Which sectors returned the most, lost the most, and what (if anything) this intimates for the coming year
In an earlier article, I looked at what trends had shaped the old year and were stamping their mark on the new. However, there is no immediate or necessary connection between macro trends—in this instance, ESG and inflation—and where the returns have been made. And it’s to this—the most positive and the most negative—that we’re going to look.
Table 1: Best-Performing IA Sectors, January-November 2021
Source: Refinitiv Lipper
The IA launched six new sectors in September 2021, with India/Indian Subcontinent being one of them. That proved quite prescient, as the newborn has delivered the top returns over the first 11 months of the year. Strong domestic and foreign direct investment has supported the market over the year, and there’s been something of an IPO boom—particularly with tech—to attract investors. That said, the market isn’t cheap, with analysts noting that India’s PE premium to other emerging markets is at a multi-decade high.
Oil and Water
The following three sectors illustrate that it’s been something of a year of extremes: the rebound of Commodities and Natural Resources shows that, despite the popularity of ESG, the game is far from over for old economy stocks—not least those held by the sector leader iShares Oil & Gas Exploration & Prod UCITS ETF USD A. This fund has returned a whopping 69.4% YTD, as rebounding economic activity has met with supply bottlenecks to send demand and prices for the sector’s products soaring—something we’re reminded of every time we cast a horrified eye over our gas and electricity bills, or watch the digits on the petrol pumps whizz past at dizzying speeds.
That’s also reflected in the top-performing North American fund share class: the SPDR S&P US Energy Select Sector UCITS ETF Acc, returning 53% YTD, and with its top two holdings, Exxon Mobil and Chevron, representing more than 40% of the portfolio as of the end of October. On the other hand, new economy and ESG funds, such as the Xtrackers MSCI USA Information Tech UCITS ETF and Xtrackers MSCI USA ESG UCITS ETF, both returning more than 32%, have also driven sector outperformance over 2021.
This bleeds into the next sector, which has a strong US tilt. Over 2020, Technology & Telecoms was the top-performing sector, and 2021 saw it return a healthy 19.5%, coming in fourth. In and of itself, that’s not massively surprising. What is perhaps, is that the sector’s top-performing funds year to date have all been passive vehicles, with four of these being ETFs (see table 2). The incorporation of these vehicles into IA sectors from September will have highlighted their potential and, in this instance, done those who’ve taken them up proud.
Table 2: Passive Triumph—Best Performing Technology Funds, January-November 2021
Source: Refinitiv Lipper
The Year’s Losers
Table 3: Poorest-Performing IA Sectors, January-November 2021
Source: Refinitiv Lipper
At the other end of the table, it’s been a disappointing year (again) for Latin American funds, with the sector losing 13.6% YTD. The previous year was similarly miserable, with a loss of 15.8%. The continent has been hit hard by COVID, and with its largest economy, Brazil, going into presidential elections in 2022, it’ll be a bold investor that hopes for a rebound from the region this year—especially in a rising rate environment.
Next comes China, the second-placed sector in 2020, which is now seeing losses of 8.2%. This seems an area where active management has been wrong-footed, with the MSCI China up more than 5% YTD, but returns running from almost negative 20% to more than 7%, and the top-returning fund being the Lyxor Hwabao WP MSCI China A (DR) UCITS ETF – Acc. After a very strong 2020, the following year has seen Xi Jinping tighten the leash on China’s tech firms, while the country has struggled with the shockwaves from its bloated property sector. It’s conceivable that both are digested next year, but the current emphasis on “common prosperity” means that holders of Chinese financial assets—especially foreign ones—will have to tread warily.
ETFs’ Bumper Year
If there’s a theme that comes through over the year, it’s that the Investment Association was right to include ETFs within its sectors. Intuitively, you might expect ETFs to be coasting along the middle of each group, cheaply and relatively cheerfully. But, as the above analysis shows, these funds have often dominated sector performance, whether at the top end, as with Natural Resources or North America, or at the bottom, as with China. The proliferation of ever-more specific indices makes this ever-more likely, and that’s before you consider the potential growth of active ETFs, something my colleague Detlef Glow has highlighted.
Active managers make the often compelling argument that they can orientate portfolios to take advantage of tailwinds and mitigate headwinds, thus optimising returns. But, as this year has shown, the evolving nature of passive management is raising the bar.
This article was originally published in Portfolio Adviser
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The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
