The fund sector delivering gains of more than 20% in third quarter

Saltydog Investor runs through reasons why this fund sector is in a rich vein of form.

It has been a volatile year for investors, but there have been rich rewards for those willing to weather the storm.

Sector performance in the first quarter was mixed. The Europe including UK and Europe excluding UK sectors both went up by more than 5%, China/Greater China rose by 5.7%, and Latin America gained 8.5%. However, there was not much else to get excited about.

The UK All Companies sector remained just above the waterline, with a three-month return of 0.1%. Elsewhere, there were some significant losses. North America fell by 7.3%, Technology & Technology Innovation was down 11.3%, and North American Smaller Companies ended the quarter down 12.8%.

The second quarter was more encouraging. It did not start well, with the “Liberation Day” tariffs sending global markets into a tailspin, but they soon rebounded. By the end of the quarter nearly all sectors were showing gains. The most notable exception was China/Greater China, which posted a three-month loss of 2.9%.

Technology & Technology Innovation was the standout sector, up 15.1%. UK Smaller Companies followed with a gain of 13.1%. The UK All Companies and UK Equity Income sectors also performed well, up 7.4% and 7.8% respectively. The North America sector was behind the Global, European, Japanese, and Asia Pacific sectors, but still rose by 4.2%.

The rally continued into the third quarter, with most sectors making further gains.

After falling in the second quarter, the China/Greater China sector recovered strongly in the third, rising 23.7%. After nine months, it was showing a year-to-date gain of 26.9%.

China’s market recovery in 2025 has been driven by targeted policy support, improving liquidity, and renewed investor confidence in its technology and manufacturing sectors. The third-quarter rally reflected several factors working together: government stimulus for domestic industries, easing trade tensions earlier in the summer, and a strong rebound in technology stocks. The Hang Seng Tech Index gained more than 22% in the third quarter, helped by policy measures promoting artificial intelligence, cloud computing, and semiconductor development.

A major focus of Chinese policy this year has been technological self-sufficiency. Under the ‘Made in China 2025’ framework and the 14th Five-Year Plan, Beijing has stepped up investment in advanced manufacturing, AI, and chipmaking. In May, the Ministry of Science and Technology and the People’s Bank of China expanded credit support for high-tech firms, offering low-interest loans and venture funding. Large state-backed funds such as the China Integrated Circuit Industry Investment Fund have directed billions into domestic chip fabrication, while new national R&D centres have been established to develop quantum computing and next-generation networks.

Liquidity conditions also improved as the central bank maintained moderate stimulus, and domestic investors shifted from low-yield deposits into equities, driving a “catch-up” rally after several subdued years. Expectations of US interest rate cuts later in 2025 also boosted global risk appetite and encouraged inflows into emerging markets.

External relations played a large part in shaping confidence. During the summer, a temporary trade truce between the US and China reduced downside risks and lifted investor optimism. Exports and domestic consumption stabilised, and confidence grew that China’s growth outlook was turning a corner.

The leading funds in the China/Greater China sector rose by over 25% in the three months to the end of September. Despite a drop-off at the end of last week, a couple are still showing year-to-date gains of around 30%: Veritas China, Matthews China and Baillie Gifford China.

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