By STEPHEN MARRIOTT 24/06/2008
It’s now a year since the first effects of the credit crunch came to light and financial markets took fright. In this environment it’s been hard making money from the stock market. The FTSE 100 peaked at 6,732 on 15 June 07 and now stands at 5757 (16/6/08), some 14.5% lower. Over the same time world markets as measured by the MSCI World index (in sterling terms) have fallen by 10%.
However, even in bear markets there are pockets of opportunity. Taking a look at a list of the top performing funds over the last twelve months (to end of May 08) one finds that eight of the top ten funds reside within the IMA Specialist sector. In fact, as a group these eight funds have average returns of 39%. Though the specialist sector as a whole has lost 2% on average, this compares to the UK All Companies sector which has lost on average 10%.
The specialist sector is made up of a disparate list of funds including real property / property shares, health & biotech and financials all of which have all been struggling. The stars of the sector are predominantly made up of commodities and Latin American funds.
The best performer is CF Junior Oils Trust, which has returned 47% and as the name suggests invests in small to medium sized companies specializing in oil exploration and production. The next best is Neptune Russia and Greater Russia, which has also benefited from the oil/commodities headwind as c50% of the fund is invested in Energy and Materials. Latin America has also been a beneficiary of the commodities boom as the MSCI Latin American index (which most funds benchmark themselves against) features some 50% exposure to Materials and Energy with Brazilian companies making up a large proportion of this. For example, the Brazilian oil company Petrobas and miner Vale accounts for almost 30% of the benchmark. Nonetheless, Latin America is not just about natural resources. A number of countries in the region are growing very quickly and earlier this year Brazils’ credit rating was upgraded to investment grade - demonstrating the strength of its economy. Additionally the region largely avoided the issues surrounding the sub-prime crisis. Both Threadneedle Latin America and Scottish Widows Latin America have returned 36% over the last twelve months.
Commodities and Latin America (emerging markets) are notoriously volatile and should be treated with caution - after such strength one should step back and reassess. With commodities the jury is still out. Some experts believe we’re still at the early stages of the commodities cycle. For example, the legendary investor Jim Rogers is still a long term bull for the sector and most specialist commodity managers still point to supply constraints and the strength of demand from China and Asia. However, there are signs that some commodities are experiencing the effects of a Western slowdown – e.g. the copper price is now 10% lower than six months ago and over the same time period zinc is off 20%. Therefore, any slow down from emerging markets would inevitably impact demand. Also if a cautious mood prevails, commodities and Latin America could be exposed to profit taking. And when it comes to oil, most fund managers we’ve met recently, express surprise at its latest surge to $135 and believe that speculation has been behind the latest price rise. Even so, the consensus seems to be that high oil prices are here to stay.
Investors will naturally resist taking profits in those few areas that have been making them money, especially when there appear to be few alternatives. But those investors who’ve benefited from natural resources may have even more exposure than they realise. This is because Oil & Gas and Materials now accounts for over 30% of the FTSE All share index. Therefore, many generalist UK funds will already have a high proportion of assets in this area. Consequently it makes sense to continually re-value one’s portfolio and follow a balanced approach to investing – meaning that one should take profits in those areas where they are overweight and reinvest in those areas where they are underweight. It may not feel right, for example to be selling commodities and investing in smaller companies, but for some people this could be the right thing to do. Remember different investments all experience their own cycles and therefore perform in diverse ways and at different times. Therefore, combining dissimilar types of investments in a portfolio, can help to even out the highs and lows of investing.