Can Europe ISAs ride crisis again?

It's that time of year again when thoughts turn to making the most of investing your annual Individual Savings Account (ISA) allocation – and the question is how much can be learned from analysing the returns achieved by various sectors over the past few years.

Does it automatically follow that putting your money into areas that have delivered consistently strong results in the past will result in bumper profits over the next 12 months – or should you be backing those that have performed dismally in the hope they will turn things around?

It's a tough one, according to Darius McDermott of Chelsea Financial Services. While the mantra is that past performance is no guide to future returns, knowing which parts of the market have soared and which are looking undervalued can have a bearing on your investment decisions.

"If you buy something that's cheap, then you've got half a chance of making some money," he explains, "If you buy something that's gone up a lot, it doesn't mean it won't continue to rise but you will need to have a reason in your head as to why that will continue."

Unfortunately, just because a sector or fund has done well in a 12-month period doesn't mean it can repeat it as the strong returns could have been due to economic climate, political issues and demand for certain products.

Europe stands out

The past year is a prime example. Although sales figures show that many investors have steered clear of Europe because of their widespread concerns about its political and economic problems, sectors focusing on this area of the world have actually been the stand-out performers since 6 April 2012.

The IMA Europe excluding UK sector has delivered an impressive 20.86 per cent in the current financial year, according to Morningstar data compiled to February 12 this year. This narrowly pushes the IMA European Smaller Companies sector into second spot with a return of 20.14 per cent.

It was a different story the previous tax year when the two Europe-focused sectors lost 12.55 per cent and 10.37 per cent respectively. Only IMA China/Greater China, which was battling its own demons, did worse, with a 13.71 per cent loss.

However, if you strongly believe that a certain area – such as the IMA UK All Companies sector – is going to be lucrative, it can be worth looking at the past performance data and picking out funds that have been able to deliver consistently, Mr McDermott says.

"Looking at the top-performing UK funds in the past should give you an indication of which managers are likely to do well in the future, although you have to remember that no fund will do well every year," he adds.

As already mentioned, IMA Europe ex-UK and IMA European Smaller Companies have been the most lucrative area for investors since last April, followed by IMA Europe including UK, which has posted a 19.06 per cent uptick. Then there is IMA UK Smaller Companies on 16.70 per cent. The worst areas so far have been IMA Short Term Money Market with a 0.11 per cent return, followed by IMA Money Market with 0.29 per cent and the 1.04 per cent uplift for IMA UK Gilts.

As far as individual funds are concerned, River & Mercantile UK Equity Smaller Companies has been the lead performer so far with a return of 34.25 per cent. This is followed by Legg Mason Japan Equity on 30.79 per cent and Standard Life UK Equity Unconstrained with 30.59 per cent.

Less impressive have been SF t1ps Smaller Companies Gold, which is down 33.45 per cent; SF t1ps Smaller Companies Growth, which has suffered a 32.44 per cent fall; and Junior Gold, down 27.59 per cent.

Lucrative gilts

In the year to 6 April 2012, Europe was certainly the pariah, as we've already discussed, along with IMA China/Greater China. At the other end of the scale, however, IMA UK Index Linked Gilts proved to be the most lucrative with an 18.57 per cent increase, followed by the 14.87 per cent rise by IMA UK Gilts, and, more randomly, IMA Japanese Smaller Companies, which went up by 11.77 per cent.

HC FCM Salamanca Global Property was the number one fund with a return of 28.55 per cent, followed by Axa Framlington Biotech on 24.39 per cent, and Vanguard UK Long Duration Gilt Index with 23.03 per cent. Guinness Alternative Energy lost the most in this period, going down by 49.59 per cent. Elsewhere, SF t1ps Smaller Companies Growth lost 45.38 per cent and SF t1ps Smaller Companies Gold dropped 43.09 per cent.

Smaller firms shone

The previous year, to 6 April 2011, was all about the smaller companies. If you put your faith in them, the chances are you would have ended up with double-digit returns.

The IMA UK Smaller Companies sector scored best with 29.50 per cent, followed by IMA European Smaller Companies with 20.29 per cent, and IMA North American Smaller Companies on 19.92 per cent. Conversely, investors in Japan were the biggest losers with an average loss of 7.80 per cent, marginally better than those in IMA Unclassified ( minus 4.17 per cent), and IMA Short Term Money Market (0.17 per cent).

Unsurprisingly, smaller companies funds were the strongest. First place went to SF t1ps Smaller Companies Gold with an 88.27 per cent return, well ahead of TB Amati UK Smaller Companies on 48.35 per cent and Scottish Widows HIFML UK Smaller Companies Alpha on 48.31 per cent.

However, a number of funds recorded double-digit losses. The worst was IP Japan, which lost 16.07 per cent. GAM Star Japan Equity, was down 13.63 per cent and JPM Japan fell 13.55 per cent.

Emerging markets up

In the year to 6 April 2010, the previous year's winners were the poor relations, with IMA Short Term Money Market at the bottom of the pile, posting a modest increase of just 0.18 per cent, followed by the 0.73 per cent improvement by IMA Money Market, and the 1.46 per cent gain of IMA UK Gilts.

The stars of this 12-month period were IMA Global Emerging Markets, which rose by 67.51 per cent, although you need to bear in mind that this sector had lost, on average, almost 26 per cent in the previous year. IMA Asia Pacific ex-Japan was next best with a 59.57 per cent return, while IMA Specialist posted an improvement of 57.35 per cent.

But Russian funds stormed the tables with Pictet Russian Equities delivering 150.39 per cent and JPM Russia recovering from the previous year's disappointment with a 149.03 per cent return. The next best was Pictet Eastern Europe with a 141.78 per cent gain. Aviva Investors Asia Pacific Property was the biggest loser with a 10.26 per cent fall, followed by the 4.50 per cent drop suffered by Manek Growth.

Few winners

The year to 6 April 2009 was right at the heart of the global financial crisis, which explains why, on average, only three sectors delivered positive returns. IMA UK Gilts topped the table with 8.59 per cent, followed by IMA Money Market on 3.13 per cent, and IMA Short Term Money Market with 2.92 per cent.

At the other end of the scale, however, we had eye-watering losses. IMA European Smaller Companies suffered most with a 34.36 per cent fall, followed by the loss of 34.10 per cent by IMA UK Smaller Companies, and the 32.79 per cent drop of IMA Property.

As far as funds were concerned, Neptune Japan Opportunities took the plaudits with a 57.86 per cent uptick, followed by City Financial UK Equity with a 40.58 per cent gain, and Janus US Short-Term Bond, which improved by 39.32 per cent.

JPM Russia, meanwhile, lost a staggering 64.58 per cent, with Skandia Global Property and Charlemagne Magna Eastern European faring only slightly better with falls of 61.95 per cent and 56.71 per cent, respectively.

So what does the future hold? Patrick Connolly, a certified financial planner at AWD Chase de Vere, says the short-term performance of funds and sectors are often dictated by investor and economic sentiment rather than real fundamental reasons why they should have performed well or badly.

He adds:"This is why it is important not to take too much notice of short-term performance and if a particular investment performs incredibly well, this should be taken as a warning sign rather than a reason to buy."

As far as the coming months are concerned, Mr Connolly insists it is difficult to predict performance, although he suggests that equities look broadly cheaper than fixed interest at this moment in time, and should be positioned to outperform if general investors sentiment improves.

"There are opportunities in all equity markets for good-calibre stock-picking fund managers, although remember that markets have already risen considerably in the past six months and so it would also be little surprise if we saw a correction," he says.

"While equities have the best potential to perform well, the journey could be pretty bumpy. The best advice is to spread your picks geographically and look for managers who have demonstrated a long-term record of outperformance."