Funds investing in tech stocks, European equities and Japanese companies have led the bull market that has been in play for the past two years, according to FE fundinfo data.
Markets reacted violently to surging inflation and interest rate hikes in 2022, with both stocks and bonds tanking. However, markets bottomed out on 13 October 2022 and have been grinding higher – with the occasional setback – ever since.
The MSCI AC World index has made a 35.6% total return (in sterling) over the two-year bull market, while gold is close behind with a 35.5% gain and corporate bonds are up 4.3%.
Other areas, however, have struggled, with government bonds down 4.6%, oil falling 8.1% and the broad commodities index dropping 13.2%.
Performance of asset classes over 2yrs
Source: FE Analytics
Tom Stevenson, investment director at Fidelity International, said: “It’s been a text-book bull market so far. On the basis of valuations 10 years ago, you might have expected a low teens annual return from shares over the subsequent decade and that is exactly what has been delivered.
“It just goes to show that investing when others are fearful (remember the eurozone sovereign debt crisis?) tends to be well rewarded.”
However, the returns of the past two years have not been equally distributed. Quality, growth and momentum stocks have outperformed the wider market, as have large-caps; this left value and income stocks as well as small- and mid-caps underperforming.
Performance of MSCI AC World and sub-indices over 2yrs
Source: FinXL
In terms of geographical performance, the tech-heavy Nasdaq 100 has made a 54% total return over the past two years, followed by the Euro STOXX (up 44.8%) and the S&P 500 (up 39.2%). Foreign exchange dynamics influence these figures; in local currency terms, instead of sterling, the S&P has beaten the Euro STOXX by a wide margin.
Emerging markets have struggled with Brazil down 8.4%; China was having a hard time as well, until it was recently buoyed by monetary and fiscal stimulus.
Information technology has been the best performing equity sector, rising more than 75%. This is far higher than the next-best sectors: industrials (up 42.2%), financials (up 36.3%) and consumer discretionary (up 25.4%).
Energy is the worst equity sector, gaining just 6.3%. This reflects the fact that the bull market was kickstarted, in part, when inflation eased and energy prices moderated.
But how have funds performed in this two-year bull run? The below chart shows the average return for all Investment Association sectors over the period.
Performance of fund sectors over 2yrs
Source: FinXL
As would be expected given the backdrop noted above, tech funds have made the highest returns with the average member of the IA Technology & Technology Innovations sector up close to 60%.
Despite interest rate hikes hitting tech stocks harder than most, they have rallied strongly over the past two years thanks to the rise of artificial intelligence (AI). A significant portion of those returns was down to a handful of companies – the so-called Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla) – although their dominance has waned in recent months.
European funds have narrowly beat the IA North America stocks, although as noted above this is down to the exchange rate dynamics between the pound and the underlying dollar and euro currencies of the funds.
Financials and Indian equity funds are towards the top of the performance tables as well, as are the UK equity sectors. Financials tend to benefit from higher interest rates while Indian stocks have been supported by factors such as robust economic growth, proactive government policies and strong corporate earnings.
At the bottom of the rankings are bond funds and those investing in Latin American, Chinese and commodities stocks.
Source: FE Analytics
Of the individual funds in the Investment Association universe, one has made a return of 100%: iShares MSCI Poland UCITS ETF.
Poland’s economic performance has impressed over the past couple of years, with government policies and infrastructure investments helping the country to hold up better than many of its European peers. Meanwhile, around half of the ETF is in financials stocks, which have performed strongly thanks to higher interest rates.
The rest of the table has more familiar themes, including the outperformance of tech stocks. Half of the 26 funds in the above table reside in the IA Technology & Technology Innovations sector or focus on technology investments.
Some of the larger tech funds in the table are Pictet Robotics, iShares S&P 500 Information Technology Sector UCITS ETF, Polar Capital Global Technology, Xtrackers MSCI World Information Technology UCITS ETF, Pictet Digital and L&G Global Technology Index Trust.
Meanwhile, outperforming IA North America funds will have significant exposure to tech stocks, given their dominance of the market.
The presence of Nomura Japan Strategic Value and GS Japan Equity Partners Portfolio reflects the fact that Japanese equities have just gone through a strong couple of years, on the back on improvements to corporate governance.
Finally, Ninety One UK Special Situations is the only UK equity fund at the top of the performance rankings, highlighting how some value funds have managed to make healthy returns despite the overall climate favouring the growth style.