September’s top and bottom performing funds

A round up of the major fund and sector trends in September as both share and bond markets slipped back in the shadow of ‘Table Mountain’.

| 5 min read

Investors faced up to the likelihood of a more drawn out process for taming inflation during September. Despite the sharp upward trajectory of interest rates markets anticipate difficulties in taming wage growth and squeezing inflation, especially in the service sector.

Although we may now be at the end of the cycle for interest rates, with price rises stubbornly persistent it may be a long time before we see the cuts that would provide economic relief for households and businesses. This is a very different profile from the typical tightening and loosening cycles of the past – the adopted analogy being more ‘Table Mountain’ than ‘Matterhorn’ – and it is making investors increasingly nervous.

Is inflation a tax?

In a recent interview Prime Minister Rishi Sunak characterised inflation as a tax. Technically, most people agree, it isn’t. But the stealth effect of prices rising ahead of income reduces our spending power and makes us poorer, so it has a similar effect. It’s clear inflation is now not just a central bank priority but a political one too, especially in the run up to elections on both sides of the Atlantic next year.

The imperative for getting the inflation genie back into the bottle is therefore likely to intensify, and the interest rate cloud raining on investors’ parade isn’t likely to blow away any time soon, especially given the recent surge in the oil price which could further undermine central banks’ best efforts.

India and Japan stand out

With this backdrop both equity and bond markets slipped back in September, including the technology sector which has provided investors with an oasis of strength in a desert of lacklustre returns year to date. Instead, the pockets of positive performance came from smaller areas, notably India where a number of positive factors supporting economic and corporate growth continues, such as positive government policies, favourable demographics, accelerating urbanisation, and an increasing middle-class consumer base.

Japan too bucked the trend with the market piquing investor interest due to the increasing focus of companies on governance and capital allocation. The nation is also gaining some traction in its fight against a long period of deflation that has seen the domestic economy stagnate.

UK market mixed

UK shares were also in positive territory, thanks in part to a weaker pound which makes overseas earnings more valuable in sterling terms, but also an upturn in the oil and gas majors which helped fuel funds in the UK equity income sector in particular.

However, broader UK shares in the form of smaller and medium-sized companies remained under pressure as evidence of the domestic economy losing momentum mounted. July’s 0.5% month-on-month drop in GDP is a concern, notwithstanding the dampening effects of inclement weather, while house prices are now dropping at their fastest rate since the Global Financial Crisis which likely heralds consumer caution heading into winter.

Bond recovery stalls

Following a seismic sell-off in bonds over the past year and a half, bond funds and sectors edged lower over the month, partially retracing a late summer bounce. However, prices may have started to stabilise and investors are now able to harvest significantly higher yields from both government bonds and the debt of companies – or ‘corporate’ bonds.

In our view, the bond market priced is now more realistically for the risks of an ongoing higher inflation and interest rate environment, and an asset class that could offer significant opportunities. That’s particularly the case for those who envisage a scenario of rates being cut a bit sooner and faster, perhaps in the event that central banks misjudge interest rate hikes and cause a hard landing for the global economy. In this scenario high quality bonds could offer defensive characteristics and some upside based on their sensitivity to interest rates. For more see my article on whether bonds are a good investment right now.

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 September 2023:

Top 10 funds:

Bottom 10 funds:

Top 10 sectors:

Bottom 10 sectors:

The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for September 2023: 31/08/2023 to 30/09/2023. Onshore and retail open-ended funds only.

*There are several thousand funds on sale in the UK. The Investment Association divides these into about 45 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.

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