- Investment Insight
- 5 minute read
2018 was a tough year. A benign start saw positive returns in our funds wiped out by early February as the first bout of volatility struck. Any gains recovered in Q2 and Q3 were again, broadly, swept away in late September with December leading equity markets meaningfully downward – US equities, for example, delivered their worst print for 50 years and all developed equity markets were down in unison. The only positive was GBP weakness against USD and JPY, which helped US and Japan equity holdings to not lose as much in GBP terms.
Whilst our Close Tactical Select Passive (TSP) funds weren’t immune from the turmoil, they proved multi-asset diversification works by avoiding the nadir of the market. All of our strategies outperformed their respective peers in 2018 – a pleasing relative return. Alternatives helped us to deliver this, carefully selected with low correlations to equities and fixed income in mind. See Figure 1 below.
Trends in the ETF market
Globally, net ETF inflows slowed in 2018 to ~$315bn* but still recorded their second strongest year ever. According to Amundi**, the US was the largest benefactor regionally (>$260bn inflows) ahead of Asia and Europe; equity the most attractive asset class (>$257bn inflows); and within fixed income, government bond ETFs swelled the most in Europe and the US ahead of corporate debt. In terms of trends, smart beta was the prime mover, with >$3.9bn of inflows ahead of SRI and other sectors and themes.
Notable fund stories for 2018
Where all developed equity markets were negative, gold was an important diversifier, particularly in Q4. Invesco Physical Gold was one of the best performing funds in 2018 returning +4.7% whilst broader commodities slumped by more than -5.0%. Alternatives also vindicated our multi-asset approach: infrastructure was a winner with most funds returning more than 3.5% over the year. And, as we’ve already highlighted for December, JPM Managed Futures finished the year up +2.5% providing hedge fund-style exposure, but through a cheap and transparent wrapper.
UK mid-caps fared worse than UK large caps in 2018, as Brexit uncertainty affected more domestic-oriented stocks. Consequently, FTSE250 trackers were Close TSP range's worst performers with HSBC FTSE 250 Index fund down -13.3% and Invesco market FTSE 250 down -13.5%. European equities mirrored this malaise with most holdings down on average -10% (X-trackers Euro Stoxx 50, -10.7%; Vanguard FTSE Developed Europe Ex-UK,-9.7%; and UBS MSCI EMU GBP Hedged, -11.7%); but again they were in-line with European equity markets.
Remembering that our Close TSP funds largely try to be the market rather than beat the market, it’s no surprise that portfolios ended 2018 underwater against such severe downdraughts. It’s never great to report absolute negative performance. But it’s heartening to see our relative outperformance, which is testament to our disciplined approach to being active-passive investors, reflecting our 'House View' faithfully, and conducting thorough due diligence on the providers and their funds which make it into our portfolios. We believe these attributes will reward the patient investor when markets are at their most testing.
Thank you for your support in 2018 and we look forward to working hard for your money in 2019.
Figure 1 - pricing spread: bid-bid, data frequency: daily, currency: GBP
*ETF.com, January 2019.
**Amundi Global ETF YTD Flows, December 2018
This article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients. The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.