August’s top and bottom performing funds

A round up of the notable market and fund sector trends in August as large technology stocks continued to set the pace.

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  1. Rob Morgan

World stock markets continued to make decent progress in August. Growing numbers of commentators believe the strength in shares to be an aberration given the huge impact the global pandemic continues to exert on many businesses and consumers, but it’s another piece of evidence that proves the stock market and the economy are not the same thing.

It was of course technology companies that continued to propel US indices upwards. Shares in the world’s largest businesses, Amazon, Microsoft, Apple and Alphabet, all powered to record new highs. Many investors harbour growing concerns these businesses can’t live up to the expectations surrounding their ‘growth runways’, but for now the trend remains firmly intact and, if anything, was recently underscored by a change in policy from the US Federal Reserve.

The world’s most important Central Bank has historically targeted an inflation rate of 2%, but Fed Chair Jerome Powell said it will now allow inflation to run above target levels to support jobs and the economy. In practice, this means the world’s most important central bank is less likely to raise interest rates when the economy is heating up. It will also be more tolerant of a booming jobs market, when it may once have feared this would stoke inflation.

It may seem a subtle change, but it has wide implications for markets as it suggests monetary policy is going to be very loose for years to come. Ultra-low interest rates mean investors see less difference between the value of money today and the value of money in the future, which serves to make future profits more valuable than they would be if higher interest rates were expected. This is particularly important for the technology sector where tomorrow’s profits are expected to be a lot greater than todays.

For bonds it’s more of a mixed picture. Low interest rates would ordinarily be helpful but having a very loose policy stance that ignores higher levels of inflation poses a risk. Interest on bonds can’t grow like company earnings can, and with bond yields already very low the increased risk of inflation further down the line would usually hinder bonds, longer dated ones especially. A modest uptick in yields can have a large effect on capital value, and the weak performance of several funds specialising in this area during August provides something of a taster of what could happen if bond markets really took fright.

The fall in bond yields did provide some relief for the financial sector where banks in particular benefit from higher interest rates, and there was something of a resurrection in some travel, leisure and retail shares in the anticipation of a return to more normal operating conditions. Yet it remains to be seen whether a change in ‘market leadership’ from more growth-orientated companies to lower valuation laggards will ensue.

Elsewhere, Latin American funds propped up the fund performance tables, as the weak Covid-19 responses of Brazil and Mexico weighed . There was no real trend among the top ten best performing funds, however, with the US, UK Smaller Companies, Japan, technology and even Europe all featuring.

In Japan, the sudden resignation of Prime Minister Shinzo Abe due to health reasons was met with a small stock market dip towards the end of the month. When he came to power in 2012 his “Abenomics” promised to re-anchor inflation at 2%, boost potential growth and reassert Japan’s standing in Asia. Although he ushered in some structural reforms, inflation has remained stubbornly low. An improvement in corporate governance is likely to be Abe’s lasting legacy for equity investors, and although reform momentum could fade as a new leader is found the structures that support it are well embedded.

Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for August 2020 in full:

Top 10 funds:

Bottom 10 funds:

Top 10 sector averages:

Bottom 10 sector averages:

Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for August 2020: 31/07/2019 to 31/08/2020. Onshore and retail open-ended funds only.

*There are around 3,000 funds on sale in the UK. The Investment Association divides these into nearly 40 ‘sectors’, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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