This year has been far from smooth sailing for investors, and you don’t have to look far to find the markets causing the worst of the pain. FE Research takes a look at 2015’s investment market nightmares for the UK retail investor.
Q3 this year has been anything but fun and games for investors. Concerns over China’s economy slowing down and the effect that is having on other emerging market economies - and the rout in the commodity sector on the back of this, has meant investors have had a bumpy ten months.
And who can forget Black Monday? Chinese stock markets bottomed out on the 24th of August - triggering a frenzied sell-off across both developed and developing equity markets – and many managers are still failing to make back the losses.
According to a recent report, seven of the world’s largest fund managers have, collectively, shed more than $700 billion in the brutal third quarter. The slump has now fuelled fears investors will pull more money out before year-end.
As investors evaluate market conditions and what may yet be in store, Patrick Enright, analyst at FE Research looks at the active funds which did worse than indexes in protecting investors’ capital this year.
Enright says: “When observing negative returns, investors should look no further than the following three IA sectors this year: Emerging Markets (bonds and equities) and Specialist (for Commodities funds).
“Investors should look at the maximum drawdown (the percentage difference between the peak to trough in a specified time period) to gauge how well they have done in the markets.
“The maximum drawdown highlights how much the unluckiest investor would have lost over this period, had they entered in the fund at the wrong time.”
FE Research found that the worst maximum drawdown for any fund in the IA Specialist sector in 2015 is the HSBC GIF Brazil Equity fund, which has lost 41.6%.
Unsurprisingly, the BlackRock World Mining fund has not safeguarded investor losses either, with a maximum drawdown of 38.8%.
In the IA Emerging Markets sector, the largest maximum drawdown figure in 2015 belongs to the FP Henderson Rowe FTSE RAFI Emerging Markets fund, which is 28.9%.
“Just under half of the fund is exposed to both China and Brazil, two highly correlated markets given Brazil’s reliance on commodity exports to support its economy, and the falling demand for such natural resources in China, as it attempts to rotate the economy away from industry to consumption,” Enright adds.
The Threadneedle Emerging Market Local Return fund has a maximum drawdown of 19.8%, the highest in the IA Emerging Markets Bonds sector. The fund holds a range of emerging market debt – including exposure to Colombian, Brazilian and Indonesian government debt, which continues to underperform given the relative strength of the US dollar.
Enright also adds that investors should look at downside risk as an indicator of how much an investor stands to lose if market conditions were to suddenly worsen.
The downside risk value of the Neptune Greater Russia & Greater Russia fund is the largest in the IA Specialist sector at 17.8%, and reflects the wider macroeconomic picture in the country right now, which is handcuffed by a low oil price and US sanctions.
Meanwhile the Lazard Emerging Markets fund exhibits the highest downside risk of any IA Emerging Markets fund, at 7.16%. Over half of the fund lies invested in China and key trading partners such as South Korea and Taiwan whose economies rely heavily on exports to the world’s second largest economy.
The Pimco GIS Emerging Market Local Bond fund has the highest downside risk of any in the IA Emerging Markets Bond sector at 6.36% illustrating how countries such as Brazil, with high amounts of dollar-denominated debt, are struggling in the face of dollar strength.