 2019 (to the end of February), according to investment research firm Morningstar. This is based on UK-domiciled funds in the Morningstar Categories, which contain funds registered across Europe.

The average loss for these funds was 9.7 percent during the fourth quarter of 2018 – based on the clean share classes [the approach giving investors a more transparent means of investing in funds] – but following the positive returns seen in 2019, their average gain across January and February is 5.6 percent. When shining a spotlight on equity growth strategies, these funds had a higher-than-average loss in the fourth quarter but a higher-than-average gain in 2019.

‘Signs of patience with future rate hikes by the Fed and an improving tone regarding the trade tensions between the US and China have been positive undertones,’ notes the Morningstar analysis. But ‘geopolitical uncertainty continues and is keeping investors on the lookout for further confirmation of the global recovery.’

US equities, as represented by the S&P 500, are leading the recovery among the major markets with 6.6 percent gains for the year through February, in sterling terms. And despite Brexit-related uncertainty weighing down sterling and UK markets, the FTSE All-Share Index posted robust gains of 6.6 percent over the same period, with domestically focused small-cap equities lagging their large-cap counterparts.

Both European equities (MSCI Europe ex-UK Index) and emerging markets (MSCI Emerging Markets Index) are not far behind with healthy gains of 5.3 percent and 4.4 percent, respectively, notes Morningstar. Japanese equities (Topix) lag the most in developed markets with a 1.7 percent increase in sterling terms over the same period.

Outside major markets, the China A-share market shows strong returns of more than 15 percent, in sterling terms, following its disastrous performance in 2018 as domestic market sentiment has markedly improved. ‘This is linked to the macro policy stance, easing of financial conditions and the rhetoric around the US-China trade war cooling,’ notes the analysis.

More granularly, small-cap stocks globally have rebounded the most from their recent fourth-quarter lows with US small-cap equities – the Russell 2000 Index – posting a 12 percent rise over the period. UK and European small-cap equities lag their US counterparts, returning 4.4 percent and 6 percent, respectively, as the region witnesses marked deceleration in domestic growth and as talks over Brexit weigh on sentiment.

Growth stocks have outshone value stocks in the US with the Russell 3000 Growth Index returning 8.4 percent versus 6.7 percent for the Russell 3000 Value Index. And Morningstar also reveals assets in European absolute return funds fell by 23 percent in 2018 – falling €24 bn to €86 bn ($98 bn).

This trend is supported by data showing that diversified growth funds (DGF) tracked by CAMRADATA suffered another significant decline in overall assets under management last year. Since Q3 2018, assets under management have fallen by more than £14 bn ($18.4 bn), meaning that assets in the DGF CAMRADATA universe are now £24 bn below their peak achieved at the end of Q4 2017.