Most fund sectors made positive returns in 2023: winners and losers

For investors, two trends stood out in 2023: technology shares returned to form and China’s stock market suffered its second consecutive lacklustre year.

Therefore, it is no surprise to see the Investment Association’s (IA) Technology and Technology Innovation sector top the charts over the year, with an average return of 38.9%. Equally, it is not unexpected to see IA China/Greater China at the bottom end of the sector charts, with an average loss of 20.2%.

Overall, out of the 57 fund sectors, most made a positive return in 2023. Only five others were in the red: IA Commodity/Natural Resources (average loss of 3.6%); IA Infrastructure (-2.8%); IA Healthcare (-2.3%); IA USD Government Bond (-1%); and IA Asia Pacific Excluding Japan (-1%).

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High levels of inflation over the past couple of years has made it harder for investors to keep their returns in positive real territory. The same is true for fund managers, with our recent number-crunching revealing that only six fund sectors have beaten inflation over the past three years: India, Commodity/Natural Resources, Latin America, North America, Global Equity Income and UK Equity Income.

With the pace of price rises slowing, following the UK Consumer Price Index (CPI) rising by 3.9% in the 12 months to November 2023, a much greater number of fund sectors, 42 in total, produced real returns ahead of that figure in 2023.

Along with technology funds, 10 other sectors produced double-digit returns: IA Latin America (average fund up 23.2%); IA India/Indian Subcontinent (17.2%); IA North America (16.7%); IA Europe Excluding UK (14%); IA Europe Including UK (13.3%); IA Global (12.7%); IA Financials and Financial Innovation (12.3%); IA Japan (11.6%); IA Sterling High Yield (11.2%) and IA North American Smaller Companies (10.9%).

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For investment trusts, the average investment company generated a share price total return of 9.9% in 2023. The best-performing sector was Private Equity with a 53.6% return, followed by Technology & Technology Innovation (48.7%), North America (24.2%), Property – UK Logistics (19.4%) and India/Indian Subcontinent (18.8%).  

The investment trust sector averages are weighted by market capitalisation. Therefore, private equity’s sector-topping performance was influenced by the strong showing of 3i Group Ord (LSE:III), up 85.5% in 2023. The investment trust sector averages are weighted by market capitalisation. Without 3i, the average investment company was up 4.6% during the year.

Bottom of the pile was the China/Greater China sector, in which the average trust lost 23.1%. China was widely tipped to recover its poise in 2023 following a poor year of returns in 2022, due to its economy re-opening following Covid. However, this did not translate into strong performance for its stock market.

While nine in 10 fund sectors were in positive territory, most failed to keep pace with America’s S&P 500 index, which finished 2023 up 24.2%. The tech-heavy Nasdaq fared even better, up 43.4%.

The performance of America’s biggest technology companies, which saw their share prices surge in response to excitement over the potential of artificial intelligence (AI) to transform various industries, heavily influenced the returns of both indices. In the case of the S&P 500, the so-called Magnificent Seven tech stocks, which includes Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), accounted for around two-thirds of the index’s gains in 2023.

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The seven stocks are around 30% of the S&P 500 index – a percentage that has increased over the past year on the back of their strong share price performance. This is because most major indices, such as the FTSE 100 and S&P 500, all use market-cap weightings, which rank companies by their size. Therefore, if a company’s share price goes up relative to other members of the index, it represents a higher percentage of the index.

As previously explained, a consequence for active funds of those indices having a higher exposure to the seven big tech stocks is that it is harder to outperform the US market. This is due to most active funds holding less than the index in those seven stocks. As a result, the average North American fund failed to keep pace, up 16.7% versus 24.2%.

Separate round-ups of individual winners and losers in 2023 have been published for funds, investment trusts and exchange-traded funds (ETFs).