Which Funds Have Been Hit Hardest by Coronavirus?

Safe havens have lived up to their name, delivering positive returns since the outbreak of the coronavirus, while global equity markets have fallen

(Morningstar)The outbreak of the coronavirus has sent global stock markets spiralling downwards, as panicked investors worry over the long-term implications of the epidemic. Experts have predicted a major hit to global growth and the US Federal Reserve has already taken bold action with its biggest rate cut since the midst of the financial crisis.

But the spread of the disease has not affected every asset class. Morningstar Direct analysis shows that some areas of the market have recovered since their initial falls after the outbreak was announced, while others have thrived.

We looked at the returns of open-ended UK-domiciled funds since January 1, the day after the World Health Organisation (WHO) was first notified of the virus.

Surprisingly, a number of asset classes are in positive territory over the period. Fixed income, convertibles, money market funds and property assets have all made gains in recent weeks. Many of these assets are perceived as safe havens for investors in times of uncertainty.

With the US S&P 500 index down almost 7% year to date and the FTSE 100 down 13%, it comes as little suprise that equity funds have been among the hardest hit. The average equity fund is down 4.5% since the start of the year. That compares with an average return of 3.6% from fixed income and 2% from money market funds over that period.

John Beck, director of fixed income at Franklin Templeton says: "The effects of coronavirus on the markets are already being seen in sharp movements in asset prices - sharply downwards in riskier assets such as equity markets and certain sections of the corporate and high yield bond universes, but also sharply upwards in traditional risk-free assets, as yields on US Treasuries, gilts and bunds plunge."

The chart below shows the returns of each asset class since the start of the year; the size of the box is denoted by the amount of assets under management in the group.

UK funds have suffered acutely, with UK Equity Income funds down more than 10% on average since the start of the year, according to Morningstar data.

Large-cap stocks have been the hardest hit as they are more exposed to global trade than their small and mid-cap counterparts. While all UK fund categories are in the red, the best performing group has been the UK Small-Cap Equity category, which is down 7.4% since the start of the year.

Russ Mould, investment director at AJ Bell, adds: "What remains unknown is the severity of the disruption to corporate earnings and how long it will last, so you cannot rule out another global market sell-off if it looks like businesses are struggling and consumer spending is deteriorating."

Indeed, a number of companies have already warned of the impact that the spread of the virus could have on profits. UK airline group FlyBe was the first to succumb, going into administration on Tuesday evening, blaming a lack of demand on the coronavirus.

Still, most professional investors expect the impact to be largely a short-term phenomenon. Andrea Iannelli, investment director of fixed income at Fidelity International, says: "While it's a major scare that will prompt further demand and supply shocks, the world eonomy will recover, and could so relatively quickly once things are back to normal."

While Money Market funds have performed well in recent weeks, few experts think investors should be selling up and moving out of the market right now. "I wouldn't recommend going into cash," says Colin Moore, global chief investment officer at Columbia Threadneedle. "Interest rates are very low, and if there is a monetary policy response to the current situation, they are going to fall even further."

He says investors should ask themselves whether they consider the situation to be a structural phenomenon or a temporary one. "I strongly believe it's not structural," says Moore. “So we should be getting to a point where markets have been overreacting, because of their extrapolation of a temporary phenomenon into a permanent one."