UK funds top the charts - but will it last?

After a week of UK fund outperformance, the Saltydog analyst sees investing trends in a state of flux.

Each week we analyse thousands of funds, covering all market sectors, and identify which way they are trending. We group the sectors according to their historic volatility and then highlight the best performing funds in each Group. Our aim is to provide all of the information that you need to develop a successful trend investing system.

Trend investing - also known as "trend following" or "momentum investing" - is a proven method of making money in the stock market, and goes back over a century. 

Like all of the best ideas, the theory of momentum investing is simple - the greater the amount of money that is being invested into a fund, or asset class, the quicker its value will rise. This in turn will attract further investment, pushing the price even higher. Obviously, the opposite also applies.

As a fund or asset class loses investors, the upward momentum ceases and it will reverse, gaining impetus in the opposite direction.
Trend investors in very different times, and places, have come up with uncannily similar rules for making good profits.

Here are some that have stood the test of time.

• The vital importance of market sector recognition and a supply of accurate up-to-date performance data.
• Don't always be invested in the market. In times of market uncertainty, cash is a good home for your money.
• Test the validity of a new trend with a small investment first.
• Once a trend is established for a fund or sector, it is more likely to continue in that direction than to move against the trend. 
• After a steady rise the fund, or sector, levels off and turns down with only occasional rallies; it is obvious that the line of least resistance has been changed from upwards to downwards. There is no need for explanations, now is the time to sell.

When we looked at our data last week we made some interesting observations. Based on our sector analysis, where we look at the relative performance of the top 50% of funds in each sector, all sectors had gone up over twenty-six weeks. However, most had made losses over the last four weeks, and a significant number were also down over twelve weeks. Of the seven sectors that were still showing gains over four weeks, five had gone down in the previous week.

It would appear that we are in a state of flux, where the sectors that were doing well earlier in the year have gone off the boil, and we are waiting to see which ones will emerge as the new front-runners.

Momentum trading works on the assumption that the forces driving the markets in the near future will be similar to those in the recent past. In the UK that may not currently be the case. For the last three years there's been uncertainty over when, if, and how we’ll leave the EU. If those questions get answered, we may be moving into a different investing environment.

We haven’t completed our analysis of last week’s data, but I thought that we would have a quick look at the leading funds based solely on their performance last week. Here are the top ten:

It's immediately obvious that all of these funds are investing in the UK. They will be at the top of the list partly because we saw sterling strengthen last week, which would have hindered any funds with overseas assets and earnings. This is a trend that could continue.

It is also clear that the performance of these funds over the last few weeks has been considerably better than during the previous few months.

In recent years UK equities have lagged world equities and US equities in particular.  Based on our employment rate, growth figures and improved public finances, UK stocks look good value. If we see a positive resolution to Brexit, then perhaps the UK sectors could be in for a good run.

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