2010 has been a decent year for investors, but what does 2011 hold?

Despite stock market fluctuations, investors have seen funds grow,especially if they backed active fund managers. By Simon Read

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The turn of the year is a good time to review your investments. Barring a sudden slump in the next two weeks, 2010 has proved reasonably rewarding for those with cash in the stock market. Investors who kept their nerve are sitting on a tidy profit as the FTSE 100 has actually climbed almost 9 per cent over the year to date, despite this summer's massive dip.

So anyone with a tracker fund should end the year achieving better returns – even taking account of charges – than they could have got by leaving their cash on deposit. When there have been fairly wide fluctuations in fortunes during the year, that result should be gratifying, but those who took a bit more of a punt and invested in specific sectors are facing even better returns.

In fact 20 out of 31 fund sectors have outperformed the Footsie, with the stragglers mainly the less risky bond and gilt-linked sectors. Topping the performance charts to the date for the year is the American Smaller Companies sector, up 29 per cent, with UK Smaller Companies second, with an increase of almost 27 per cent.

Technology funds are up almost 22 per cent, with Asia including Japan and European Smaller Companies sectors both posting 20 per cent growth since January. Even speculative Emerging Markets funds have done well, climbing 19 per cent over the year to date.

The lesson is clear: those who strayed out of trackers into the right managed funds could have made profits up to three times as much.

The debate about active versus passive funds will continue onwards, but 2010's results should give food for thought for those who stick religiously to trackers. One approach could be to put a portion of your portfolio into a managed fund, but that begs the question of which? We've canvassed opinions from some of the UK's leading fund managers for predictions in 2011 to give you some help with investment decision-making.

But bear in mind that crystal-ball gazing is exactly that: no one actually knows what may happen next year. "It is important to remember that while it is interesting to gauge the views of professionals, it is nearly impossible to predict what will happen to markets in the future, and one year's top sector could become the next year's worst performer," warns Ian Overgage, acting communications director at the Association of Investment Companies. "It is therefore important to take a long-term view on your investments and make sure that you have a balanced portfolio and don't get too led by stories of the next hot sector."

Fairly good advice, I'd suggest.

UK

"The UK is still the world's sixth largest industrial power, bigger than France or Italy," points out Neil Richardson, deputy head of UK equities at Ignis. "The devaluation of sterling and the recovery in global trade is therefore stimulating a substantial portion of the economy.

"As a major trading nation, the UK is a natural beneficiary of the expected acceleration in global growth. The dynamic private sector is taking advantage of the opportunities that this offers, aided by a competitive currency. I believe that the first half of 2011 and beyond will see a resilient, strong UK economy."

Europe

"Investors should reconsider European equities," says James Glover, from the European equities desk at JP Morgan. "European companies have been transforming themselves over the last two decades, helping drive consistent outperformance from European stock markets. Worries about deflation and sovereign debt defaults appear overblown. Instead, the outlook for European equities appears attractive, supported by global leadership in exports and a competitive exchange rate and attractive equity valuations, both compared to history and to bonds."

His view is backed up by Alister Hibbert, manager of the BlackRock European Dynamic fund. His view is that European stocks are currently cheap. "Europe remains under-owned and valuations continue to look compelling on a relative and historic basis," Hibbert says. "The region offers a broad selection of well-managed companies that are able to access the strongest areas of global growth through high-quality product offerings."

Fixed income

M&G's head of retail fixed interest, Jim Leaviss, does not believe there will be a double-dip recession. "I expect that inflation will remain above target at a headline level but anticipate that falling core inflationary pressures may prompt a renewed bout of quantitative easing in the UK.

"My core view is that the economic environment should remain reasonably bond friendly, in that we expect low but positive growth, muted inflationary pressures and low interest rates for some time," he says.

"We must remain vigilant to the risks to this scenario, such as the potential for further stress within European banks and sovereigns, a correction in China, or indeed a buyers' strike in the US Treasury market. As such this remains a world where corporate bonds can continue to outperform their heavily indebted government counterparts."

Ian Fishwick, fixed income fund manager at Fidelity Investments, says 2011 will see much softer returns after a solid performance from bonds in 2010. "Government bonds could see some weakness as yields rise, but I do not expect a material rise in yields as economic growth stays slow. The best value area of fixed income remains corporate bonds, where spreads are providing adequate compensation for the default risks, so I continue to favour this area."

America

David Coombs, manager of the Rathbone multi-asset portfolios, has just returned from the States and is very bullish about prospects in the region. "With emerging markets looking expensive, inflated by hot money, now is the time to take profits there and buy the US," he says.

"It's time for the politicians to take a lead from the Fed to stimulate growth. Valuations look realistic, and strong fiscal stimulus in the corporate arena is likely. I'm convinced that the US has the potential to continue to surprise on the upside."

Adrian Brass, manager of Fidelity's American Special Situations fund, is much less bullish, but still expects growth opportunities in the US. "I remain concerned by the levels of government and consumer indebtedness and the possibility of rising taxes," he says. "These systemic problems are faced across the western world and are likely to constrain economic growth in the coming years. However, the US is a broad market in which I am able to find plenty of attractively valued investment opportunities."

China

"2011 is going to be an interesting year for China," predicts Stephen Ma, manager of Fidelity's China Opportunities fund. "It is likely to focus its efforts on creating new sectors such as alternative energy, chemicals, materials, and industries focused on improving income distribution in a way that will bring harmony to society."

His expectations are that the Chinese government will continue to move the country's economy from an export/investment-driven model to a consumption-driven one, says Ma. "The appreciation of the renminbi and wage growth will continue to be growth catalysts, boosting domestic demand and household income."

Adrian Lowcock, senior investment adviser at Bestinvest, is more wary of future prospects. "China remains the driver of global growth but its level of capital spending is unsustainable and its inflation rate is becoming uncomfortable. How the government contends with it will be something to watch carefully," he warns. "It is taking steps to cool things down, so it should be manageable."