Interactive Investor

Two years since Covid crash: fund winners, losers and what to buy now

7th March 2022 11:37

Sam Benstead from interactive investor

Commodity funds are primed to continue leading the performance charts. Sam Benstead explains why.

Since stock markets first plummeted in reaction to coronavirus two years ago, there has been a wide range of winning funds but one standout losing investment sector.

The best-performing funds, which have survived a storm of economic shutdowns, rising inflation and conflict in Eastern Europe, include Premier Miton UK Smaller Companies, which has risen 92%, Guinness Sustainable Energy , up 57%, and Fidelity Global Technology, returning 50%, from 24 February 2020 to 24 February 2022.  

Some more niche funds have also excelled. JPM Korea Equity, JPM Emerging Middle East Equity, and Matthews Asia Small Companies have all made investors about 50% since the start of the pandemic.

But the biggest theme among the winning strategies was the standout performance of natural resources funds, with four of the top 15 funds coming from the sector. This includes BlackRock World Mining Fund, which returned 73%, Pimco Commodity Real Return, up 62%, and BlackRock Natural Resources Income and Growth, returning 52%.

The best-performing funds since the pandemic

Fund Return (%)
Premier Miton UK Smaller Companies in GB 91.8
BlackRock GF World Mining TR in GB 73.31
Pimco GIS Commodity Real Return in GB 61.95
Vontobel Commodity in GB 57.88
LF Brook Absolute Return in GB 57.83
Guinness Sustainable Energy in GB 57.29
Legg Mason Royce US Small Cap Opportunity in GB 53.36
BlackRock Natural Resources Growth & Income in GB 51.46
AB International Technology Portfolio in GB 50.86
JPM Emerging Middle East Equity in GB 50.76
Baillie Gifford Pacific TR in GB 50.72
Fidelity Global Technology in GB 49.89
JPM Korea Equity Fund in GB 49.4
Matthews Asia Small Companies in GB 49.29
IFSL Marlborough Global Innovation in GB 48.84

FE FundInfo, 24 February 2020 to  24 February 2022.

On the losers’ side, emerging market funds dominate the list. The conflict in Ukraine has crashed Russian shares, with JPM Emerging Europe Equity, Invesco Emerging European and Liontrust Russia all at the bottom of the chart, losing investors close to 40% of their money. However, given that the Russia stock market is shut, the real losses are far greater.

Latin America funds also disappointed, with HSBC Brazil Equity dropping 35%, Comgest Growth Latin America down 23%, and Liontrust Latin America off 22%. In total, 13 of the bottom 15 funds invest in emerging markets.

Luke Hyde-Smith, co-head of multi-asset strategies at Waverton Investment Management, says: “Among the diverse list of winners, commodities stood out as the top -performing sector. There has been a huge rally in raw material prices over the past six months, which has helped shares recover following dreadful performance from 2011 to 2020.

“The fact that there was no dominant winning theme, and a UK stocks fund was top of the list, shows how important stock picking has been over the past two years.”

The fund buyer is backing commodities to keep up their stellar run and has been adding more of the sector to client portfolios.

“We own single stocks, such as Shell (LSE:SHEL), but also an exchange-trade fund that tracks the price of copper and First Quantum Minerals (TSE:FM), a Canadian copper miner,” he adds.

Thomas Becket, chief investment officer at Punter Southall Wealth,  also thinks commodities funds will keep rising. He invests in the Lazard Commodities fund, which owns a basket of raw materials. He has been increasing his position this year, although took some profits when Russia invaded Ukraine and the oil price soared.

Becket says: “Commodities still look good as economies are doing well. Ethical investment trends, which are putting companies off drilling for oil, mean that supply is low when demand is high, which means prices should keep going up.”

The sector is also a favourite for Barry Norris, manager of the VT Argonaut Absolute Return fund. He highlights how investment in drilling oil from major oil and gas companies has fallen from $330 billion in 2013 to just $140 billion today. This has caused a drop in the amount of new oil and gas discovered.

Norris says: “Even in a global economy where Western democracies are hell-bent on zero carbon, in view of robust economic growth, particularly from less dogmatic developing nations and the recovery in the demand for transportation fuels post-Covid, demand for oil and gas will still grow while supply plummets. The result can only be a new bull market in fossil fuels and structural inflation in the wider economy.” 

Curiously, emerging market funds have performed poorly even as commodity prices have risen. They generally move in tandem as emerging economies rely on exporting raw materials, especially Latin American economies.

Hyde-Smith says this could be a buying opportunity. “Emerging markets and commodities normally correlate – but this has not happened. The relationship may begin to reassert itself and it could be a good time to buy shares.

“For example, a recovery in the Chinese economy, driven by cutting interest rates and possibly more accommodative policies towards companies could also boost Vale (NYSE:VALE), the giant Brazilian iron ore miner.”

Becket adds: “Emerging markets could be bottoming out as investor sentiment is at an incredibly weak level. Instead of investing directly in Latin America, a better option is to buy a general emerging markets fund. We own the Pacific North of South Emerging Markets All Cap Equity fund, which focuses on the cheapest emerging market stocks.”

Both investors say they would not currently buy Russia funds as the geopolitical situation is too volatile.

Looking longer term, Hyde-Smith notes that rising commodity prices may trigger a recession, as central banks would have to step in and sharply raise interest rates.

“Our base case is that price rising subsides later this year, but if energy prices keep rising then inflation could persist for longer. In this scenario interest rates would have to go up faster than markets expect and that is bad for economies.”

The worst-performing funds since the pandemic

Fund Return (%)
LF Equity Income -70.65
JPM Emerging Europe Equity -40.11
Invesco Emerging European -36.63
Liontrust Russia -35.57
HSBC GIF Brazil Equity -35.43
Barings Eastern Europe -34.75
Jupiter Emerging European Opportunities -33.61
Fiera Capital Europe Magna Eastern European -30.14
ASI Eastern European Equity -29.24
Nomura Asia High Yield Bond -28.28
Quilter Investors Equity -24.64
Comgest Growth Latin America -23.33
JPM Brazil Equity -22.04
Liontrust Latin America -21.66
BlackRock GF Latin American -20.8

FE FundInfo, 24 February 2020 to  24 February 2022.

If this happens, Hyde-Smith says the best place to be invested is in companies that dominate their markets and have strong pricing power. He suggests the BlackRock Global Unconstrained Equity fund, which owns firms such as Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG (Google), and LVMH (EURONEXT:MC), the luxury goods firm.

Becket thinks a good longer-term investment area is renewable energy, a sector which has taken a beating recently as investor have Investments dumped fast-growing stocks.

“I have been buying Ninety One Global Environment due to poor performance recently. It takes a broad approach to renewable energy, such as by buying waste management companies as well as electricity utilities. The spike in the oil price could accelerate investment into renewables to reduce dependence on Russia gas,” he said.

While a fascinating exercise to look at two years of fund performance data over a volatile period for financial markets, Becket notes that investors had to do their own research into why some funds had performed well or poorly before making an investment decision. Hyde-Smith makes the same point: “It’s interesting but not a good indicator of which funds will keep doing well or poorly.”

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