Figures from Morningstar show that UK gilt funds dominated the top 10 performers for 2011. In fact, only one fund in the top ten didn’t fall into the gilt sector, the Legg Mason Japan Equity Fund. Few people would have predicted that Japanese equities and UK gilts would have made up the top 10. In fact, these asset classes would perhaps have been described by many as “boring” or “overvalued” back in January 2011.

What of the “exciting” funds then? Of the 10 worst performing funds in 2011, 5 of these were India funds with the worst, the HSBC GIF Indian Equity A Inc fund losing over 45% of its value in a 12 month period.

Only one in 5 funds managed to produce positive performance in 2011 compared to 97% of funds in 2010.

In terms of conclusions to draw, the old adage that past performance is no guarantee of future performance rings very true. Those investors who took 2010 as a sign to increase risk and add further “excitement” to their portfolio would have seen this backfire.

The other message to take is of the benefit of diversification. When markets are buoyant it is human nature to want more of the action and this often manifests itself in wanting extra exposure to exciting or exotic sounding investment markets – China, India, South America – countries that feel as far removed from our own troubles in the UK as possible.  However, we would encourage investors not to get too greedy in the good years and similarly not to get too fearful in the bad ones.

Instead, make sure you are taking the right level of risk in terms of what you want to take and need to take (often two different things) and stick with this portfolio through thick and thin, with the only activity being portfolio rebalancing, buying assets that have gone down and taking profits on assets that have gone up. This may feel uncomfortable as it is going in the opposite direction of the herd but it is a way of systemising the process of buying low and selling high.