There’s been a wholesale change in the top-performing fund sectors over the last six months, according to Trustnet. After recording returns of over 60% in the year to April 2021, the smaller company and technology sectors have slipped down to mid-table. While the commodities, Latin America, infrastructure and property sectors have taken their place. Could these sectors provide an opportunity for ISA investors to diversify their portfolios into different asset classes?
Vince Childers from Cohen & Steers believes so, commenting that the “combination of potential inflation benefits, diversification and relative value represents a compelling opportunity to realign portfolios to take advantage of what real assets can offer”.
Here, I evaluate the outlook for the best-performing sectors for ISA and SIPP investors looking to rebalance their portfolios.
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What are the best-performing ISA sectors?
According to Trustnet, these sectors have produced the highest returns over the last six months:
|
Position |
IA Sector |
6-month return |
1-month return |
|
1 |
Latin America |
25% |
14% |
|
2 |
Commodities/Natural Resources |
24% |
8% |
|
3 |
Infrastructure |
11% |
7% |
|
4 |
UK Direct Property |
8% |
2% |
|
5 |
Property Other |
7% |
7% |
|
6 |
North America |
7% |
6% |
|
7 |
Global Equity Income |
6% |
5% |
|
8 |
UK Equity Income |
4% |
9% |
|
9 |
Healthcare |
3% |
7% |
|
10 |
Global |
2% |
7% |
What can ISA investors learn about the top 4 sectors?
1. Latin America
Latin America tops the list with a six-month return of 25%. However, it comes after a period of under-performance, with losses of 3%-15% in three of the last five years.
Raina Oberoi, Managing Director at MSCI Research, comments that “While Latin America has been more volatile than other emerging markets, the region has, on average, outperformed other emerging markets during growth periods and recovered faster following economic distress.”
Raina Oberoi points to Latin America attracting more foreign investment than other emerging markets, reducing poverty and expanding the middle class. She also states that Latin America has strong exposure to “the efficient-energy theme”, together with “ESG leaders”.
Within this sector, the HSBC MSCI EM Latin America UCITS ETF achieved the highest 12-month return of 34%.
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2. Commodities and natural resources
This sector delivered the second-highest six-month return of 24%. However, it’s been less volatile than Latin America, achieving positive returns in four of the last five years.
John Baron from Investors Chronicle comments that this sector “usually comes into its own once it is apparent the inflationary genie is out of the bottle.” He also points to “handsome dividends” and “geopolitical tensions” increasing short-term demand.
However, Baron states that “it is the longer-term secular trends including the push to net-zero, industrial manufacturing, transportation and food that encourage optimism.” Commodities will play a key role in decarbonisation, while the rise in renewable energy should increase demand for copper and other battery-related metals.
Another tracker ETF took the honours for the best performer, with the iShares Oil & Gas Exploration & Production UCITS delivering a 12-month return of 76%.
3. Infrastructure
The infrastructure sector achieved a six-month return of 11%, less than half the return of the top two sectors. It’s made modest losses of 2%-3% in two of the last five years and gains of 9%-22% in the other three years.
According to McKinsey’s Private Markets Annual Review, infrastructure fundraising hit a record high in 2021. McKinsey comments that “infrastructure’s mandate has evolved” with capital “increasingly flowing into subsectors that support the energy transition and digitisation.” Infrastructure is also seen as a partial hedge against high inflation.
The highest-performing fund is FTF ClearBridge Global Infrastructure Income, with a 27% return in the past year and a consistent top-quartile performer over three and five years.
4. Property
UK property sector funds invest directly in retail, industrial and/or commercial ‘bricks and mortar’. Whereas the IA Property Other sector includes funds that invest globally, or indirectly through property company shares.
Global property delivered a higher five-year return of 36% compared to 19% for the UK. However, the UK property sector returns were less volatile, ranging from a loss of 4% in 2020 to a gain of 9% in 2021.
Property is also viewed as a hedge against inflation. Theoretically, inflation pushes up rents and, by extension, property values. However, landlords’ pricing power depends largely on the local level of supply and demand. Property companies can also manage high inflation by demanding shorter leases, more regular rent reviews and inflation-linked rents.
Josef Licsauer from Hargreaves Lansdown believes direct property funds are less attractive as “Commercial property is not easily bought and sold. It’s time-consuming, labour-intensive and expensive.” Whereas he advises that investing in indirect funds “helps to spread risk” as they “don’t rely on a small number of properties.”
The highest-performers in both sectors were the iShares US Property Yield UCITS ETF and Scottish Widows HIFML UK Property, with 12-month returns of 30%.
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Take away
With high inflation and rising interest rates, ISA investors might want to consider diversifying into ‘real asset’ sectors. These have out-performed other sectors in the last few months, principally due to a growing appetite for more defensive asset classes.
If you’re looking for an ISA provider, our experts have compiled a list of our top-rated ISA providers to help with this.
