UK smaller companies, emerging markets and income were the key focuses for investors when buying funds in January, according to data from our sister website Interactive Investor.
Topping the list was Paul Marriage's Cazenove UK Smaller Companies fund, as investors rushed to get their money in before the fund hard-closed. Marriage's fund has been most bought for five consecutive months, but closed to new money on 22 January "to protect the returns that investors have seen in recent years and to ensure that the fund's objective is delivered".
Three other funds investing in UK smaller companies also made it onto the list, with the River and Mercantile UK Equity Smaller Companies fund, the Investec UK Smaller Companies fund and the CF Miton UK Smaller Companies fund taking seventh, eighth and ninth place respectively. All three funds outperformed the IMA UK Smaller Companies sector.
Over one year, the sector delivered a 32.9% average return, while the return over three years was 57%. The River and Mercantile fund, managed by Daniel Hanbury, almost doubled the three-year return, delivering 96.9%, and managed a 53% return over the last year.
The Investec UK Smaller Companies fund reported a 42.5% return over the last year and a 71.1% return over the last three years. Managed by Ken Hsia, the fund incudes popular UK small caps such as Quindell, Optimal Payments and Utilitywise.
Quindell is also one of the top holdings in Gervais Williams' fund, CF Miton UK Smaller Companies. The fund, which also counts Michelmersh Brick Holdings and SQS Software Quality Systems among its top holdings, was the second most-bought fund on Interactive Investor in December but has now slipped to ninth place despite a sector-beating 56.6% return over the last year.
"Whilst many investors have hunkered down and are hiding out in cash for the moment, those that have decided to invest are choosing mainly UK-based funds for their investments, concluding that investing closer to home is a safer strategy for now," commented Interactive Investor's head of investment Rebecca O'Keeffe.
"With continued government support for investment in small and medium enterprises combined with the generally positive outlook for the eurozone, we're likely to see more investment in the UK smaller companies sector and UK equities in general."
The second most-bought fund, Linden Thomson's AXA Framlington Biotech fund, was something of a wild card. The fund invests chiefly in the US equities of biotechnology, genomics and medical research companies, and its popularity is unsurprising given that it delivered a 153.47% return over the last three years, against a return of just 3.39% from the specialist sector.
Income still a key concern
The list also suggested that income was still a major preoccupation for investors, with the inclusion of two UK income funds, the Invesco Perpetual High Income fund and the Unicorn UK Income fund.
The Invesco fund was the third most bought in January, as investors appeared unfazed by the imminent departure of star fund manager Neil Woodford. Woodford will be replaced at the helm of the fund by Mark Barnett in April.
The fund, which invests in major UK equities including AstraZeneca, GlaxoSmithKline and BT Group, delivered a 17.27% return over the last year and 47.39% over the last three, beating the average returns of 15.73% and 34.19% from the IMA UK Equity Income sector.
The Unicorn UK Income fund, managed by John McClure, and investing in such companies as RPC Group, Berendsen and Cineworld Group, took sixth place on the list. It also beat the sector, delivering a 16% return in the last year and a 36.2% return over three years.
Emerging markets back in vogue?
Despite instability in the emerging markets, First State Asia Pacific Leaders, Aberdeen Emerging Markets Equity and Newton Asian Income were respectively the fourth, fifth and tenth most-popular funds with investors in January.
Investors were no doubt hoping to see recovery from these funds, which all saw negative returns over the last year (-7.63% from First State, -19.2% from Aberdeen and -10% from Newton). However, with the exception of Aberdeen, all delivered positive returns over three years, outperforming the Asia Pacific Excluding Japan and Global Emerging Markets sectors.
However, Westhouse Securities analyst Paul Locke advised investors to remain cautious in their approach to emerging markets.
"Emerging markets have often struggled to gain traction since 2010, when they recovered their post-2008 crisis lows," he said.
"A combination of slowing economies, global capital flow distortions arising from US quantitative easing and more recent trends toward removing this artificial fix have created periodic problems for emerging market equities."
Many investors are following this more cautious line when it comes to emerging market investing, with nine out of the ten most-sold funds in January being emerging market funds. In fact, the top three most-sold funds were the First State, Aberdeen and Newton funds which made the most-bought list.
This feature was written for our sister website Interactive Investor