By 
Investors who bought global stocks this year have enjoyed phenomenal returns. Those toasting their successes have our panel of experts to thank for directing them away from the worst areas of the past 12 months.
At the start of 2019 we asked fund managers what investors should avoid. All urged people to remain invested in global stocks, particularly America, which has been one of the world’s best-performing regions, returning nearly 30pc this year.
Three of our four experts made predictions that served investors well over the year. David Coombs, of asset manager Rathbones, advised shunning open-ended property funds, which had performed well in 2018. This year the sector was flat and investors in some of the largest funds found their money locked in due to liquidity issues.
Tom Sparke, of fund group GDIM, pointed to cash as a poor choice, based on his prediction that the stock market would do well. Cash made around 1pc, compared with global stocks’ 24pc. And Ben Willis, at financial advice firm Chase de Vere, warned investors to avoid gilts. Government bonds returned 8pc in 2019, a healthy return but some way off the stock market.
Our only prediction that fell slightly short was provided by James Bateman, of fund group Fidelity International. He said to avoid European stocks given political instability in Italy and Spain and global issues that would impact exports. He said the region would perform worse than both American stocks (which proved correct) and the British market (which was off the mark).
So – based on that largely impressive success rate – where should investors avoid this year?
Avoid: absolute return funds
Mr Sparke said 2020 should be a good year for stocks, thanks to robust economic data and a partial resolution in the US-China trade war.
With interest rates being kept low in most major markets, government and corporate bonds – which move in the opposite direction to rates – should provide diversification at times when the stock market falls.
As such, Mr Sparke said he would avoid another favourite of cautious-minded investors: absolute return funds. Although these complex multi-asset funds promise to deliver returns even when markets fall, they often do not. Many have lost out.
Avoid: American tech companies
Simon Evan-Cook of Premier Miton Asset Management said his team would be steering clear of technology funds next year. “We can see why tech businesses are important and will continue to grow, but we’re concerned that we’re being asked to pay too much for them,” he said.
Justin Onuekwusi of Legal & General Investment Management said this would also affect global funds.
“Anyone investing in a tracker fund that aims to mimic the performance of global stocks will have more than half of their portfolio invested in US stocks. Their exposure to Apple, Microsoft, Google owner Alphabet and Facebook would exceed exposure to Britain as well as France and Germany combined,” he said. Although these tech giants performed well in 2017 and 2018, this allocation leaves investors exposed to considerable risk.
Avoid: passive bond funds
Mr Coombs took aim at passive bond funds, including passive multi-asset funds such as the Vanguard LifeStrategy range, largely because of concerns over liquidity.
If investors pulled their money in great numbers, these funds would be force to sell every bond in the portfolio as they have to maintain weightings to an index. “These funds were not around in 2008 so have not been tested in a liquidity squeeze,” he said. “It’s never good to be part of a test.”
Avoid: Reits
Shunning open-ended property funds turned out to be a good bet this year. Daniel Lockyer, of Hawksmoor Fund Managers, said he would also avoid real estate investment trust (Reits). Some see Reits as an alternative to open-ended funds that have closed. However, while their listing on the stock market makes them “perfectly suited” to the illiquid nature of buying property, Mr Lockyer said, they are not as safe as some might believe.
Generalist Reits typically buy a spread of properties across all sectors, including some that investors may want to avoid. “This means many of them will have a material exposure to retail,” Mr Lockyer said. “We all know the travails of retail in 2019 and the outlook is much the same for 2020.”
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