The best investment funds of 2014 – and the financial turkeys

It was another good year for investors, with markets in bullish mode

On the up: 2014 was another good year for many investors in the stock markets. Photograph: Andrew Burton/Getty Images

Tue Dec 23 2014 - 02:00

The year may be ending in turmoil as Russia lurches towards a financial crisis, but overall 2014 was another good year for investors. With markets across the world in bullish mode, many investors will have enjoyed double-digit growth, far in excess of what they would have earned by keeping their money on deposit.

Some indices, such as the broadly based S&P 500, reached new highs during the year, while the Nasdaq touched a 14-year high. Closer to home the Iseq was back at 2008 levels.

Despite the gains, however, investors who allocated pre-financial crash may still be sitting on losses.

But which were the best and worst of the bunch? We take a look at the performance of Irish domestic funds as compiled by Moneymate.

US equities

Although the US bull market continued in 2014, not all markets were buoyant. Mid-cap stocks, as evidenced by growth of just 6.9 per cent for the worst-performing fund on the list, VAM funds, struggled in a domestic economy which has yet to fully turn the corner.

Funds invested in US indices continued to perform strongly, however, with Blackrock’s passive fund, which tracks the FTSE AllWorld USA Index, the strongest performer.

But despite the strong returns this year, the bull market still has space to run if you have yet to invest in US equities, according to Andrew Milligan, head of global strategy with Standard Life Investments.

“What we’re looking for are corporate earnings growth and companies that are able to achieve good corporate earnings growth,” says Milligan, noting that the US still has an expanding economy which should continue to drive earnings. While falling oil prices will hit companies which benefit from higher prices, he also expects it to boost consumer spending, as the benefit of lower petrol prices starts to come through. This in turn will help increase earnings.

However, he is looking towards more muted returns in the year ahead.

“I don’t think it will be wonderful but at about 5-10 per cent, it will still be reasonable,” he says.

BEST

Axa Financial Blackrock US Index +26.6 per cent (annual management charge/AMC: 0.5 per cent)

WORST

VAM Funds US Mid Cap +6.9 per cent (AMC: 2.25 per cent)

Emerging market

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Emerging stock markets did not perform as one in 2014. For every market that soared (eg India), there was another which plummeted (eg Russia). As a result, the best performing funds during the year tended to be those which were concentrated in a market which outperformed, rather than those which took a broader, more diversified approach.

Actively managed funds tended to perform better in this category.

"A lot of people say active is the way to go," says Killian Nolan, head of investments with RaboDirect, pointing out that buying a broad index in emerging markets can be risky, as it may include stocks which do not have good corporate governance.

“You need to be more active in those spaces and pick out the best companies.”

Investors in India saw the best returns in 2014, with Danske Bank’s actively managed Invest India top of the bunch with returns of 54 per cent. Its top holdings include Housing Development Finance (9.1 per cent), Infosys (7.7 per cent) and Tata (7.4 per cent).

Irish Life’s Fidelity India Fund was another stellar performer, up by 52 per cent in the year. While it does charge a hefty 2.25 per cent in annual management charges, it’s hard to quibble with the cost given its performance in 2014.

Chinese funds also performed strongly – Fidelity’s Chinese fund advanced by 18.4 per cent, for example – but if you had spread your risk, you wouldn’t have seen your portfolio grow by as much. For example, Zurich Life’s Global Emerging Markets equity fund, which is managed by Aberdeen, returned 11.4 per cent and had just a 14.7 per cent allocation to India, with a greater holding (16.9 per cent) in China/Hong Kong.

Similarly, Fidelity’s EMEA Fund, which invests in shares from emerging Europe, Middle East and Africa, and is distributed by Irish Life in Ireland, only returned 1.2 per cent in the year. It was heavily invested in South Africa (47 per cent) and Russia (19 per cent).

Looking ahead, Nolan expects more volatility, but notes that countries like China, India and South Korea are likely to post returns of 5 per cent plus into 2015. However, he cautions that investors may want to seek out funds with lower allocations to countries like Russia, and Brazil, which has been hurt by the decline in commodity prices.

BEST

Danske Invest India +53.84 per cent (AMC: 1.6 per cent)

WORST

Irish Life Fidelity EMEA Fund +1.2 per cent (AMC: n/a)

Technology

Technology stocks continued to roar ahead in 2014, despite concerns that the sector, and particularly social media names such as Facebook and Twitter, are overvalued. Top of the bunch was Zurich Life’s Top Tech 100 fund, which tracks the Nasdaq 100 index.

Its significant holding in Apple (13.4 per cent) was a key factor in its strong performance, given that the gadget giant has surged by almost 45 per cent this year. Microsoft (8.5 per cent) and Google (4.3 per cent) were the other main holdings.

While Aberdeen Asset Management’s technology fund also had a good year, its gains were more muted given its lack of exposure to Apple. Its biggest holding was Oracle (6.7 per cent).

Indeed, shunning Apple in 2014 has been described as one of the biggest blunders investment managers could have made.

BEST

Zurich Life Top Tech 100 +34.2 per cent

WORST

AAM Global Technology +17.5 per cent (AMC: 1.75 per cent)

European equities

With a 26 per cent allocation to financials, Blackrock’s Euro markets fund, offered for sale by Zurich Life in Ireland, underperformed during the year, losing 4 per cent.

A better option in 2014 would have been Threadneedle’s European Select fund, also distributed by Zurich Life. Its European Select fund returned 12 per cent by focusing on consumer goods (27.3 per cent), healthcare (19.3 per cent) and basic materials (16.1 per cent). It has a preference for globally diversified stocks, rather than relying on the sluggish European market.

Its top holding, for example, is German pharma/agriscience/polymer company Bayer (6.7 per cent), followed by Novo Nordisk (6.5 per cent), L’Oréal (5.5 per cent) and Unilever (5.0 per cent).

But what about the outlook for 2015?

“I’m less bullish at this moment in time on European markets,” says Milligan, but adds, “we’re getting more interested in European stocks; we’re not negative.”

For Milligan, the euro exchange rate, as well as prospects for European corporate earnings, will likely inhibit stock market growth, while the much-discussed quantitative easing from the European Central Bank is unlikely to be enough to stimulate the stagnant European economy.

“QE is necessary but not sufficient; QE on its own we don’t see as a magic wand – it will help at the margins but it’s not the be-all and end-all,” he says.

BEST

Zurich Life Threadneedle European Select +12.1 per cent (AMC: n/a)

WORST

Zurich Life Euro Markets (Blackrock) -3.99 per cent (AMC: 1.2 per cent)

Property

Irish commercial property performed strongly in 2014, buoyed by the capital gains tax exemption and the presence of international investors.

Top of the pile was Friends First’s Corinthian Fund, which has had a rocky road since its launch in 2007. It was brought to market with a lifespan of five to seven years, and its original portfolio was four Superquinn supermarkets, but its value plummeted as the property market crashed. Though it now consists of three supermarkets which have been rebranded as SuperValu, investors are still sitting on a loss, with the value of the portfolio down by 43.1 per cent on the original purchase price.

And the fund still has some road to run, with the fund manager recently noting that while the seven-year period has now lapsed, the fund won’t be wound up until “the economic environment and demand improves sufficiently”.

Investors in other Irish funds also saw their returns advance and Simon Kinnie, head of real estate forecasting with Standard Life, says the fund manager currently likes the Dublin market. "On a near-term basis we're pretty positive on the market," he says, but adds that the manager's three-year view on Ireland is that towards the end of that period there will be better opportunities elsewhere.

Friends First European fund, managed by AEW, is the worst performer in the category, as it continues to struggle having acquired the bulk of its portfolio at the peak of the market in 2006-2008.

BEST

Friends First Corinthian Property Fund +155.04 per cent (AMC: 1.4 per cent)

WORST

Friends First Pan Euro Insight Property Fund -20.75 per cent (AMC: n/a)

Irish equity

During 2014, the Iseq reached a high last seen back in 2008, and investors benefited from a surge in stocks such as Ryanair.

Ark Life’s Irish fund advanced by almost 20 per cent during the year and is up by 90 per cent over five years. However, investors who allocated to the Iseq pre-crash may still be nursing losses – or be on the cusp of seeing their money move back into the black.

Ark Life’s fund, for example, is about to break even on a 10-year basis, but others, such as Irish Life’s indexed fund, which tracks the Iseq, may have advanced by 15 per cent in 2014, but is still down by about 35 per cent on a seven-year basis.

BEST

Ark Life Irish +19.4 per cent (AMC: 1.72 per cent)

WORST

Ulster Bank Secure Iseq +7.4 per cent

Managed balanced

For many Irish people saving for their retirement, their vehicle of choice will be a managed balanced fund, which aims to offer investors a combination of modest capital appreciation at a lower risk than a pure equity fund.

The downside can be that gains can be restricted while, as the experience of the financial crash taught investors, the funds can still plummet in value.

This year, however, was a good one for Irish managed funds. Irish Life leads the charge in this category, with its Pension for Life fund, which invests only in AAA/AA rated euro zone government bonds. It returned almost 25 per cent during the year. Its greatest allocation is to France (40.5 per cent) followed by Germany (29.3 per cent) and Belgium (12.8 per cent).

Ulster Bank’s protected capital bond was another strong performer, with returns of almost 17 per cent.

Worst of the bunch was the Global Value fund from former family office Covestone, which returned just 2.3 per cent, although it does have quite conservative goals.

It aims to produce an average annual return of cash plus 3-4 per cent, over an investment term of five to seven years. It had just about 35 per cent invested in equities during 2014, with 15 per cent in cash, and notes that both equities and bonds look expensive and are “set to deliver subpar returns over the next five to 10 years”.

BEST

Irish Life Pension for Life +24.7 per cent (AMC: 0.65 per cent)

WORST

Covestone Global Value +2.3 per cent (AMC: 1.5 per cent)

Government bond

Best performer in this category is the Indexed Eurozone Long Bond fund from Friends First which aims to replicate the Citigroup EMU Government Bond Index. This index has a strong holding in core European economies like France and Germany, but also has a sizeable allocation to peripheral European nations like Italy and Spain.

BEST

Friends First Indexed Eurozone Long Bond +26.9 per cent (AMC: 0.65 per cent)

WORST

New Ireland 2014 Government Bond -1.9 per cent (AMC: 1.5 per cent)

Corporate bonds

Irish Life tops and tails the corporate bond category, with one of its returns returning close to 24 per cent and the other with a still solid return of 7 per cent.

The latter’s investment remit is limited to investment grade euro corporate bonds and it tracks the performance of the Merrill Lynch EMU Large Cap Corporate Bond Index. Its main focus is on France (23.4 per cent).