Which sectors are holding up best in the market volatility?

Chris Salih 13/04/22 in Strategy

It has been a very tough start to 2022 for many investment funds and only three sectors out of 50 are in positive territory year-to-date*

The Investment Association (IA) Latin America sector is by far the biggest riser with an average return of 26.19%*. It is followed by the more modest increases of the IA UK Direct Property sector (2.79%*) and IA Infrastructure (1.36%*).

Latin America – top of the class

Latin American equities have been rising over recent months, which has seen Russia hit by economic sanctions from trading partners such as the European Union, UK, and US.

As we have seen, this has caused oil prices to soar (having already risen significantly as economies reopened) and global equity markets to fall sharply.

However, Latin American stocks appeared to have held up very well. In fact, they have proved to be extraordinarily resilient during this uncertain period, having been boosted by robust commodity prices.

Biggest losers

IA Short Term Money Market, meanwhile, has flatlined over this period, while the remaining sectors are all down since the beginning of January.

The biggest losers have fallen by double digit amounts. IA UK Smaller Companies and IA European Smaller Companies have slipped 13%*, while IA China/Greater China has lost 12.56%*.

IA Technology and Technology Innovations is down around 10%* over this first quarter, followed by IA Japanese Smaller Companies (-8.3%*) and IA Asia Pacific including Japan (-7.7%*).

Playing the winners

Of course, we all know that past performance is no guarantee of future returns. Just because a handful of sectors have done well this year, doesn’t mean they will continue rising.

It’s still important to base your decisions on factors such as your investment goals, attitude to risk, and research on particular sectors and markets.

However, if you want exposure to the three sectors that have topped the performance tables this year, then here are some funds to consider.

Latin America

This is one of the relatively new regional equity sectors that was introduced by the Investment Association last year. Funds in this sector invest at least 80% of their assets in Latin American equities.

ASI Latin American Equity

The objective of this fund is to generate long-term growth, defined as a minimum of five years, by investing in Latin American equities. At least 70% of assets will be invested in companies that are domiciled in – or derive a significant amount of their revenues from – these regions.

The management team focuses on finding high quality companies at attractive valuations that can be held for the long term. It also tries to maintain a diverse asset mix of countries, sectors and stocks.

Financials currently has the largest sector exposure, followed by consumer staples and materials**. Energy, industrials, consumer discretionary and real estate are among the other sectors**.

The largest stock holding, meanwhile, is the 6.4% in Petróleo Brasileiro, followed by the 5.4% in retailer Wal-Mart de Mexico, and the 5% in Grupo México, the conglomerate whose interests include mining and transportation**.

IA UK Direct Property

This sector is for funds that invest at least 70% of their assets directly in UK property over rolling five-year periods. UK property is defined as real estate located within the UK.

TIME: Commercial Long income

This fund aims to provide investors with a consistent income stream and some capital growth by acquiring properties with long leases. These assets can include commercial freehold ground rents and commercial freehold property. Interestingly, around 94% of rent reviews are linked to inflation or have a fixed uplift, rather than being subject to open-market negotiation**.

On a regional basis, the East Midlands currently accounts for the largest share of assets (25.5%**), followed by the 20.4%** in the South West, and 13.2%** in the South East. The majority of the rent reviews are also upwards only. This helps to provide some degree of clarity over future income, which is useful in the current environment.

In their latest commentary, the fund’s managers Nigel Ashfield and Roger Skeldon pointed out that the portfolio doesn’t have any properties without tenants. “The fund and its property portfolio are well-positioned, and we anticipate the positive performance in property values to continue, with an annualised income return of around 3.5%, with that income return expected to grow in 2022,” they wrote.

IA Infrastructure

This is another sector that was introduced last year by the IA. It’s for funds investing at least 80% of assets in companies involved in the ownership, operation or maintenance of infrastructure assets. These can include utilities, energy, transport, health, education, security, and communications.

First Sentier Global Listed Infrastructure

This fund doesn’t invest directly in infrastructure assets. Instead, it invests in shares of companies that are involved in infrastructure around the world – and is well diversified in terms of both sector and country exposure.

According to First Sentier, despite the fact that over the past 15 years, global listed infrastructure has returned over 3% more than global equities on average with a lower level of volatility, many global equity managers hold less than 2% of their portfolios in infrastructure assets – and those tend to be concentrated in larger utility names.

“We have generated much of our alpha from growing mid cap stocks, such as toll roads, oil storage and gas utilities, which are often under-researched by global equity managers,” it stated.

The most recent fund factsheet illustrates its exposure to a wide variety of sectors. These include electric utilities, highways and railtracks, multi-utilities, and railroads**. It is also invested in specialised Real Estate Investment Trusts, oil and gas storage and transportation, airport services, gas utilities, water utilities, and construction and engineering**.

*Source: Morningstar Direct data, 1 January to 31 March 2022
**Source: fund factsheet, 28 February 2022

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.