Best performing funds of 2023

As we entered 2023, the outlook for the global economy was weak. Inflation was rampant, interest rates were on an upward trajectory and recession seemed probable. Despite these inauspicious conditions it was a year where a traditional balanced portfolio fared well. This was in stark contrast to 2022 when there were few routes of escape from a simultaneous sell off in share and bond markets.

Economic rumbles failed to escalate into full-blown crises with turbulence in the financial sector contained and companies largely resistant to rising interest rates thanks to cheap debt secured in previous years. The US economy in particular remained robust with the labour market tight. Yet with inflation proving sticky, worries mounted over the summer months that tighter monetary policy was not filtering through to the real economy as fast as anticipated.

Expectations about inflation, and the path of interest rates to needed to contain it, subsequently shifted dramatically into the year end. Markets rallied almost across the board in November and December on hopes that the last of interest rate rises are behind us and that economies will by and large experience a ‘soft landing’. The sentiment was seemingly underscored by the US Federal Reserve, which held interest rates steady in December but indicated that members of the rate-setting committee predict three quarter-point cuts next year.

The ‘Magnificent Seven’ ride on

For investors, the combination of economic resilience and less hawkish central banks led to some strong returns, with all major asset classes ending the year in positive territory. The most notable trend within this was the remarkable performance of the ‘Magnificent Seven’ stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) whose share prices rallied sharply as perceived beneficiaries of artificial intelligence (AI). Funds with healthy weights to this small band of stocks, or the technology sector more broadly, were the top performers.

Without these stocks global and US indices would look less impressive, but some high single-digit returns were eminently achievable even outside technology-laden markets. In emerging markets India and Latin America performed well as the surpassed growth expectations, and European funds also showed double digit percentage gains. Achieving ‘healthy’ levels of inflation helped make Japanese equities one of the outstanding markets of 2023 too, though a weaker yen diluted returns for overseas investors.

Fragile China and UK lags

Investors in China began the year with high hopes. Strict lockdowns had resulted in excess savings and pent-up demand, which fuelled a spending boom when restrictions were lifted late in 2022. Yet underlying economic frailties centred around the important property sector beset the rebound. The country then fell into deflationary territory for the second time during the year in October, while manufacturing activity shrank for a second consecutive month in November – and at a faster rate – suggesting that more stimulus measures will be needed to restore confidence.

As for the UK, a resilient performance versus other markets in 2022 gave way to lacklustre returns in 2023. Weaker energy prices were a headwind for the FTSE’s oil and gas heavyweights while more broadly a weaker dollar was negative for businesses with mostly overseas earnings. Smaller companies suffered overall from expectations about the domestic economy, and although they joined in the year-end market rally, they still finished slightly lower over the 12-month period.

The standout sector disappointment was healthcare, which endured a COVID-19 hangover as some companies saw revenues decline following the end of the public health emergency. Demand for diagnostics and the equipment used to manufacture vaccines also waned. Enthusiasm for a new class of weight-loss drugs proved a bright spot, and these treatments may have other health benefits too including reducing the risk of death from heart attack, stroke or cardiovascular disease. There’s a general shift to prevention therapies rather than cures across the industry which is creating both winners and losers.

I’ve been expecting you Mr Bond

This was the year we could declare “bonds are back”, although there was much volatility along the way as inflation and interest rate expectations gathered pace through much of the year before receding very sharply in the run up to the festive period.

Bonds are typically valued by the yield they provide in the context of inflation and interest rate expectations, and as the price of the bond rises, the yield falls and vice versa. The 10-year US Treasury bond, seen as the world’s benchmark bond, saw a remarkable move in a very short space of time with the yield falling from 5% in the middle of October to under 4% before the year end amid the about-turn in rhetoric from the US Federal Reserve.

Bonds of all shapes and sizes joined in the rally with government bonds yields in the UK and US ending the year more or less where they started. Meanwhile, it was a particularly good year for high yield bonds, which benefitted from both a fall in interest rate expectations and the anticipation of an economic ‘soft landing’ keeping defaults to a minimum.

Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for 2023.

Top 10 performing funds of 2023

Bottom 10 performing funds of 2023

Top 10 performing sectors of 2023

Bottom 10 performing sectors of 2023

Wondering where to invest this year? See my top four funds for 2024.

Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for 2022 year to date: 31/12/2022 to 31/12/2023. Onshore and retail open-ended funds only, excludes funds in the process of being wound up or suspended from dealing.

*There are several thousand funds on sale in the UK. The Investment Association divides these into nearly 40 ‘sectors’, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.