February’s top and bottom performing funds

A round up of the notable market and fund sector trends in February as bond markets feared inflation lurks.

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  1. Rob Morgan

Confidence in the global economic recovery continues to grow, in turn leading to inflationary risks and higher bond yields. The ten-year US Treasury bond, a common yardstick, recently hit 1.5% - meaning the US government will pay you 1.5% interest a year if you lend it money for a decade. This might seem very low but in fact it’s at its highest level in a year as investors increasingly price in the stimulus and spending plans of the new Biden administration, the impact this might have on inflation and the possible need to contain it through higher interest rates.

When the global pandemic took hold last year US Treasury yields plunged and spent most of last summer in the 0.5%-0.7% range. So, while the yield on the ten-year is still extremely low, it has almost trebled in six months. It is a similar story across the bond universe with the UK benchmark 10-year gilts now yielding 0.80%, compared to roughly 0.30% in mid-January and just 0.1% last summer. Expectations in some quarters are growing that a broad reopening, when it arrives, will send inflation much higher across the globe, so it’s possible that bond yields could continue to rise, and prices fall.

Markets could be right in forecasting that despite unemployment moving substantially higher, there will be a massive surge in spending as people emerge from lockdown life. The total amount of pandemic stimulus in the United States, including the next round of stimulus cheques, is estimated at $5 trillion, or about a quarter of pre-pandemic GDP, a monumental amount, especially given the short timeframe in which it has been unleashed. The vaccination programmes are a pivotal factor in determining the pace of re-openings and, consequently, a key influence in market action. Riskier assets do well on good vaccination news, but as any problems occur safe havens such as bonds come back to the fore.

As well as impacting the bond market, the reopening and higher inflation narrative also implies a change in share market leadership, long dominated by big tech and other ‘lockdown winners’. When government bond yields increase, it tends to hinder the valuation of ‘growth’ companies that mainly reinvest in their businesses to expand market share rather than pay dividends. The future value of cash is higher if interest rates and yields stay low. So, if these continue to rise, growth companies’ share prices will face an ongoing headwind. In contrast, ‘value’ areas, especially those linked to shorter term economic fortunes, might be more resilient in this scenario – especially where there is ‘pricing power’ to maintain margins.

This seems to explain the market moves in February at least. Alongside weakness in bonds, large technology companies came under some selling pressure. Another struggling asset was gold, which pays no income and is considered an unneeded deadweight in a scenario of economic recovery where inflation creeps up but is ultimately under control as monetary policy tightens. The end of ‘loose’ policy is bad for bullion, but if inflation does end up ‘running free’ at higher levels it could, once again, come into its own.

The more economically sensitive areas of the commodity complex fared better over the month with oil and industrial metal prices buoyant. Other ‘value’ orientated areas such as leisure and traditional retail also fared well with investors motivated to rebalance portfolios into areas expected to benefit most from a vigorous economic rebound. However, towards the end of the month the possibility of higher interest rates was enough to spook investors into selling a wider variety of assets.

The pound was strong, largely owing to the UK’s rapid vaccine roll out which promises a faster return to a more normal life than elsewhere. As such, there was a headwind for overseas assets, as well as UK companies whose earnings are mostly international rather than domestic. Overall, UK funds performed strongly but smaller company funds were generally the outperformers. Meanwhile, in Asia, Japan’s Nikkei 225 surpassed 30,000 for the first time in three decades, boosted by hopes of rising corporate earnings for its large exporters amid improving global trade.

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 February 2021 in full:

Top 10 funds:

Bottom 10 funds:

Top 10 sectors:

Bottom 10 sectors:

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 February 2021: 31/01/2021 to 28/02/2021. 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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