Twenty-four out of 1,941 stock funds: That’s how many managed to avoid this year’s carnage.
After a far-from-stellar 2015 for equities, almost no one was prepared for such a rough start to 2016. As shares worldwide have plunged 8%, the only funds in positive territory were those lucky enough to focus on utilities and other industries deemed defensive - those seen as more immune to an economic slowdown.
Less than a repudiation of investing skill one month into the new year, the data show the pervasiveness of losses in global markets where $6.5tn has been erased. Almost nothing has worked in 2016 as last year’s winners health-care and consumer stocks joined in the meltdown since December 31.
“The vast majority of people were caught off guard,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W Baird & Co in Milwaukee. “Utilities, telecoms are the kind of sectors you would jump into - companies that do relatively well in downturns because they offer products that people won’t stop using. We’re starting to see a rotation into those sectors, and it’s an expression of people preparing for a lower-growth world.”
With stocks plunging, volatility is on the rise as oil’s decline shows no signs of abating and worries about China’s slowdown intensify. This year, utilities were the only industry group in the MSCI All-Country World Index that managed to avoid losses.
Skip Aylesworth, who oversees the Hennessy Gas Utility Fund, says the turmoil is likely to continue. With a 2.3% advance in 2016 through Tuesday, his is one of the top performers among equity funds tracked by Bloomberg with more than $1bn in assets.
“If you’re thinking volatility, you would want to shift into utility companies, real estate - sectors that might help ride out the storm,” Aylesworth said. Spectra Energy Corp and Dominion Resources are among his biggest holdings. He likes natural-gas companies because they’re poised to benefit from consumers looking at the commodity “as a fuel of choice,” he said.
The Reaves Utility Income Fund and Franklin Utilities Fund were the biggest gainers, up 5.1% in 2016. More than 85% of their holdings are in US stocks, with DTE Energy Co, Dominion Resources and Edison International among their biggest. BlackRock funds focusing on miners of precious metals and the Shinko Resona JREIT Active Open, holding Japanese real estate investment trusts, were also among the biggest advancers, with rises of more than 2.5%.
An index tracking defensive companies globally has jumped to a record high relative to a gauge following cyclical ones - those more affected by the economic trends. With an estimated dividend yield of more than 4%, utilities and telecommunication shares in the MSCI All-Country World Index are seen as a haven. JPMorgan Chase & Co upgraded the US companies in both industries last week, while cutting its estimate for the Standard & Poor’s 500 Index by more than 9%.
The start of the year was a surprise to most. In December, strategists projected the S&P 500 would rise to 2,216 by the end of 2016 - or an annual 8.4% - and the Stoxx Europe 600 Index to 415, a 13% surge. A month later, they cut their estimates to 2,190 for the US gauge and 402 for the European one, while analysts slashed profit forecasts at companies in both regions.
Old Mutual Global Investors’ Global Equity Absolute Return Fund managed to avoid losses in a different way. The fund buys and shorts stocks across industries while remaining market neutral, allowing it to weather tumultuous times.
“We built a portfolio where it doesn’t matter how the underlying market is doing, or whether volatility is moving, or whether investors are scared like they seem to be right now,” Ian Heslop, Old Mutual’s head of global equity, said in a phone interview. “We look at company fundamentals, if investors are buying or selling the stock, and the overarching view on what type of market we’re in.”
As for the worst-performing funds, they all focused on China. The ICBC Credit Suisse Internet Plus Equity Fund and Rongtong Leading Growth Fund have slumped more than 27% this year as the Shanghai Composite Index has lost 23%, the most out of 93 equity gauges tracked by Bloomberg.
Defensive stocks will keep performing better than the market because volatility is unlikely to subside in the short term, according to Hennessy Funds’ Aylesworth.
“At least until oil stabilises, we are at risk on the general equity side,” he said. “In that environment, we’ll have more volatility than we historically have had - but still less than the market.”