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UK: a first quarter review of markets and funds
Amid a string of threats to world markets, the FTSE clung onto some minor gains in the first quarter. We reveal which funds weathered the storm best.
Amid a string of threats to world markets, the FTSE clung onto some minor gains and funds in the first quarter. We reveal which funds weathered the storm best.
Economy and markets overview
Nobody expected economic growth in the last three months of 2010 to be quite so bad. The 0.5% contraction, blamed largely on the impact of bad weather, set the tone for the months ahead: concerns over stagflation gained momentum; a rate rise looked too risky despite rising inflation; and the government was forced to use the March Budget to supplement its programme of spending cuts with something more closely resembling a plan for growth.
Even before the news on the economy, Brits were contending with the VAT hike to 20% that came into effect at the start of the year – not good for the crucial consumer spending needed to drive the economy forward. This rise coincided with a sharp decline in consumer confidence, which remained weak throughout the first quarter of the year.
Prominent in investors and economists’ minds though has been rising inflation and how we deal with it. Prices have steadily risen and the consumer prices measure of inflation (CPI) now stands at 4.4%. The UK is facing the same conundrum as most of the rest of the world: how to bring down inflation while keeping the economy alive.
The first line of defence against the corrosive effects of rising prices is an interest rate hike. Against a background of fierce debate – can the feeble economy handle a rate rise? – the Bank of England’s has so far resisted calls to unsheathe this weapon. The Bank’s monetary policy committee meets this week, but despite increasingly diverging views among its members, it is expected to again leave rates on hold at 0.5%. It will probably maintain this status quo until its August meeting, economists say. In the meantime, Capital spreads say: ‘The crunch of the BOE will come at the end of this month when we get the first release of Q1 GDP where expectations are for growth of 0.8%.’ Think tank Niesr estimates 0.7% GDP growth in the first quarter.
The Bank’s ability to raise rates depends on the strength of the economy. Tuesday brought some good news with unexpectedly strong data for Britain’s key services sector. However, this is balanced against other less upbeat surveys for the same industry, as well as evidence that the manufacturing sector could be losing its momentum.
The fragility of the UK economy has taken its toll on markets, conspiring with events around the globe to put the wind up investors. Unrest in the Middle East and North Africa – and subsequent oil price rises – the initial wave of fear that spread from Japan’s crisis, and the re-emergence of fears over the eurozone’s peripheral members all spooked investors. However, helped by signs that the world’s biggest two economies are looking upbeat, the FTSE 100 managed to finish the quarter with a slight rise to 5,908. The pound fell to a five-month low against the euro towards the end of the quarter, in part as investors took a punt on the European Central Bank raising rates before the Bank of England.
How investment funds fared
Investors in UK-focused funds in the first quarter of 2011 had a pretty good run considering the scale and number of ‘black swan' events. These would usually trigger dashes for safety when investors pull cash from riskier investments like volatile small companies and put it into the larger stable ones.
However, this rule of thumb was not entirely reliable as our review found that small companies have suffered the least from exotic economic shocks while medium sized companies fared the worst.
The benchmarks against which investors can measure the performance of their fund managers are the FTSE 100 which returned 1.44% over the period we looked at: 31 December 2010 to 30 March 2011 - the FTSE 250 which increased by 1% and the Hoare Govett Small Cap index, which tracks the share prices of UK smaller companies, returned 2.64%.
Using these as the baselines for performance, only the managers of smaller company funds have beaten their benchmark, returning an average of 2.66% over the period. The UK All Companies sector average was less impressive with managers returning an average of 0.97%.
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