May’s top and bottom performing funds

A round up of the notable market and fund sector trends in May as markets continued to grapple with inflation fears.

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  1. Rob Morgan

Fears about rising inflation remained at the front of investors’ minds in May. Specifically, that pandemic-driven disruption of supply chains, labour shortages and a ‘wall of money’ being released from war chests built during lockdown will conspire to drive the price of lots of goods and services.

Policymakers around the world are convinced (or at least trying to sound convinced) that a little more inflation is to be expected – given the ‘base effect’ of very low readings this time last year – and it will be ‘transitory’. ‘Transitory’ it seems is fast becoming the word of 2021 as ‘unprecedented’ was in 2020. Markets, though, are not so confident. They believe there is a real chance that the US Federal Reserve and other Central Banks will have to raise interest rates to contain an inflation spike, stopping the economic recovery in its tracks.

In general, data releases over the month failed to allay investors’ concerns. April US inflation for April was 4.4%, higher than the 3.6% anticipated, while Chinese producer prices also overshot expectations. In the UK, the UK’s annual rate of inflation more than doubled in April to hit 1.5%, the highest level since the pandemic struck, though this was broadly in line with what the Bank of England said it was expecting.

Why does this matter for investors? A bit of inflation isn’t necessarily a bad thing, especially if it’s driven by economic recovery that generally lifts businesses and improves life for people. It tends to be bad for assets such as bonds that pay a fixed income, though, plus rising yields impact share market leadership. Companies expected to deliver the greatest long-term earnings growth are unlikely to fare best as I explained here.

This goes some way to explaining the recent lacklustre performance of the tech sector despite a blockbuster results season. The US tech-heavy Nasdaq index is up just 6% this year – about half of the broader S&P 500 and Dow's gains. Investors are also growing more fearful that ‘antitrust’ regulations might impose restrictions on the US tech giants, as has been the case in China in recent months. Clearly, the regulatory environment is very different, but huge fines for Alibaba and others, as well as the blocked IPO of fintech giant Ant, are a reminder that investors need to take the possibility of government intervention seriously.

Another casualty of Chinese state pronouncements was Bitcoin and other cryptocurrencies as Beijing reminded companies that crypto services are still banned. Although Elon Musk’s decision to reverse plans to accept bitcoin as payment for Tesla vehicles was probably more influential. Either way, Bitcoin’s oft-cited role as an inflation hedge was struck a blow as the value of the decentralised money almost halved from its all-time high. As I argued recently, crypto is an unregulated space rife with speculation and a hazardous place for even the very brave to put money.

More broadly across Asia, the outlook was clouded by the pandemic. Although leading Asian economies handled the first surges of the Covid-19 virus well, the vaccine rollout has been slow and several nations have reported surging case numbers and have had to reintroduce lockdowns and restrictions, which are having an impact on economic activity.

Taiwan, which had one of the best early responses to the pandemic, has aggressively locked down parts of Taipei and insisted on even more stringent precautions. Japan, which still hopes to host the Olympics this summer, is struggling with overwhelmed hospitals and a stubborn march higher in infections. Meanwhile, Indian pandemic news remains extremely grim.

Among the few strong performing areas was the UK, much cited as offering relative value versus other global markets. A large weighting in areas sensitive to economic recovery such as commodities and financials has also attracted investors. We asked River & Mercantile fund manager Dan Hanbury, whether the tide has really turned for UK equities here.

Gold was another area that fared well and is a potential beneficiary as investors seek inflation ‘hedges’, especially if interest rates do remain close to zero. The bullion price has rebounded from prior weakness during the month, which ignited share prices in the gold mining sector. six of the top ten performing funds over the month are precious metals related.

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 May 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 May 2021: 30/04/2021 to 31/05/2021. 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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