Just as the public health story of this year has not been a straightforward tale of recovery from the pandemic, so the best performing investments of 2021 have not necessarily been those most keenly expected last New Year.
The Indian Subcontinent, Commodities and Natural Resources, and North America Investment Association (IA) fund sectors were the top performing categories year - but only the second of these featured widely in analysts’ predictions a year ago.
Jason Hollands of investing platform Bestinvest said that the picture in early January seemed to point towards a very different 12 months, with India suffering severe disruption from coronavirus and the US undergoing a highly charged change of administrations.
‘Japan meanwhile was broadly tipped to have a good year with an expected boost from the Tokyo Olympics in the summer, but ended up disappointing with a relatively meagre return of 4.4%,’ he added.
Here Bestinvest reveals the top sectors and the best performing funds of 2021 (data sourced from Lipper Investment Management from the start of the year to 13/12/2021).
Source: Bestinvest / Lipper IM. IA fund sector average total returns from 30/12/20 - 13/12/21
The US stock market with its heady valuations built up during 2020 was not expected to be among the winners this year – and indeed some analysts last winter were forecasting a major correction in the nation’s growth-stock heavy indices as inflation expectations and bond yields rose on the back of the incoming Biden administration’s massive spending plans.
However, while tech and other growth stocks did indeed come under pressure in the earlier part of 2021, North America has ended up as the third-strongest performing Investment Association sector in 2021 with total returns of 26.0%.
‘Equities have remained for many investors the only option as bonds and cash holdings are ravaged by inflation. And the US remains the premier equity market, accounting for a whopping 61% of the MSCI All Country World Index,’ said Hollands.
‘The much-touted rotation from growth into value stocks partially materialised and so 2021 has seen a more balanced outcome than the extreme divergence of 2020 when ‘growth’ stocks were the clear lockdown winners. While the US market has a strong bias towards growth stocks with 29% exposure to tech companies and over 10% to communication services in the S&P 500, it is not devoid of cyclical stocks. For instance, the energy and material sectors, respectively represent 2.7% and 2.5% of the index,’ he added.
‘With institutional investors still looking for quality in uncertain times, the US bull market has rumbled on, though historically stretched valuations remain a concern.’
In another unexpected development, the Indian Subcontinent was the highest returning sector of the year at 28.8%.
India’s burgeoning tech sector and its multi-industry conglomerates helped lift its main stock market index but this continues a volatile few years for Indian equities and funds.
‘It could be argued,’ said Hollands, ’that some of China’s troubles were India’s fortune as emerging market investors sought alternative fast growth areas outside the People’s Republic. Investors have been spooked by crackdowns on tech companies and the education sector and the ongoing woes at Evergrande, the country’s largest property company. It must also be remembered that while there are many reasons to be positive about India’s future, the narrative can change very quickly in emerging markets - just as it did for China this year.’
The vaccine rebound was expected to send demand for raw materials and energy soaring, particularly after the slump of natural resource prices in 2020. And, sure enough, the Commodities and Natural Resources sector was the second-best performer this year with a total return of 26.6%. Oil and gas were back in heavy demand and industry swiftly ramped up orders for earth metals.
‘Whether this is a new “commodities super-cycle” remains to be seen,’ said Hollands. ‘But it does look as if the much-reported death of old energy in 2020 was something of an exaggeration, as economies reopened and demand surged.’
The strongest performing fund of 2021, that is widely available to British retail investors, has been the Guinness Global Energy fund, which is a play on the world’s ongoing need for oil and gas during the transition to renewable energy 1. The fund returned 47.7%.
‘It might not be every sustainable investor’s cup of tea, however, and those who prefer to back clean energy can turn to the sister Guinness Sustainable Energy fund. Guiness Asset Management are leading specialists in the energy investing space,’ says Hollands.
The UK equity market started to re-emerge on the radar of global investors in 2021, after years of being relatively ignored, with a frenzy of private equity bidders scooping up UK companies. In particular, Britain’s small companies are currently a growth success story.
UK Smaller Companies, the fourth-fastest growing IA sector, returned 19.5% - notably ahead of the equivalent North American sector which grew 15.6%.
‘Smaller companies are by their nature faster growing, more nimble and responsive to rapidly changing environments,’ says Hollands. ‘The UK might lack the US's world-beating mega-cap tech giants, but we do nurture plenty of exciting smaller companies that often get bought out by bigger beasts – including overseas investors - as they grow.’
’As we head into 2022, UK equities look relatively cheap in comparison to other major markets and so I expect they will continue to attract international bargain hunters.’
1. Lipper Investment Management YTD, data as at 12/12/2021