Smaller companies lead the global bull market… along with high yield bonds

Having plummeted more than 25%* in the space of just a month, the world’s stocks markets – panicked by the onset of the global pandemic - bottomed on the 23 March 2020.

In the 12 months since, global equities have rallied more than 46%**, with smaller companies once again proving they are the place to be invested in a stock market recovery.

The three top performing sectors in the Investment Association groupings over the past year have been IA North American Smaller Companies (up 86.8%**), IA UK Smaller Companies (up 83.8%**) and IA European Smaller Companies (up 69.8%**).

In contrast, the average fund in the IA Technology and Telecommunications sector – an area full of names that have been beneficiaries of the pandemic – is up 65.3%**.

Darius McDermott, managing director of Chelsea Financial Services, commented: “Stock market recoveries happen when investors are more optimistic about the future and believe that things are improving. Sometimes they occur earlier – when things stop getting worse.

“Smaller companies are considered higher risk. As investors become more confident in the future, they are happy to take on higher risk assets and therefore allocate more to smaller companies.”

Top ten sectors in the bull market recovery

Rank Sector Percentage returns**
1 IA North American Smaller Companies          86.8%
2 IA UK Smaller Companies 83.8%
3 IA European Smaller Companies 69.8%
4 IA Technology & Telecommunications 65.3%
5 IA Asia Pacific ex Japan 55.7%
6 IA UK All Companies 54.5%
7 IA Asia Pacific inc Japan 53.9%
8 IA Japanese Smaller Companies 53.5%
9 IA Global Emerging Markets 52.3%
10 IA North American      51.5%

Top ten individual equity funds***

Rank Fund Percentage returns***
1 Legg Mason Royce US Small Cap Opportunity 147.4%
2 Baillie Gifford American 139.7%
3 Guinness Sustainable Energy 122.1%
4 Thesis Stonehage Fleming AIM 120.0%
5 ASI UK Unconstrained Equity 113.0%
6 Premier Miton US Smaller Companies 112.7%
7 TM Crux UK Special Situations 112.0%
8 Thesis Stonehage Fleming Opportunities 111.3%
9 Threadneedle American Smaller Companies 109.4%
10 VT Cape Wrath Focus 106.8%

High yield bonds also rebound strongly

Equities were not the only asset class to fall in early 2020. In fact, every asset class saw its value drop.

But having enjoyed a bull market for almost four decades previously, the correction in bond markets created what some investors at the time described as “the bargain of the century". Chris Bowie, manager of TwentyFour Corporate Bond fund said: “Investors should be hoarding credit like they’re hoarding toilet rolls.”

While equity returns were far higher as you would expect, corporate bonds have performed well over the year – despite their recent wobble due to inflation fears.

The IA Sterling High Yield Bond sector had the best performance for the fixed income asset class, up 30.0%**. Second was IA Sterling Strategic Bond (15.0%**) and third was IA Sterling Corporate Bond (10.9%**).

Darius McDermott added: “High yield bonds are more economically sensitive than other parts of the bond market. As the economic picture improves, the chances of high yield companies going bust reduces and investors get more confident, allocating more money their way.”

Performance of fixed income sectors

Rank Sector Percentage returns**
1 IA Sterling High Yield Bond     30.0%
2 IA Sterling Strategic Bond 15.0%
3 IA Sterling Corporate Bond 10.9%
4 IA Global EM Bonds Hard Currency 9.4%
5 IA Global EM Bonds Blended 8.7%
6 IA UK Index Linked Gilts 5.6%
7 IA Global EM Bonds Local Currency                                  3.5%
8 IA Global Bonds 1.8%
9 IA Gilts -5.3%

Top ten performing individual bond funds***

Rank Fund Percentage returns***
1 Man GLG High Yield Opportunities 49.7%
2 Schroder High Yield Opportunities 39.7%
3 Aegon High Yield Bond 38.5%
4 L&G High Income Trust 36.6%
5 Royal London Global High Yield Bond 36.5%
6 Barings Developed and Emerging Markets High Yield Bond 36.4%
7 GS ESG-Enhanced Europe High Yield Bond Portfolio 35.0%
8 ASI European High Yield Bond 34.8%
9 Baring Global High Yield Bond 33.6%
10 JPM Global High Yield Bond 33.5%

*Source: FE fundinfo, total returns in sterling, MSCI World index 20 February 2020 to 23 March 2021

**Source: FE fundinfo, total returns in sterling, 23 March 2020 to 22 March 2021

***Source: FE fundinfo, total returns in sterling, 23 March 2020 to 22 March 2021 – funds available on the Aegon platform

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

Published on 22/03/2021