HOWEVER experienced or knowledgeable we regard ourselves in our assessment about markets, we are constantly vulnerable to surprise. I strike this cautionary note for investors at the start of a year widely written off before it has even begun.
If we followed conventional assumptions this time last year, we would have missed out on some very striking surprises.
Barely a week has passed without fresh evidence of the deep problems in the retail sector. Concern over borrowing and debt, pressures on consumer spending and falls in real spending power have seen familiar retail names founder while others have been struggling to stay afloat. Who would have dared to invest in retail companies over the past 12 months?
Yet the FTSE All-Share general retail sector delivered a return of 39.2 per cent, making it the best-performing sector except for forestry and paper. According to stockbroker Peel Hunt, the average share price in the retail sector was up by more than 50 per cent in 2012.
But retail was not the only sector to spring a big surprise.
The gain in London-listed share prices over the past year has been widely attributed to international factors, fuelling a belief that only the global behemoths fared well while UK-facing shares had an altogether more difficult time.
But the FTSE 250 index – which more accurately reflects the performance of UK shares – outperformed the FTSE 100. And smaller company funds peppered the top performers tables, some gaining 40 per cent and more.
According to Joshua Ausden, at FE Trustnet, six of the ten best-performing investment trusts last year had a specific smaller companies focus, with many more in the top 50. Acorn Income Trust was number one overall, with a return of 59 per cent. Henderson Smaller Companies and Dunedin Smaller Companies also made it into the top ten.
Arguably the most unlikely geographic area to perform in 2012 was Europe. But despite all the traumas of the Greek debt crisis and worries about Spain, Portugal and Italy falling like dominoes to trigger a single currency crash, Europe-orientated trusts have done remarkably well, confounding the warnings of those who said Europe as an investment destination was a no-no.
According to FE Trustnet, the average trust in the sector scored a return of 27 per cent in 2012 – a figure beaten only by the property, biotechnology and healthcare sectors, with a much smaller investment universe.
Many will have been reluctant to place any bets on the private equity trust stable, given the traumas of recent years. But four – SVG Capital, Electra Private Equity, Dunedin Enterprise and Pantheon International Participations – made it into the top 20.
All of these delivered more than 35 per cent to investors. And more recently, it looks as if it is Japan that is springing the big surprise,
As Annabel Brodie-Smith of the Association of Investment Companies (AIC) points out, it was a remarkably successful year for investment trust followers despite tough trading conditions.
According to FE data, of the 392 trusts in the AIC Investment Companies universe, only 86 – or 22 per cent – lost money in 2012, a big improvement on 2011, when more than two-thirds failed to break even.
The average investment trust returned 10.5 per cent over the year – a figure that should give those who rushed into bonds and fixed interest stocks for greater certainty of returns pause for thought.
So what accounts for these surprises? And what lessons may be learnt from them?
The gainers have often been those sectors over-sold the previous year or those, like smaller companies, which have been overlooked. Policy emphasis to help the SME sector should help the business environment on a three- to five-year view. European markets, too, saw a reappraisal of the region’s successful international traders which continued to do well.
As for retailers, the average share price performance should deceive no-one as to the severity of the problems Britain’s high streets have faced. But while economic conditions have worked to pummel the weak, the strong will be gainers.
As Comet has foundered, rival Dixons is set to pick up some of the £1.2 billion sales that Comet enjoyed. For the same reason, Sports Direct stands to gain from the demise of rival JJB Sports.
Larger companies with the resource and expertise to expand abroad and to develop successful online operations at home have also pulled further ahead.
Indeed, a key feature of the retail trauma has been the disruptive effect of technology and innovation – the growing appeal and sophistication of online shopping in particular.
Innovation is the factor that has driven business upturns in the past and will continue to do. Individual company performance can trump overall average performance – and spring the biggest surprises.