INVESTORS brave enough to back China have been clear winners in 2007, but
those who stayed closer to home have had a turbulent time, especially the
ones who piled into property funds this time last year.
As the credit crunch has taken its toll on western economies, the FTSE 100
index of leading British companies is likely to fail to beat cash for the
first time since the bear market of 2002.
On Friday, the index closed at 6,434, up just 3% on the year, or 5% including
dividends, almost identical to what you could have earned in a savings
account. With just four trading days to go until the end of 2007, this
picture is unlikely to change much.
China has shrugged off much of the uncertainty that has afflicted western
markets. The Shanghai stock market is up 91% in the local currency and 99%
in sterling terms, despite profit-taking in the past few months.
The top investment funds of the year all invest in China: Gartmore China
Opportunities, managed by Charlie Awdry, takes the No 1 spot with a return
of 57%.
However, many analysts warn that investors shouldn’t expect a repeat
performance in 2008.
Hugh Young, managing director of Aberdeen Asset Management Asia, said: “There
is the risk of a sharp correction, particularly in China where share prices
have become overinflated.”
Investment guru Warren Buffett sold his stake in PetroChina, the only Chinese
company he owned, in October because he was concerned that the market was
“too hot”. The billionaire investor has turned to Korea, which he described
as “one of the world’s most attractively priced markets”.
Research shows that chasing the best investments of the past year often
results in disappointment. Property funds topped the charts 12 months ago,
but are now languishing at the bottom of the league tables.
Four out of the five bottom funds invest in shops, offices and industrial
premises and are all down more than 20%, even though investors were told the
sector should provide steady returns. Confidence in commercial property has
evaporated since the sharp rise in interest rates earlier in the year.
Here we look at how your funds have performed, what to expect next year and
whether it is time to rebalance your portfolio.
Britain
Hopes that the FTSE 100 would surge to a record high of 7,000 this year,
smashing through the previous peak of 6,930 in December 1999, were dashed as
the market turmoil struck in the summer. The Footsie hit a near seven-year
high of 6,732 on June 15, but falls since then have wiped out most of the
gains made earlier in the year.
The average UK fund has sadly performed even worse than the Footsie, dropping
an average of 2%. The worst performer has been the Sovereign Ethical fund,
down 23%, which suffered from its exposure to banks and smaller companies.
But it hasn’t been all doom and gloom. The top-performing UK fund, Newton
Income, which confusingly isn’t an income fund and can be partly invested
overseas, is up 13%. Christopher Metcalfe, the fund’s manager since
April, said: “Focusing on larger companies, sharply reducing exposure to
financials before that sector sold off and investing the proceeds in energy
and fast-growing telecom stocks has helped us to beat the competition. I
don’t think the credit problems are going to disappear quickly so I’ll be
sticking to a similar strategy in 2008.”
With little sign of an end to the financial crunch, many fund managers are
gloomy about the next 12 months, according to Merrill Lynch. Fellow
investment bank Dresdner Kleinwort said last week Britain faces a 50-50
chance of a recession next year.
Against this backdrop many advisers suggest banking profits from risky parts
of the market such as smaller companies, especially if you have been in the
funds for several years, in favour of large high-quality shares or cash.
However, they don’t suggest quitting shares completely. If interest rates
are cut dramatically and credit troubles are resolved, markets could bounce
strongly.
Property
This time last year property funds were riding high: Aberdeen Property was
2006’s second-best fund after gaining 43%.
But the market has soured, as Money warned (Warning over rush into property,
January 7), with higher borrowing costs and the credit crunch taking their
toll.
The value of commercial property dropped 3.6% in November, its worst ever
recorded monthly fall, according to the analyst IPD. It is the fourth
consecutive month in which returns have dropped as the sector experiences
the most painful downturn since the crash in 1990. The FTSE real-estate sector is down 29% over the past six months.
Share-based funds have come off worst during the downturn, with Swip UK Real
Estate and Aberdeen Property Share both down 42%.
However, schemes that put their money predominantly in bricks and mortar have
not escaped. Earlier this month New Star saw the value of its UK property
fund fall by 8.2%, taking the total drop since the start of the year to 20%.
Some professionals, including Fidelity’s star stockpicker Anthony Bolton, are
taking a contrarian approach and betting on a recovery. Bolton said he has
bought into a number of property shares in recent weeks.
However, most experts, including Bank of England governor Mervyn King, believe
losses in the commercial property market could get worse before they get
better.
The crisis deepened last week when Friends Provident became the first fund
manager to limit withdrawals from its retail property fund. It said
investors wanting to get their money out would have to wait six months.
Advisers expect other funds to follow suit. Anyone in a property fund taking a
long-term view should stick with them, as selling out now will crystallise a
loss. If you have been invested for several years, though, and are sitting
on big gains, it makes sense to review your investment and take money out if
you are concerned.
Overseas funds
Chinese funds were this year’s biggest moneyspinner and the Shanghai market
was far and away the best performer.
It was a great year for most other emerging markets: Asian funds returned an
average of 27% while general emerging-market funds produced a gain of 26%.
A growing number of commentators have been warning that Asia, and particularly
China, is in a bubble that could burst in 2008 - especially if the worst
fears about a global recession are realised. Aberdeen Asset Management,
which invests billions in Asia, draws parallels between China and the
technology bubble of the late 1990s.
Deciding where to redeploy money pulled out of China is tricky as the
volatility that has afflicted many markets this year is expected to run into
2008. Warren Buffett has been buying into Korea through a stake in
steel-maker Posco. Korea is also a favoured market of Suresh Sadasivan, who
runs Old Mutual Asian Select, one of this year’s top performers. He
recommends shipbuilders such as Hyundai or Daewoo.
Some believe America and Japan could stage a comeback in 2008, although
similar hopes were expressed at this time last year.
On Friday, the S&P 500 was up just 3% in dollars - 2% in sterling terms –
while the average US fund has gained an average of just 2% since the year
began. Hopes that Japan’s stock market would take off after years of poor
performance were also dashed. For the second year running, every Japan fund
lost investors money. Investec Japan, the best of a bad lot, still fell 7%.
2006’s worst Japanese fund, Legg Mason Japan Equity, repeated the feat,
finishing the year 35% lower.
The average European fund managed a respectable 7% return, but if the US goes
into recession, as some fear, the region is expected to be hit hard.
Bonds
Bond investors have suffered poor returns over recent years and 2007 was no
different: the average UK bond fund has dropped 2% in value over the past
year. The best fund, UBS Active Bond, returned just 3%.
However, with shares expected to remain volatile, some advisers are backing
bonds as a safe haven against further turmoil. The prospect of further cuts
in interest rates should also be good for bonds, because prices
traditionally rise when rates fall.
Commodities
The Money section started tipping agricultural commodities in 2006 on the
premise that growing demand from China and India as well as biofuel
producers would push up prices. This year, the tip came good as world-wide
shortages of everything from wheat to rice hit home.
Soft red wheat was this year’s top performer, soaring 89%, according to
insurer Clerical Medical. Oil is up 50% and the gold price has jumped 25%.
The top performing commodity fund was First State Global Resources, up 41%.
It wasn’t all good news. Base metals such as aluminium, nickel and zinc have
slumped by up to 49%. However, with demand from China and other developing
markets expected to remain strong, many analysts believe the bull run in
commodities will continue.
