Should investors stick with the winners of 2011?
The eurozone crisis has plunged many investors into a state of gloom. But some shares and funds have still made money this year. Are these the assets to hold on to, or should we look elsewhere in the new year?
The eurozone crisis has plunged many investors into a state of gloom. But some shares and funds have still made money this year. Are these the assets to hold on to, or should we look elsewhere in the new year?
6:00AM GMT 12 Dec 2011
CommentWith the euro crisis posing as many questions as Jeremy Paxman in an episode of University Challenge, it is difficult to know what lessons can be drawn from the past year's performance of funds and shares.
Almost all the world's major stock markets are in negative territory this year. Despite this, some funds and individual shares have done exceptionally well over the past 12 months. Is their performance likely to continue, and how are the experts rebalancing their portfolios?
Figures from Morningstar show that almost all the best-performing funds of the year are corporate or government bond funds. These have benefited from investor panic, with prices rising as people sought safe havens.
Baillie Gifford's long-dated gilt fund rose by nearly 22pc in the period – beaten only by Legg Mason's Japan Equity Fund, which has been boosted by a faster-than-expected recovery following the Japanese earthquake. Index-linked gilt funds also did well out of rising inflation.
Are these funds the place to be for the next 12 months? John Chatfeild-Roberts, who runs the Merlin funds of funds for Jupiter, said not. His advice came with a caveat: "If you had asked me a year ago I would have said gilts were too expensive, and I would have been wrong. They are even more expensive now."
He said that if you valued gilts and US Treasury bonds like shares they would look overpriced. "There's no long-term growth, and a price to earnings ratio of about 44."
Instead he urged investors to think carefully about the nature of risk when picking funds and stocks, given the situation in Europe. His Merlin funds hold a number of good performers from the past year, including star fund manager Neil Woodford's Invesco funds. Mr Woodford has seen his High Income fund gain around 11pc in a year. He holds cash-generating stocks including large pharmaceutical companies.
Mr Woodford said he was confident that by picking strong companies with sustainable earnings growth his portfolio would continue to thrive in 2012. "The increasingly tough economic outlook is not a surprise to me – I maintain my view that the developed world faces a prolonged period of low economic growth," he said.
"However, I also continue to believe that there are certain types of company that can thrive, delivering sustainable dividend and earnings growth in this environment."
Nick Raynor, an investment analyst at the Share Centre, is also banging the drum for defensive sectors. His research shows that the top performers this year come from sectors such as food, drinks and pharmaceuticals. "The majority of defensive sectors have held up well and are among the highest performers for the period," he said. "In 2012 we expect this to continue and the markets to remain unpredictable until the uncertainty with the eurozone is resolved."
The top-performing share for the year so far is Arm Holdings, which has risen by 46pc. The chip maker is doing well out of the fact that there is greater demand for mobile phones, and more advanced chips as phones get "smarter". Other top performers include Shire Pharmaceuticals, up by 43pc, which has made advances in market share and has been buoyed by takeover rumours.
Not everyone is confident that even defensive stocks are the answer. Douglas Chadwick of Saltydog Investor, a newsletter for those who control their own Isas and Sipps (self-invested personal pensions), said: "Wait for the market to confirm your opinions before trading. You've plenty of time to capitalise on a recovery."
His portfolio has risen by 7.2pc since its launch on November 23 2010. However, since last week, Saltydog has advised people to put 100pc of their money into cash.
But advisers agree that trying to time the market is an impossible task. Ted Scott, director of global strategy at F & C Investments, believes that those in cash may miss out on recovery.
"With each emergency summit proving to be more disappointing than the last, investors have lost faith in eurozone policymakers to provide a solution that will work," Mr Scott wrote in a research note under the heading "A great opportunity to buy equities will emerge".
"This has contributed to a collapse in investor sentiment with fear the overriding emotion in today's markets." But he added: "If a satisfactory solution for the debt crisis were to be found, the reversal in investor sentiment could contribute to a very strong and sustained rally." Equity fans can only hope that Mr Scott is right.