Mark Dampier: Britain's small-cap funds punched well above their weight this year

 

It's been a good year for stock markets. In particular, European and Japanese markets have made large gains. There is a lesson here for all investors: despite a poor economic backdrop, stock markets can perform well. This is often because much of the bad news is priced in and markets are focusing on improved corporate prospects. Similarly, it shows the most uncomfortable investment decisions often turn out to be correct.

The best-performing European funds have made more than 30 per cent over the year to date. Hats off to Invesco Perpetual; its European Opportunities, European Equity Income and European Equity funds are in the top five. Legg Mason Japan Equity was the top-performing Japanese fund, up more than 60 per cent. The Neptune Japan Opportunities Fund, which hedges out its currency exposure, was up more than 40 per cent. My own favourite, GLG Japan CoreAlpha, returned a respectable 28 per cent, ranking 11th in performance.

The UK stock market has been continually written off by commentators, and a point I have made in many articles is that UK investors often fail to see the attractions of their own stock market. Smaller UK companies have had a fantastic year, and some of the top-performing funds have been in this sector. River and Mercantile UK Equity Smaller Companies is up more than 53 per cent and the popular Cazenove UK Smaller Companies by more than 45 per cent.

The strong performance of smaller companies has been felt in other sectors. In the UK equity income space Unicorn UK Income and Marlborough Multi-Cap Income occupy first and second spot respectively. Both have a bias to smaller companies. I have written recently about a trend in which fund managers are finding attractive opportunities further down the market cap spectrum, among some of the UK's smallest companies. It will be interesting to see how the Marlborough Nano Cap Fund fares next year: it targets very small companies, less than £100m in size.

Smaller companies have also performed well internationally and it is not surprising to see the Standard Life Investments Global Smaller Companies Fund appear as one of the best-performing global funds this year.

What of the laggards? They can mostly be found in the specialist sector, which usually has either the very best or the very worst funds. Top of the tables is AXA Framlington's Biotech fund, with an increase of 57 per cent. The bottom is full of gold mining and resource funds, the worst being Junior Gold, which has lost 65 per cent. Market favourite BlackRock Gold and General is down almost 48 per cent. Specialist funds are either brilliant or awful and it is difficult to predict which it will be. AXA Framlington Biotech has experienced lean times as well as good over the past few years. Often the winners of tomorrow can be found among the laggards of today, so perhaps gold-mining funds will have a better time in 2014. That said, momentum is still lacking in mining and resources companies.

Equities have shown bonds a clean pair of heels this year, but many bond funds have delivered respectable returns: some commentators have been suggesting bonds are a sell for more than three years but they keep performing. Strategic bond funds have generally held their own, with gains of over 5 per cent. My own favourite, Royal London Sterling Extra Yield Bond, is up around 10 per cent.

Developed markets have performed much better than emerging markets this year. North America has had a stellar year with funds up well over 30 per cent. It is extremely hard to find active fund managers that can consistently outperform in this area. Global emerging markets had a poor year with only a handful of funds making a return.

It should be remembered that, over the year, gains for sterling investors have been pared because of sterling strength. This was not expected at the beginning of this year as the dollar was supposed to get stronger. It goes to show that while it is interesting reading forecasts, the vast majority are normally wrong. Indeed, if you can find a consensus in them it is usually best to bet against it.

That said investment isn't about a one-year time horizon. Investors need to be looking closer to 10 years ahead rather than at what might be hot or cold over one year. I wish all readers a happy and prosperous new year.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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