Investing: best- and worst-performing shares and funds 2016

It’s been a great year for passive investors and gold, but once again absolute return funds have disappointed. Here are the best and worst shares and funds of 2016.

As 2016 draws to a close the results are coming in on which funds and shares have proven to be winners in these turbulent times, and which have left investors with a bad taste in their mouth.

“It’s been a great year to be a stock market investor, and yet another poor year to be a cash saver, as interest rates fell to a new record low in August,” says Laith Khalaf, a senior analyst at investment firm Hargreaves Lansdown.

“Stock market investors found themselves quids in as a result of the fall in the pound, which helped boost the price of both UK and overseas shares.”

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Passive beats active

However, while many investments have boomed, fund managers have failed to dazzle, with the average UK stock market fund underperforming the FTSE All Share this year by 5%.

So, if you are invested in actively-managed FTSE funds you’ve paid a fund manager who has failed to achieve what a passive fund has done.

Research by Hargreaves Lansdown shows that the average UK All Companies fund returned 8.7% in 2016, compared to a 13.7% return from the FTSE All Share index.

“This is to be expected in a year when the mega-caps have done so well, as active managers tend to be underweight in the FTSE 100, particularly the very biggest stocks, and overweight the FTSE 250, which has fallen behind the blue chips in 2016,” says Khalaf.

These results will fuel the debate over active vs passive funds, but Khalaf believes you need both in a balanced portfolio.

“Both are useful tools, however investors should make sure the active funds in their portfolio are run by high calibre managers, and not benchmark huggers, otherwise they might as well go passive.”

The markets in 2016

The falling pound has helped investors in overseas markets this year. For example, the Japanese stock market has barely moved, rising just 1.5%, but thanks to plunging sterling UK investors have benefitted from a 23% return.

Meanwhile, US and Emerging markets are up an impressive 31% thanks to strengthening stock markets and positive currency movements.

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The best funds

Resources funds have had a good year largely thanks to the surge in the gold price, which rose by $70 over the year.

“When you factor in a 15% fall in the pound against the dollar, that has left investors in gold and gold mining companies with a healthy return over the course of the year”, says Khalaf.

“Low interest rates and political upheaval continue to be supportive of the yellow metal.”

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The worst funds

At the other end of the scale lie several absolute return funds which “does nothing to assuage concerns that absolute return funds may not live up to their billing,” says Khalaf.

The three funds at the bottom of the table all have more impressive returns over the long term, but their positioning here show that absolute returns “can be anything but a smooth ride.”

Absolute return funds aim for a positive return over, at most, three years, but they all go about that in very different ways with varying levels of risk.

Property funds have also had a rough year after many had to suspend trading over the summer in order to sell properties to meet demand for withdrawals.

“While some order has now returned to this sector, the underlying risk of another big freeze remains, if we see another run on commercial property funds,” says Khalaf.

“Meanwhile managers are holding high levels of cash to try to avoid running into problems, which will act as a drag on investor returns.”

This table also serves as a reason  not to judge a fund by short-term performance. “Even good managers have bad years,” says Khalaf, which is proved by the presence of Steve Davies’ Jupiter UK Growth fund in the list.

“His top ten holdings reads like a roll call of Brexit losers, including Lloyds, Dixons Carphone, and IAG.”

But, over five years the fund is still more than 20% ahead of the UK stock market.

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The best shares

It has been a great year for mining stocks thanks to rising commodity prices and a falling pound, but the huge returns banked this year don’t take these stocks back to the peaks they have seen in recent years.

For example, Anglo American’s quadrupling share price only makes up ground lost in 2015, “amply demonstrating why the sector falls firmly into the camp of cyclical stocks,” says Khalaf.

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The worst shares

The shares languishing at the bottom of the FTSE can blame Brexit, as the economic uncertainty it brings has hit airlines, retailers and construction firms.

Capita has suffered a particularly bad year issuing a profit warning in September as a result of business customers delaying decisions, “probably as a result of the Brexit vote,” says Khalaf.

To add to its problems it has rising debt levels, operation delays on the IT systems for London’s congestion charge and a contractual dispute with the Co-op bank.

Another company keen to see the back of 2016 is Royal Bank of Scotland which failed a stress test, struggled to offload Williams & Glyn and faced yet more litigation costs.

“The bank has lost a third of its value since the start of the year and in July, RBS shares traded at their lowest price since 2009,” says Khalaf.

“While the stock has since recovered a bit of its poise, the share price needs to more than double from here before the taxpayer breaks even on the bailout.”

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