January’s top and bottom performing funds

A round up of the notable market and fund sector trends in January 2022 as the prospect of more aggressive interest rate rises spooked markets.

| 6 min read

The strong returns of last year partially unravelled in a poor first month of 2022. In the US, the tech-heavy Nasdaq index fell into ‘correction’ territory – a drop of 10% or more from the most recent high – down by 15% at its trough before staging a rally towards the end of the month.

The proximate cause was action in the bond market where fears of rising interest rates gathered momentum. The Federal Reserve had its first interest-rate setting meeting of the year, and while the decision to leave rates on hold for another month wasn’t a surprise, the tone from the Fed was more ‘hawkish’ than investors had expected. Markets now expect interest rates to rise further and faster than they did before. In the US at least, four hikes are anticipated this year, and this shift pushed bond yields up significantly, meaning prices fell.

With virtually everything priced against government bond yields as a yardstick, most assets were under pressure. Earlier stage tech stocks, and those with little in the way of earnings today but lots of ‘jam’ expected tomorrow, were most affected. As the potential returns from lower-risk investments (government bonds and cash) rise, investors want to see higher returns to justify prices. Equities whose cashflows are mainly further into the future thus become less appealing in this situation and companies with decent shorter term returns seem a better option, especially if they are good at passing on inflation through higher prices. Yet if the cost of borrowing rises and higher costs weigh on profit margins most shares feel the headwind to a degree.

A market rotation

Markets were also concerned about potential conflict in Ukraine. Russian forces gathering on the border helped push up the oil price, which only fuelled inflationary fears further. US President Joe Biden warned of a "distinct possibility" that Russia will invade Ukraine next month, and Russia said it saw "little ground for optimism" in resolving the crisis after the US rejected Russia's main demands.

The Dow – which is heavier on non-tech stocks with lower expectations of growth – was more resilient. So too the UK market where the composition that includes chunky weights in banks, energy and miners offered resilience in the face of inflationary concerns – something I noted in my recent article on the UK market. A strengthening dollar against the pound has also helped the UK blue-chip index, as it has an array of multi-nationals with profits in sterling. Specialist areas such as natural resources and Latin America, owing to its resource-laden economy, also fared relatively well during the month.

This trend continues a ‘rotation’ seen in the fourth quarter of 2021 with investors eschewing businesses that have done well during the pandemic in favour of ‘value’ and ‘cyclical’ businesses, which tend to increase profits when the economy improves, or which directly benefit from higher commodity prices.

Short term outlook hinges on inflation

Markets remain choppy and our prognosis that 2022 promised a more difficult environment than we have seen for the past couple of years seems to be coming to pass. Policy makers at central banks have a tough job on their hands as they attempt to unwind their pandemic support without upsetting the recovery. Should wage rises escalate and inflation become embedded, then they would need to take tougher action to rein in prices. If they overreact, they could accidently engineer a downturn.

Nonetheless, it makes sense for central banks to ‘normalise’ now, while economic growth is reasonable, employment is high and companies are making good profits. Overall, they will be aiming to remove stimulus in a measured way to facilitate an orderly transition without slamming the brakes on too hard. Our base case assumes a tailing off in inflation later this year, based on the assumption that average wages growth will be below peak inflation levels. Moreover, most of last year’s rise in inflation was driven by rebounding energy prices and a shift in how households spent money during lockdowns – bumps that will probably fall away as we progress through the year. There’s more on our views on inflation in this article.

This should allow a ‘softer landing’ to take place without upsetting economic growth and corporate health – at least in respect of companies with robust balance sheets and strong cashflows. More marginal or speculative businesses that have been fed with cheap money are likely to find the going tougher, though.

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 January 2022 in full:

Top 10 funds:

Bottom 10 funds:

Top 10 sectors:

Bottom 10 sectors:

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 January 2022: 31/12/2021 to 31/01/2021. Onshore and retail open-ended funds only.

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

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

January’s top and bottom performing funds

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