The FTSE 100 index of Britain’s biggest stock market-listed companies has enjoyed its strongest year since 2009, jumping from 6,137 at the start of the year to touch nearly 7,000 this week. Wall Street’s S&P 500 has hit record highs, with British investors gaining even more in sterling terms because of the fall in the currency. This has meant that some of the biggest funds popular with small investors – such as M&G’s £6.3bn Global Dividend – have made gains of nearly 40% over the past year.
But not everyone has shared in the party. The single biggest fund in the UK, Standard Life’s £26.3bn Global Absolute Return Strategies, has managed to lose money when almost everyone else has been coining it. The fund is down 3.3% over the past 12 months, compared with the 17% gain made by UK index-tracking funds over the same period.
Star fund manager Neil Woodford has also had a poor year, making just 2.7% over the past 12 months for investors in his popular £9.2bn equity income fund.
The prize for the best performance of any fund in the UK goes to the little-known JFM Gold, which has given investors a return of 128% over the past year. Unfortunately, it’s only a £20m minnow, so we took a look at the big funds instead. M&G Global Dividend performed best, rising 39.4%, while Fundsmith Equity was up 28.2%. Both are heavily invested in Wall Street-listed stocks, which have rocketed in sterling terms. For example, Microsoft (a big holding in both funds) was trading at $54.80 at the start of the year and was $63.14 this week – a rise of 15%. But in sterling terms that translated into £37.27 at the beginning of the year, and £49 now – a rise of 31%. While the post-Brexit plunge in sterling will make holidays more expensive for everyone in 2017, it has turbo-charged returns for pension and Isa holders with investments in big US companies.
Billionaire Brexiter and hedge fund manager Crispin Odey reportedly made millions around the referendum, but investors who put money into his Odey Absolute Return fund won’t be smiling. It was the second worst performing fund of the year, losing 15.7% and beaten to the bottom only by an absolute return fund from Argonaut Partners. These hedge fund-style investments became popular a decade ago, but in 2016 almost everything with the words “absolute return” in their name turned into absolute rubbish. Sadly, we can assume their managers will still receive giant pay packets for their sterling performance.
So what will be the winning formula for 2017? We polled some of the leading managers and here’s what they think:
Stephanie Flanders, chief market strategist, UK and Europe, JP Morgan Asset Management
The former BBC economics correspondent reckons Donald Trump’s spending will boost the US economy in the near term, but US shares look fully priced, and Westminster has cloth ears about the Brexit issues facing London banks.
“Politics and policy are likely to dominate the headlines again in 2017. Voters have decided against business as usual and, increasingly, investors are also expecting a change. Whether either will be satisfied remains to be seen.
“The eurozone and Japan have come to the conclusion that when it comes to pushing down long-term interest rates, you can have too much of a good thing. So investors should not expect capital gains on bond holdings to compensate for low interest rates as they have in the past. People have been predicting a turn in the bond market for several years, only to see bond prices reach new highs. But in the past few years, inflation was heading down, not up. This time it really does look different.
“Eight years into a slow recovery marked by low productivity and weak investment, increased [Trump’s plans for] US public spending to support long-term potential growth could be positive for the global economy. But the policies Trump has suggested spending on are not those that economists would say are likely to give the highest return.
“In terms of the big picture, the S&P 500 has risen by 292% on a total return basis since early 2009, and a 50/50 portfolio of global bonds and equities has delivered an average annual return of 7.6%. That is higher than the 5.1% average annual return between 1998 and 2008, despite the weaker performance of the global economy.
“The most worrying thing [about Brexit] is how unrealistic the debate in the media and Westminster is compared with what anyone working in a major company or financial institution would tell you about the logistics involved – let alone trade negotiators and financial regulators, who think in terms of two- or three-year transition periods for even small demergers or regulatory reforms.
“The idea of having a transition is being read as a remainer plot to buy time to stay in the EU. That is the best way to have businesses in the UK and the EU planning for the worst. The transition deal we need is for both sides to agree upfront that whatever the outcome of the negotiations, nothing will happen on the ground for two years after that deal.”
Terry Smith, chief executive, Fundsmith
Don’t even try to predict the future, says the manager of the £8.7bn Fundsmith Equity fund.
“I am amazed by how much time and effort people waste trying to guess what will happen in known unknowns, such as Brexit, China, commodities, interest rates, oil prices and the US presidential election. Then there is the problem of unknown unknowns: the event that may cause a major move in the market may be one that no one has even spotted.
“So what should investors focus on? I would suggest just three things: invest in the shares of good businesses, stick to investing in things you understand and don’t worry too much about valuations. If you are a long-term investor, buying shares in a good business is more important than valuations. If you are not a long-term investor, what are you doing investing in the stock market?”
Edward Bonham Carter, vice-chairman, Jupiter Asset Management
On the watch list: a rise in inflation, greater volatility as politics takes centre stage and a possible end to the 35-year bond rally.
“Politics developed a nasty habit of gatecrashing the markets in 2016. The UK’s decision to leave the EU and Trump’s victory were, for some, like opening the door to an uninvited guest at a party that was going fine without them. Expect more of the same in 2017.
“While the first 100 days of Trump’s presidency will be scrutinised for policy initiatives, Europe is likely to move centre stage next year with elections in France, Germany and the Netherlands. The outcome of these may seal the victory of anti-establishment, anti-globalisation forces that have played a large part in the outcome of the EU referendum and Trump’s election.
“The implementation of protectionist policies would have only a limited impact in the dematerialised world we live in, where so much trade is in services and takes place online. Emerging economies may have more to fear, especially in light of Trump’s calls for 45% trade tariffs on Chinese goods, but even here there is hope, given over half of all Asian trade is done in the region.
“Trump’s plans to use tax cuts and increases in infrastructure spending to boost the US economy seems to be sending a clear signal that government fiscal stimulus and not central bank monetary policy should do the heavy lifting to galvanise the economy.
“Bond markets have reacted accordingly, with the expectation that all this stimulus will lead to greater inflation. The question remains whether the sell-off in the bond market marks the beginning of the end in the 35-year bond market rally.
“For stocks, inflation expectations are likely to influence outcomes in 2017. The return of inflation should benefit banks, which will earn more as central banks start to lift interest rates to keep a lid on rising prices, but also the metals, mining and energy sectors, as a pick-up in economic growth boosts demand for their products.”
Alex Tedder, head of global equities, Schroders
Get ready for the Trump boom
“The global cyclical upswing looks set to run further into 2017, supported by proactive fiscal policies from the new US president. Trump’s aggressive infrastructure and tax-cutting agenda may yet be watered down in Congress, but we consider it likely that much of it will make it through, with material implications for US growth and earnings.
“The current momentum in the US economy, boosted by the proposed Trump agenda, could deliver double-digit earnings growth in both 2017 and 2018. A $600bn infrastructure package could add around 0.25% to US growth, while a cut in the corporate tax rate from 35% to 15% could add 10% to US earnings growth for 2018.”
Do investment gurus really get it right?
Forecasts made by investment banks such as Goldman Sachs, JP Morgan and Barclays Capital are only marginally better than flipping a coin, and if you hold on to their “hot picks” longer than a few months you will almost certainly lose money, according to new research.
Intertrader, a spread betting firm, examined stock predictions from so-called (and highly paid) gurus at 16 investment banks, tracked them over the following 12 months and compared them to the returns on just putting your money into a savings account or a stock market index such as the S&P 500 on Wall Street.
“Investment banks’ recommendations are only marginally better than a coin flip,” says Intertrader. “The banks we looked at only managed to predict the correct direction their hot picks would go 55% of the time. And that is actually the kindest we could be – holding their predictions for longer just meant worsening results.”
Investors who bought and sold an investment bank recommendation within 30 days on average made a gain of just 0.8%. If they held it for 90 days, it moved to a loss of 1.48%, while over a year the average loss from buying an investment bank recommendation was 4.79%.
“We found that if you put the money you would have invested in a 3% high-interest bank account instead, your returns would generally be higher,” says Intertrader, which has created a Gurudex index that analyses investment banks.
The firm says the findings serve as a reminder of Warren Buffett’s words of advice on the value of stock market forecasters: “We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie [Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grownups who behave in the market like children.”
