TB Evenlode Income has emerged once again as the most consistent IA UK All Companies fund of the past decade, beating the FTSE All Share – the most common benchmark in its sector – in every one of the past 10 calendar years.

Tied in second place are Lindsell Train UK Equity, Liontrust Special Situations and Liontrust UK Growth, which beat the benchmark in nine of the past 10 years.

Most consistent IA UK All Companies funds

Source: FE Analytics

Of the 194 funds in the sector with a track record long enough to qualify for this study, a further nine beat the FTSE All Share in eight of the past 10 calendar years.

TB Evenlode Income’s managers Hugh Yarrow and Ben Peters aim to identify businesses with a large market share and/or competitive edges that can consistently generate high levels of recurring profits to be returned to shareholders as dividends. They look for profitable, asset-light, cash-generative companies with low debt and intangible assets that are difficult to replicate.

This fund is a member of the FE Investments Approved List, with the analysts that selected it saying: “The monitoring of a smaller universe of companies allows the managers to delve deeper into modelling and understanding companies, which makes for strong stock selection and fewer mistakes.

“Their processes and systems have become increasingly robust and efficient over the years, which sets Evenlode apart from other smaller management houses.

“With increasing commonality between larger cap income managers, we find that this fund provides a consistent process and unique growth profile that will complement any investor portfolio in search of income.”

TB Evenlode Income has made 172.31 per cent over the past decade, compared with 83.3 per cent from its sector and 73.26 per cent from its benchmark.

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

The £3.7bn fund has an ongoing charges figure (OCF) of 0.87 per cent and is yielding 3 per cent.

Next up is LF Lindsell Train UK Equity, which has beaten the index in nine of the past 10 calendar years and the sector in all 10.

Manager Nick Train’s strategy involves investing in quality businesses and holding them for the long term.

The team at Square Mile Investment Consulting & Research pointed out there are few companies that actually meet the manager's criteria and, as a result, the final portfolio is concentrated across a limited number of holdings.

“The fund has successfully and consistently met its long-term performance objective and we have conviction in the manager and his ability to continue to meet this over the long term,” the team added.

Despite the fund’s record of consistency, Square Mile said it would be “best suited to investors that have little interest in the month-to-month and year-to-year performance of their investments, but instead seek attractive returns over very long time periods”.

In a recent note to investors, Train described the last 12 months as among the most challenging he can remember as a manager.

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Although LF Lindsell Train UK Equity has not beaten the FTSE All Share as often as TB Evenlode Income over the past decade, it has delivered a higher total return over this time, at 217.24 per cent.

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

The £6.5bn fund has ongoing charges of 0.65 per cent.

Both Liontrust Special Situations and Liontrust UK Growth are headed up by Anthony Cross and Julian Fosh, who run the funds in line with their Economic Advantage strategy.

The team at Square Mile said this is based on the belief that companies that have a durable competitive edge will generate above-average returns over the long term.

“For a company to have such an advantage, it needs to have one of the following three characteristics: intellectual property, a strong distribution network or a recurring revenue stream,” it added.

“These factors build the idea of a company having intangible assets, which may not be evident on its balance sheet but are vital components of its competitive advantage, as they are very difficult for others to replicate.”

Liontrust UK Growth fund has a higher weighting to the FTSE 100, at 60.1 per cent of its assets, than Liontrust Special Situations, at 39.9 per cent.

The £5.6bn Liontrust Special Situations fund returned 198.41 per cent over the 10-year period in question. It has an OCF of 0.82 per cent.

Performance of funds vs sector and index over 10yrs

Source: FE Analytics

The £613m Liontrust UK Growth fund made 127.47 per cent and has an OCF of 0.88 per cent.

Hydrogen is the oldest, lightest and most abundant element in the universe. But it wasn’t until 1766 when the world learned of its potential as a power source.

In a groundbreaking experiment, the English scientist Henry Cavendish isolated the gas by mixing metal and acid to produce what he called the “inflammable air” that emitted water when burned.

Unfortunately, the world’s greatest minds haven’t made much progress since.

Efforts to turn hydrogen into a source of clean energy have been persistently stymied by the costs involved. The gas has been prohibitively expensive to produce, store and transport, which is why many experts have overlooked it as a viable alternative to fossil fuel.

Yet, recent signs suggest this view no longer holds sway.

From Europe to Asia and the Pacific, governments and businesses – electricity and gas producers, utilities and carmakers – are stepping up investment to develop new hydrogen-based technologies.

Soon, hydrogen production costs could fall as steeply as those of wind and solar power, making it easier to integrate hydrogen into the carbon-free energy mix.

Many colours of hydrogen

Hydrogen might be the most abundant of gases, but it doesn’t exist in its pure form in the atmosphere.

There are only a few ways to extract it, all of which are complicated and costly.

Today, some 95 per cent of hydrogen is “brown” or “grey” – extracted through a process in which it is stripped out of coal or natural gas by reforming methane or hydrocarbon.

These industrial processes are estimated to produce as much as 11kg of carbon dioxide in indirect emissions to generate just 1kg of hydrogen.

This is where "blue" hydrogen – which has a much smaller carbon footprint - can help. The process used to produce blue hydrogen begins in the same way as that for grey hydrogen. But the blue variety then deploys carbon capture and storage (CCS) technology which buries the carbon bi-product in underground reservoirs to reduce emissions.

Blue hydrogen is not cheap, not is it emission-free. Experts say the blue method begins to become cost-competitive if carbon prices – or a cost applied to carbon polluters – are set at around EUR60-70 tonnes of CO2 and if the industry scales up commercial CCS technology.

Making hydrogen greener

Given all the environmental shortcomings of brown, grey and blue hydrogen, it is “green” hydrogen that perhaps offers the most sustainable solution.

Green hydrogen comes from water electrolysis, a process which splits water into oxygen and hydrogen, using an electric current generated by renewable sources such as wind and solar. The process produces zero carbon emission, that’s why it’s known as “green”.

Worldwide, green hydrogen capacity has increased from 1MW in 2010 to 25MW in 2019, the International Energy Agency says, thanks to a dramatic decline in renewable energy costs.

The problem is that the process accounts for less than 0.1 per cent of total hydrogen production today.

But with investment in the technology growing, the picture could change dramatically in the next decade.

The EU, which has an ambitious CO2 reduction goal, is aiming to install 6GW of green hydrogen capacity at an estimated cost of €5-9bn, scaling that up to 80GW by 2030.

Cumulative investments in renewable hydrogen in Europe could be up to €470bn by 2050 which would take the share of hydrogen in Europe’s energy mix to 13-14 per cent by 2050 from less than 2 per cent today.

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Green hydrogen may also be a viable, long-term and large-scale solution to store excess renewable energy production, which could become a growing challenge in the coming decades as the energy mix shifts away from fossil fuels.

Due their intermittent nature, renewable energy sources will increasingly face an issue known as “curtailment”. This happens when grid operators are forced to dial back renewable electricity generation as network and storage infrastructure cannot cope with a rush of supply during a period that is exceptionally sunny or windy.

Batteries may work as a short-term storage. For longer-term needs though, grid operators have used pump storage, which typically stores and generates energy by moving water between two reservoirs at different elevations.

But the infrastructure is costly and there’s a limit to how many large-scale storages of this kind the world can build.

Hydrogen, on the other hand, can be used to capture an oversupply of renewable energy.

Electrolysers can work around the clock to produce green hydrogen using surplus renewable energy that would otherwise be “curtailed”. Hydrogen can be stored either as a gas or liquid in a high-pressure or cold tank ready to be deployed.

While much progress is still needed for hydrogen storage to become competitive, we expect this could become an important niche for hydrogen in the energy mix.

Hydrogen cars on the road

Today’s mandates and policies – around 50 are in place globally – mainly focus on introducing green hydrogen into transport sector, which accounts for about a fifth of annual emissions and is the main cause of pollution in cities.

Advances in fuel cells – which work like batteries but do not need charging – are vital as that would speed up the use of hydrogen in vehicles.

But this is where hydrogen enthusiasts may need to temper their optimism.

Fuel cells typically convert hydrogen as a fuel into electricity, which then powers vehicles. However, the energy efficiency of fuel cells – measured by how much final electricity they can extract for 100 units of typically renewable power – stands at a poor 26 per cent.

This compares with batteries’ 69 per cent efficiency (albeit fuel cells are superior to internal combustion engines, which operate at 13 per cent efficiency.)

Fuel cells are at disadvantage due to the power loss they suffer during conversion processes, such as transmission, electrolysis and transport, as well as electric motor and mechanical applications.

Still, fuel cell system costs are falling dramatically thanks to improving technology and economies of scale.

A few years ago, it cost more than $1,000 to produce a single kilowatt of power from hydrogen fuel cells. By 2019, the cost had dropped to just $53 per kilowatt, according to the US Department of Energy.

This should promote the application of hydrogen fuel cells in niche medium- and heavy-duty segments such as busses and trucks, where batteries cannot compete due to long charging times. Experts say fuel cell vehicles could achieve total cost of ownership parity with diesel by 2028-2033.

In China, the number of refuelling stations increased threefold in 2019 to 61. Chinese authorities are exploring further possibilities for hydrogen-fuelled rail after a successful pilot programme in 2019.

Hydrogen has routinely overpromised and underdelivered. But a fierce race to develop new technologies, backed by big government investments, is changing the calculus.

A battle against climate change through decarbonisation is a challenge that requires an all-hands-on-deck approach. Hydrogen may soon play a credible part in such a transition.

 

Xavier Chollet is co-manager of Pictet Clean Energy. The views expressed above are his own and should not be taken as investment advice.

Baillie Gifford Positive Change, Liontrust Sustainable Future Managed Growth and Pictet Clean Energy were just some of the best performing sustainable and environmental, social & governance (ESG) funds from 2020, according to data from FE Analytics.

While awareness of sustainable and ESG investing had been gaining momentum for some years prior to 2020, the coronavirus pandemic forced social and environmental issues into the spotlight and resulted in higher inflows.

According to global funds network Calastone’s Fund Flows Index, inflows into ESG strategies accounted for half the £2.4bn of inflows into active equity funds during November and December.

Inflows were supported by the strong performance of sustainable and ESG strategies during the pandemic, debunking ingrained beliefs that investing for environmental or social benefit can compromise performance.

Indeed, the MSCI ACWI ESG Focus index outperformed the broad MSCI ACWI last year, making a total return of 14.88 per cent versus 12.67 per cent.

Performance of MSCI ACWI ESG Focus and MSCI ACWI indices in 2020

 

Source: FE Analytics

This outperformance of ESG strategies was seen in the equity fund universe with several sustainable portfolios featuring near or at the of its sector in 2020 performance rankings.

Top-25 best performing ESG sustainable funds in 2020

 

Source: FE Analytics

Looking at the sustainable ESG funds that performed the best last year, two Baillie Gifford portfolios feature at the top: Baillie Gifford Positive Change and Baillie Gifford Global Stewardship.

Many of long-term, growth-focused Baillie Gifford’s strategies have featured at the top of various 2020 performance tables, as the sectors they favoured outperformed.

This was no different in its sustainable portfolios which also hold some of the big tech names which were 2020’s ‘winners’.

Tesla, for example, saw a 700 per cent increase in its share price last year and is the Baillie Gifford Positive Change and Baillie Gifford Global Stewardship’s top holding.

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The £2.2bn Baillie Gifford Positive Change fund is run by Kate Fox and Lee Qian. Not only was the fund the best performing ESG sustainable portfolio it was the second-best performer in the entire IA Global sector, and the fifth best-performing fund across all asset classes in 2020.

The fund invests in companies which are “contributing towards a more sustainable and positive world”, according to the managers, including those that are contributing towards the United Nation’s sustainable development goals.

Performance of fund vs sector & benchmark in 2020

 

Source: FE Analytics

It made a total return of 80.08 per cent last year, significantly outperforming the IA Global (15.27 per cent) and the MSCI ACWI index (12.67 per cent).

Meanwhile, the £573.8m Baillie Gifford Global Stewardship fund – managed by head of governance and sustainability Caroline Cook, Gary Robinson, Iain McCombie, Andrew Cave, Matthew Brett, Mike Gush, Zaki Sabir and Josie Bentley – invests in a diversified portfolio of 70-100 stocks, mitigating ESG risks by applying ‘sin’ sector exclusions and screening for companies which are a net benefit to society.

The top-rated fund made a total return of 70.06 per cent last year.

The third best performing fund was the Aegon Global Sustainable Equity fund.

Managers Andrei Kiselev and Malcolm McPartlin took over the €276m fund in May 2020. The fund is unconstrained from the benchmark and has no geographical limits on where it can allocate.

It follows Aegon Asset Management’s approach to responsible investment which consists of four main pillars: ESG integration, engagement and voting, exclusion, and reporting.

During 2020, the fund made a total return of 57.61 per cent.

Another top-performing fund was the $4.2bn Pictet Clean Energy fund.

Renewable energy was a major sustainable investment theme last year, with several governments announcing new legislation to help meet its carbon and climate targets going forward.

The Pictet Clean Energy fund invests in companies which are contributing to lowering global carbon emissions and the transition to cleaner energy sources by focusing on four main areas: renewable energy, energy efficiency, enabling technologies, and infrastructure.

Rounding out the top-five was the $636.5m Ninety One Global Environment fund, which made a 47.35 per cent return in 2020.

The fund overseen by Dierdre Cooper and Graeme Baker invests in companies the mangers consider are contributing to positive environmental change, favouring companies operating in services, infrastructures, technologies and resources related to environmental sustainability.

The asset manager with the most funds among the top-25 ESG-sustainable strategies, was Liontrust Asset Management, which had three: Liontrust Sustainable Future Managed Growth, Liontrust Sustainable Future Global Growth, and Liontrust Sustainable Future European Growth.

All three have been run since launch in 2001 by Peter Michaelis, who joined Liontrust in 2017 following its takeover of Alliance Trust Investments.

All three portfolios use the proprietary Sustainable Future process, which looks for companies within three themes: firstly, improving people’s quality of life either through medicine, technology or education; secondly, driving the improvements into the efficiency which scarce resources are being used; and, thirdly, helping to rebuild a more stable, resilient and prosperous economy.

The best performer was the £638.7m, five FE fundinfo Crown-rated Liontrust Sustainable Future Managed Growth fund, which Michaelis manages alongside Simon Clements and Chris Foster. It made a total return of 33.17 per cent last year.

Smith & Williamson Investment Management’s has begun to inflation-proof its managed portfolio service (MPS) with the addition of the BlackRock Gold & General fund in anticipation of a pick-up in prices over the next few years.

While there’s a general consensus that pent-up consumer demand as a result of the lockdown and social distancing measures to tackle Covid-19 will lead to a short-term surge in inflation.

Some forecasters expect it to then level out while others believe other factors such as increasing levels of monetary and fiscal stimulus will converge to change the longer-term outlook.

In response to this, the team has added the £1.3bn BlackRock Gold & General fund across the portfolios in its MPS range, with gold an asset that is likely to protect against rising inflation and provide diversification.

James Burns, co-manager of Smith & Williamson Investment Management’s MPS, said the expectation of higher inflation, as well as tailwinds for other markets, had shifted its outlook for 2021.

“We haven’t seen inflation come through significantly yet,” he said. “But you want to have it in-play before it does, plus we’ve been overweight equities for a number of years now which is inflation-proofing to an extent.”

Gold had a landmark year in 2020, rising to a record high of $2,067 per ounce on 7 August 2020, as investors drove up prices amid the uncertainty of the Covid-19 pandemic.

This was seen in the performance of BlackRock Gold & General – managed by Evy Hambro and FE fundinfo Alpha Manager Tom Holl – which invests at least 70 per cent if its assets in shares of gold mining and other precious metals companies.

Performance of fund vs benchmark in 2020

 

Source: FE Analytics

Over 2020, the BlackRock Gold & General fund made a total return of 27.20 per cent against a return of 20.77 per cent for the FTSE Gold Mines index.

However, with inflation looking likely to pick up at some point – particularly with central banks unlikely to rein it in with interest rate hikes – conditions could benefit the yellow metal.

“The key driver of this view is the outsized impact of policy, particularly the deployment of fiscal measures on top of the monetary stimulus that has been repeatedly used over the last decade,” said Burns.

“We believe tail-risks of significant inflation may also be tilted to the upside, with the risk that policymakers are potentially building up more significant challenges in the longer-term and that the reaction function of central banks and governments might well be too slow.”

Indeed, the Smith & Williamson team believe gold and precious metal securities, while carrying some beta, should also provide some protection in challenging markets.

“While inflation was a consideration, gold is also a means of diversifying returns in this environment,” Burns said.

Gold is considered a viable hedge against inflation and currency debasement that can occur after periods of increased stimulus – a real concern considering that nearly one-fifth of all US dollars in existence have been created this year.

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Elsewhere, the Smith & Williamson team has increased the allocation to the UK equity market at the expense of the US, in the view that much of the UK market is undervalued and US names are looking increasingly expensive.

In December, they took the opportunity to move to an overweight position in UK equities and underweight in the US.

“This was driven by what we believed to be excess pessimism towards the UK at a time when Brexit would soon be done – one way or the other – mass vaccine roll-outs were on the horizon, and the UK simply looked too cheap relative to virtually all other markets,” Burns noted.

The UK has lagged many of its peers in recent years due to the uncertainty surrounding Brexit, and also struggled to initially to get to grips with the developing pandemic.

Indeed, the MSCI USA index was up by 17 per cent during 2020, in sterling terms, while the MSCI UK index lagged behind, making a loss of 13.23 per cent.

Performance of indices in 2020

 

Source: FE Analytics

“With value having underperformed growth ever since the global financial crisis and, particularly over the last year, a historically large valuation gap has opened up between the styles,” said the manager. “The US market has been the most significant beneficiary of this, but we see this changing.”

The sheer size of the fiscal stimulus packages in the US also give the MPS team cause to believe the power of the US dollar may start to wane.

“The dollar’s period of strength is also unlikely to continue, primarily because the Federal Reserve has been more aggressive than other central banks in currency printing,” said Burns.

“Our move against the US reflects these drivers, meaning there are more attractive opportunities elsewhere.”

As such, the team has added to existing UK holdings such as Man GLG Undervalued Assets, which is run by FE fundinfo Alpha Managers, Henry Dixon and Jack Barrat.

Elsewhere, Burns explained that the team has also become pretty positive on Asia and emerging markets in the last couple of months and are currently running overweight positions.

“It’s an area that our strategy team has become increasingly positive on and a weaker dollar will only strengthen that,” said Burns.

Nevertheless, it has been reducing its exposure to China, as the team decreased its position in Fidelity China Special Situations following a very strong period of performance in 2020.

Performance of trust vs sector & benchmark in 2020

 

Source: FE Analytics

Over the course of 2020, the Fidelity China Special Situations fund posted a total return of 68.59 per cent, compared with a 27.86 per cent gain for the IT Country Specialist: Asia Pacific ex Japan sector and 25.50 per cent for the MSCI China index.

Indeed, Burns was quick to note that reduction in exposure was not an indicator of its lack of faith in China, with the investment trust remaining a core holding.

“It will be in the portfolio for a long time,” said Burns. “In fact, our allocation to Chinese equities is only going to go up in the coming years.”

Growth-oriented US and technology strategies remain at the top of the three-year performance tables as the investment backdrop continues to favour such funds, according to data from FE Analytics.

While the Covid-19 pandemic saw more volatile markets in 2020, the economic response to the coronavirus pandemic caused most markets recover their losses by the end of the year.

According to the Investment Association, the average holding period for an open-ended fund is three years. As such, the three-year track record has become a standard measure for assessing performance.

However, leadership can change as markets first sold off as the Covid-19 pandemic struck and then rallied, while strategies just celebrating their third anniversary come to investors’ attention.

Below, Trustnet highlights the equity strategies that have topped the performance table in the three years to the end of the most recent half (31 December 2020).

Top-25 equity strategies over 3yrs to last half-end

 

Source: FE Analytics

As the above table shows, the best-performing equity strategy over the past three years is the £7.2bn Baillie Gifford American fund – overseen by Gary Robinson, Tom Slater, Kirsty Gibson and Dave Bujnowski – with a return of 219.03 per cent. When we ran the three-year performance figures six months ago, this was also the best-performing fund.

Strong levels of fiscal and monetary support for the economy following the initial outbreak of the coronavirus pandemic helped US stocks recover their losses.

It was also boosted as the domicile for many of the large technology names that benefited from the stay-at-home conditions imposed by coronavirus.

The five FE fundinfo Crown-rated Baillie Gifford American fund was one of five strategies in the top-25 for the growth-focused asset manager, including Baillie Gifford Long Term Global Growth Investment, Baillie Gifford Positive Change, Baillie Gifford Global Discovery and Baillie Gifford Global Stewardship.

All top-three funds were unchanged with the $7.2bn Morgan Stanley US Growth fund remaining second-placed with a return of 177.50 per cent, while Mark Urquhart and Tom Slater’s £4.6bn Baillie Gifford Long Term Global Growth Investment was in third with a 162.62 per cent gain.

The weighting of US stocks in global benchmarks saw the IA Global sector emerge with the most strategies among the top-25 at nine, tied with the IA North America sector. Meanwhile, there were seven IA Technology & Telecommunications strategies making the top-25.

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The only fund from outside these sectors was the five Crown-rated $1.7bn Allianz China A-Shares fund, overseen by Anthony Wong and Sunny Chung.

Over the three years to end-December, it made a total return of 105.40 per cent compared with a 40.02 per cent gain for the average IA China/Greater China peer and a 27.67 per cent return for the MSCI China A Onshore benchmark.

Performance of fund vs sector & benchmark over 3yrs

 

Source: FE Analytics

There were some big movers also with the $1.6bn GS Global Millennials Equity Portfolio jumping 31 places into 23^rd position having returned 98.43 per cent over three years, while Aegon Global Sustainable Equity moved 27 places higher to 21^st with a gain of 100.08 per cent.

The Goldman Sachs ‘millennial’ strategy’s top-10 names include many of the technology stocks that have flourished during the pandemic, such as Amazon, Google-parent Alphabet, Facebook, Walt Disney and Slack.

Elsewhere, the types of stocks favoured by Aegon Global Sustainable Equity have boosted performance as awareness around ESG (environmental, social & governance) has grown during lockdown and the bias towards the technology sector has benefited such strategies.

At the bottom of the three-year performance table, the worst performers over the past three years were energy strategies.

Oil & gas prices have remained low in recent years as global growth has slowed and were impacted last year first by an oil price war and then by the Covid-19 pandemic, which further weakened the economic outlook.

Bottom-25 equity strategies over 3yrs to last half-end

 

Source: FE Analytics

As such, Mark Lacey’s $375.2m Schroder ISF Global Energy and the $158.1m Guinness Global Energy fund – overseen by Jonathan Waghorn, Tim Guinness and Will Riley – sat at the bottom of the table with losses of 47.88 per cent and 43.08 per cent respectively.

The dominance of value-oriented UK equity strategies was also clear to see as the uncertainty surrounding Brexit – despite an 11th-hour agreement on a trade deal on Christmas Eve – continued to be felt in the UK market.

The biggest faller was the LF ASI Income Focus – better known under its former guise as LF Woodford Income Focus – which made a loss of 40.54 per cent in the three years to end-December, including a loss of 20.38 per cent last year.

There were a number of UK equity income funds at the bottom of the table after a difficult year for the strategies following the forced suspension of dividends for banks and the cutting of payouts by many other companies to conserve cash.

The UK is likely to be one of the best performing markets over the next 20 years, according to Premier Miton Investors’ Gervais Williams (pictured), who adds that there are further opportunities to be found in a “valuation dichotomy that is at its most attractive in my entire career”.

Williams’ Premier Miton UK Smaller Companies fund was the best performer in its IA UK Smaller Companies sector last year, with gains of 77.33 per cent. This was more than double the return of the fund in second place, FP Octopus UK Micro Cap Growth.

The manager said this could be partly attributed to a bounce-back from a period of underwhelming performance the year before.

“We had a very bad 2019,” he explained. “We tend to invest in companies that are below the radar screen for a lot of investors and [performance] was made worse by the gridlock in Parliament, when nobody knew who was going to be driving Brexit or whether we would go through Brexit without any leadership at all. There was massive uncertainty.

“Then of course, overlaid with that were the Woodford anxieties, which were mainly related to private companies. But a lot of people linked small quality companies to private companies, which I thought was very unwise.”

However, it wasn’t all bad for the manager.

He said his focus on well capitalised stocks meant that although some of them fell, they didn’t need to raise money through an emergency fundraising at depressed levels – unlike much of the market last year.

“We came into 2020 at low levels and didn’t need to change the portfolio very much,” Williams added. “And a lot of our picks came right very early.

“There was also more opportunity further along in the year and we were able to put some money into things like Synairgen and some of the meditechs, which made absurd amounts of money.”

Performance of stock in 2020

Source: FE Analytics

Williams is confident he can make further gains going forward, pointing out the FTSE All Share is now at its lowest level compared with the S&P 500 since 1975.

The manager said this is because the UK tends to have more shorter duration-type investments, which deliver a faster cash payback, but don’t offer the same potential for “long-term knockout returns”.

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However, he prefers shorter-duration investments, pointing out no one knows what will happen over the next 10 or 20 years.

“Ultimately, we want our companies to be sustainable even in difficult circumstances,” he continued.

“I think the UK is actually massively overlooked and its stock market is likely to be one of the best performers over the next 10 to 20 years, partly because there will be a move from long to short duration.”

Of course, numerous UK managers have for many years been highlighting the valuation discrepancy with the US as a buying opportunity, yet the gap has continued to widen.

However, Williams said that the coronavirus crisis could end up creating the catalyst needed to turn this relationship on its head.

“Basically, it is bond yields,” he explained. “If we find for whatever reason that bond yields go up – because there are a lot of defaults and companies go bust, or because inflation picks up – it makes long duration less attractive, especially when there have been ultra-high valuations in bonds up to now.

“The UK is so lowly valued at the moment, it is quite absurd. Especially the sort of the companies we’re investing in. I can hardly believe how cheap it is.”

He added: “What’s amazing, and this is probably the most attractive moment in my entire career, is the valuation dichotomy between a lot of the long-duration technology-led ‘potential’ companies and the current cash-generative grubby things like mining companies and slightly difficult-to-understand financials. I’ve never known such a disparity between those two.

“Currently you can buy companies on P/E [price-to-earnings] ratios of five or four with immediate cash paybacks of sensational returns. It is quite honestly astonishing. The risk/reward ratio is sensational.

“You think, ‘for goodness sake, someone’s got to work it out’.”

Data from FE Analytics shows Premier Miton UK Smaller Companies has made 259.87 per cent since launch in December 2012, compared with gains of 157.29 per cent from its IA UK Smaller Companies sector.

Performance of fund vs sector since launch

Source: FE Analytics

The £138m fund has ongoing charges of 0.91 per cent.

Having reflected on the December Federal Open Market Committee (FOMC) statement and of course the Fed chair Jerome Powell’s press conference, there appears to be a near-complete consensus view.

Firstly, that 2021 will see an enhanced recovery/reflation trend through successful vaccine rollout generating a high reopening delta (i.e. the change in the price of an asset compared to the corresponding change in the price of its derivative) from a relatively low base.

Secondly, that US nominal yields continue higher as the economy rebounds, led by inflation expectations, thus keeping US real yields suppressed and driving a lower US dollar.

Lastly, by extension, that this low real yield base and global post-covid reopening will drive a rotation out of growth stocks (particularly tech that has benefitted from the lockdown) and into value (predominantly old economy) stocks, inside and outside the US.

Among analysts, there is some variation on the primary drivers of valuation, or the currencies or global equity markets that would benefit most from this consensus macroeconomic projection - but surprisingly no dissent.

In January, there have been some interesting developments for the US and for the global economy, but the consensus is unaltered. Plus ça change, plus c’est la meme chose.

As is often the case, with a consensus view, particularly when things have generally moved in the expected direction and there is a marked-to-market event (in this case the start of a new year), 2021 has begun with a wobble of uncertainty. Against this backdrop it is perhaps worth considering whether events have brought any real change to the macro outlook:

*The release of December’s FOMC minutes continued to highlight a Fed that is intent on maintaining monetary accommodation for the medium term – only one additional member joined the ‘dots’ of those expecting a rate hike in 2023 and “all participants judged that it would be appropriate to continue those purchases at least at the current pace [$120bn per month] ... until there is substantial further progress” towards its dual mandate of price stability and full employment.

*Further, building on the positive economic narrative surrounding vaccine breakthrough from the minutes, there has been further positive vaccine-related news (both in the US and globally), despite some supply issues, with more vaccines likely authorised and coming ‘on-line’ soon.

*Lastly, the Georgia elections have resulted in a de-facto (though limited) Democratic Senate majority, which is likely to generate a further fiscal stimulus. This implied fiscal expansion (expected to be in the region of $600-750bn or a further 3+ per cent GDP) was deemed as both stimulative and reflationary by financial markets. The fact that it is likely to consist of around $300bn in stimulus checks/cheques suggests a fast fiscal transmission or economic boost.

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So essentially, we would argue that the events over the past three weeks have strengthened the consensus arguments. The growth argument is perhaps clearest. The reaffirmation of loose monetary policy (adding to the huge tailwind from lower rates in the US), further fiscal stimulus and higher vaccine expectations all contribute – and the net positive wealth effects of higher equity and house prices remain clear. From our perspective, this continues to argue for higher US equity markets, and while we fail to see a strong case for the rotation out of either (tech) growth into (old economy) value or indeed out of the (faster-growing) US into (lower-trend growth rate) global economies, equities are likely a rising sea that should lift most, if not all boats.

The arguments for a weaker US dollar are likely also reaffirmed by recent events, as the Fed appear resolute in driving real rates lower to stimulate demand (and inflation) and notably, the shift towards a more fiscally profligate US administration and a higher support for policies that potentially nudge (alarmingly) towards those of Modern Monetary Theory.

There is a conflict within the consensus that is potentially difficult to square in that, higher US rates, higher equities and a lower dollar are only likely compatible in a world where the US is not significantly outperforming. In the near term, it is likely that the recovery pace of many global economies flatters the sustainable or trend growth rate over subsequent periods. However, at some point, potentially relatively soon, we expect the US to widen its growth differential advantage over the rest of G10 and against that backdrop – against those currencies where perhaps vaccine rollout is weaker, and or pre-existing conditions or constraints return – the US dollar can buck the trend.

Ultimately, therefore, we continue to view the main themes as unchanged - despite the wobble of conviction as we enter 2021. However, as the year progresses, it is unlikely that the dominant FX narrative remains a uniform ‘sell the US dollar’. Differentiation will return – in some instances potentially quite soon.

Neil Staines is a senior portfolio manager at Eurizon SLJ Capital. The views expressed above are his own and should not be taken as investment advice.

With the its separation from the EU now completed, the UK now has greater freedom to pursue trade deals on its own and build out some industries without falling foul of the bloc’ state aid rules. As such, the UK economy is likely to become increasingly decoupled from the EU.

This poses the question of whether asset allocators and fund strategists should now treat the UK as a separate asset class, rather than as part of a pan-European allocation.

Indeed, this is something that Lazard Asset Management’s head of UK equities Alan Custis has already begun to ponder.

Custis told Trustnet that while many years ago investors would make separate allocations to European and UK equities, this has “morphed” into a pan-European allocation more recently.

However, Custis said that people may now start to allocate to the UK in the same way that they do to Switzerland.

Since the 2016 referendum, UK equities have seemingly been treated as a separate asset class by international investors and remains the most underweighted area in the closely watched Bank of America Global Fund Managers Survey.

 

But is this something that could become common practice for investors?

According to Nick Peters, multi asset-portfolio manager at Fidelity International, it depends on whether you are a UK or international investor.

Peters said there is no right answer on whether to treat the UK as a separate asset class.

He said: “In our experience, investors’ preferences generally tend to depend on their location.

“In the UK, many investors already consider the UK as separate from the European market. On the other hand, many overseas investors will consider them together.

“We don’t believe this is likely to change significantly following Brexit, as many overseas clients already tend to think regionally, already accounting for the fact that politics and economies will be different for countries across Europe.”

But going forward Peters does believe that there will now be a greater demand for standalone UK funds on a “tactical” basis for two reasons.

He explained: “Firstly, Brexit caused four years of uncertainty with regards to the UK’s future relationship with the EU, which led to UK shares materially underperforming in recent years leading to a potential undervaluation in asset prices.

“Secondly, the UK equity market – due to its composition – has a bias towards financials and energy sectors which are likely to perform well in a post-pandemic environment where economic growth gains momentum.

“While investors may not change the way they think about the UK versus Europe in structural terms when building a long-term portfolio, there may be increasing appetite to express tactical positions over the coming months and years.”

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Other multi-asset managers fell on either side of the fence on the UK becoming a separate asset class.

Managers of the £5.6bn BNY Mellon Real Return fund said that it would be “unlikely”, for investors to start treating the UK as a separate asset class post-Brexit.

They said: “As investors observe how the UK emerges post the Brexit-deal, confidence should start to rebuild, assuming the economy regains its poise. We are already seeing evidence of this, with the FTSE 100 being one of the best performing markets so far in 2021.

“The UK is unlikely to be treated by investors as an entirely separate allocation to Europe and remains a constituent within broader pan-European indices.

“Furthermore, with many UK-listed companies, notably at the large cap end of the spectrum, being global in nature, their businesses are not materially impacted by any Brexit repercussions.”

Performance of FTSE 100 in 2021

 

Source: FE Analytics

However, Trevor Greetham, head of multi-asset at Royal London Asset Management, said he already treats UK equities as a separate asset class when constructing multi-asset portfolios for UK savers.

“We treat UK equities as a separate asset class when building multi asset funds for UK savers,” he explained. “A purely global [benchmark] approach would mean less than 5 per cent of equity exposure in the UK but we find a weighting of 35-40 per cent reduces risk and results in a more diversified sector mix.”

Greetham added: “The UK underperformed sharply in 2020 because it has a heavy weighting in leisure, resources and financial stocks hit hardest by Covid but almost no exposure to technology, a sector that benefitted from increased revenue and an upward valuation shift as bond yields fell.

“The UK outperformed sharply on vaccine news in November, however, and we are overweight tactically for the first time in years.”

He finished: “Lockdowns continue but there is light at the end of the tunnel and the UK is likely to do better in a post-Covid recovery as commodity prices and bond yields rise.”

Although Covid-19 vaccines have given people greater hope for 2021, the path to recovery is likely to have many bumps in the road, according to WisdomTree’s Nitesh Shah, who highlighted the emergence of new more contagious variants as a headwind.

“It is unlikely that the UK is the only country to have an adversely mutated form of the virus,” said Shah, director – research at exchange-traded product provider WisdomTree.

“So, we start the year 2021 with a lot of uncertainty as to how many more bumps in the road will face. As in 2020, gold is likely to serve as a strong hedge against these uncertainties.”

Shah said the size of fiscal stimulus packages in the US and the ongoing monetary policy support could have a “highly distortionary” effect on the economy.

“We have seen the largest fiscal and monetary response to an economic shock seen in history,” said Shah.

As such, the potential for elevated inflation in the coming years has been heightened and the burden of increased government indebtedness could fall on the younger generation, driving further social unrest, he noted.

Therefore, the precious metal could continue to have a role to play in investor portfolios.

Gold had a strong 2020, as investors sought out ‘safe havens’ for their cash as the first truly global pandemic in a century took hold.

Performance of Bloomberg Gold Sub index in 2020

 

Source: FE Analytics

As the above chart shows, the Bloomberg Gold Sub index ended the year up by 20.95 per cent, in US dollar terms.

Below, Shah presents three scenarios for gold in 2021.

Consensus

The first scenario is based on consensus forecasts for macroeconomic indicators and assumes sentiment towards gold remains flat.

“Consensus has adjusted to the Federal Reserve’s new inflation targeting regime, where the central bank looks at average inflation and thus will let inflation rise above 2 per cent to compensate for periods when it has been below,” said Shah, adding that it could hit 2.6 per cent by the middle of the year to reflect rising energy costs.

“Consensus is [also] looking for interest rates to remain on hold for more than a year.”

As such, gold could rise to $2,130 per ounce – a fresh high for the yellow metal and surpassing the $2,075 per ounce level reached in August 2020.

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Continued economic uncertainty

Under the ‘continued economic uncertainty’ scenario there could be further monetary intervention, weakening the US dollar and strengthening investor sentiment towards gold.

“The consensus view appears to be pricing in a straight-line recovery with very few bumps along the road,” said Shah. “However, on the ground in the UK we are witnessing a substantial bump in the road which is echoed throughout Europe as stricter social distancing rules and lockdowns in various forms have been put in place due to a more infectious mutation of the virus spreading.

“The consensus surveys were largely taken before this came to light.”

While many will receive a vaccine in 2021, the operational challenge to get an entire population inoculated cannot be underestimated, he noted.

“With this in mind, we doubt that central banks will be in any hurry to communicate a path towards tightening rates or broader policy any time soon,” said Shah.

“One potential avenue is for the Fed to undertake yield curve control. That is likely to constrain Treasury yields – relative to what consensus is expecting.”

In this scenario, inflation could peak at around 2.8 per cent, as the Fed actions generate greater economic demand while supply remains constrained.

He added: “The looser monetary policy could also weaken the US dollar further than in the consensus case.”

The WisdomTree director said gold could rise to $2,340 per ounce if this were to happen, close to a 24 per cent upside from December 2020 levels.

Hawkish Fed

Finally, in a ‘hawkish Fed’ scenario, economic conditions improve and the central bank begins to raise rates.

In this scenario, inflation remains below 2 per cent and rates increase to 1.8 per cent. This could see the US dollar also appreciate more aggressively.

Should this happen, gold could fall to $1,595 falling to levels last seen in April 2020.

 

Source: WisdomTree

Shah concluded: “We generally believe that economic uncertainty will persist during this unusual pandemic crisis that hasn’t been fully resolved yet.

“We can’t rule out a scenario where the economy improves considerably. However, we are sceptical that the Fed would behave in a very hawkish fashion and, therefore, put a low probability to the hawkish Fed scenario.”

UK small- and mid-caps, along with Asian and European stocks, were the easiest equity markets for active managers to beat in 2020, analysis by Trustnet suggests, while global, US and Indian markets were the hardest.

Last year saw equity markets rattled by the coronavirus pandemic and massive disruption to the global economy, before giant fiscal and monetary stimulus resulted in most major equity indices delivering positive returns for investors.

Against this backdrop, Trustnet looked at the major equity benchmarks that have more than 10 active funds measuring performance against it and determined what percentage of managers were able to beat them.

 

Source: FinXL

The UK equity market was one of the easier markets to beat in 2020 for small- and mid-cap funds. As shown in the table above, an overwhelming majority of active UK small-cap funds benchmarked against the FTSE SmallCap and Numis Smaller Companies indices managed to beat the market.

The UK small-cap fund that beat the benchmark by the most was the £282m Baillie Gifford British Smaller Companies fund, which returned 32.03 per cent during the year. This was far above the Numis Smaller Companies Excluding Investment Companies index’s 4.29 per cent drop.

The £121m FP Octopus UK Micro Cap Growth fund also performed exceptionally, with a return of 34.67 per cent, well above the Numis Smaller Companies plus AIM (excluding investment companies) benchmark return of 4.93 per cent.

In the mid-cap space, more than 80 per cent of active funds benchmarked against the FTSE 250 managed to beat the index.

The top performer was the £3.4bn Merian UK Mid Cap fund, which returned 10.83 compared to a loss of 8.48 per cent from the FTSE 250 benchmark.

Active managers appeared to have thrived in the small- and mid-cap space, which is often considered to be under-researched and relatively illiquid.

Indeed, smaller businesses often face higher risks and, in many cases, go bust, which can provide active managers an opportunity to leverage their expertise to avoid them and generate index-beating returns.

UK large-cap counterparts were less successful, however, with only around 60 per cent of active funds beating the FTSE All Share. This is the most common benchmark in the Investment Association universe, with 234 funds using it.

It is worth noting that many UK equity income strategies are benchmarked against the FTSE All Share, which would have affected the percentage of active funds that managed to outperform given last year’s difficulties for income investors.

After all, equity income funds were hit hard by the concentration of high dividend payers in the industries most affected by the pandemic and forced to cut payouts, the oil majors and banks being prime examples.

Although 28 IA UK Equity Income funds managed to outperform the FTSE All Share during the year, not one of them posted positive total returns.

UK funds that were underweight companies that operate in sectors worst affected by the pandemic, such as energy, financials and retail, managed to relatively perform well.

Performance of fund vs sector and index in 2020

 

Source: FE Analytics

A case in point is the £205m Baillie Gifford UK Equity Focus fund, the top performer by a wide margin, returning 16 per cent during the year versus a 9.82 per cent loss from the FTSE All Share.

The managers at the fund said in their interim report that a large part of their outperformance was down to not having exposure to high street banks and oil majors when the crisis struck.

The table also shows a relatively large percentage of funds managed to outperform the MSCI AC Asia ex Japan, MSCI AC Asia Pacific ex Japan and the MSIC China benchmarks.

For example, roughly three-quarters of funds benchmarked against the MSCI AC Asia managed to beat the benchmark’s 21.16 per cent for the year.

The fund that exceeded that benchmark by the most was the £2.4bn Baillie Gifford Pacific fund with a 60.36 per cent return. It is run by Roderick Snell and Ewan Markson-Brown, who have a large allocation to China and have previously said investors are underweight the vast opportunity in China.

European equity markets, as represented by the MSCI Europe ex UK and the MSCI Europe, which returned 7.49 and 2.13 per cent respectively, also had more active funds able to beat the benchmark.

Over 70 per cent of funds benchmarked against MSCI Europe, 63 per cent of funds using FTSE World Europe ex UK and 54 per cent of funds using MSCI Europe ex UK managed to outperform.

Some notable standout performers were the £2.5bn Baillie Gifford European and the €1.5bn Comgest Growth Europe Opportunities funds with a 43.24 and 33.24 per cent return respectively for the year.

Much of Europe was heavily impacted by the coronavirus pandemic last year, which forced the continent into widespread lockdowns and ground most economic activity to a halt.

Baillie Gifford European, however, had a large weighting to European technology and e-commerce firms that thrived in such an environment with the likes of Delivery Hero, Spotify and Zalando.

Likewise, Comgest Europe Opportunities benefited from a heavy weighting to Dutch semiconductor supplier ASML, whose sales were not that impacted as its customers typically supply technology companies who thrived in the pandemic.

In the US market, however, less than half of active funds benchmarked against the S&P 500 and the MSCI North America managed to outperform.

In a market where most of the returns came from technology firms, US funds that were underweight the technology sector suffered in 2020.

Global equity markets, which have a heavy weighting to US equity markets, were also a hard market to beat, with only 38.9 per cent of active funds outpacing the MSCI World and 28.6 per cent of active funds beating the FTSE World benchmarks.

By far the hardest market to beat was the Indian equity market, with only around a quarter of the actively managed funds exceeding the MSCI India benchmark’s 11.99 per cent total return.

With a Brexit trade deal agreed and an aggressive vaccine programme in place, Trustnet asks several fund managers whether 2021 will be a turnaround year for the UK market?

The UK has consistently been out of favour with investors for several years since the referendum on EU membership in 2016, which brought great uncertainty to the UK market and kept many overseas investors away.

This was compounded by the impact of the Covid-19 pandemic last year, which initially saw a flat-footed response to tackling the coronavirus.

The economic response to the virus favoured growth style companies – supported by all-time low interest rates, ultra-loose monetary policy and fiscal measures.

However, the UK is predominantly a value market, with the market dominated by oil, banks and financials which all took major hits and struggled to recover.

Performance of major indices in from 1/1/2020 to date

 

Source: FE fundinfo

But now the UK has secured a post-Brexit trade deal and – despite a third national lockdown – implemented an aggressive vaccine programme, will 2021 be a more positive year for the UK?

One thing the managers Trustnet spoke with think, is that the UK market will see the return of overseas investors.

Manager James Thomson (pictured), who runs the Rathbone Global Opportunities Fund, said that the Brexit trade deal has made the UK an option for overseas investors again.

He said: “Brexit clarity has put the UK back on the menu for international investors. Never underestimate the grit, adaptability and foresight of British business.”

Like many overseas investors Thomson had stayed away from UK equities due to the uncertainty. But with that now gone the FE fundinfo Alpha Manager said he has increased his UK weighting for the first time in four years, indicating a more positive outlook on the UK going forward.

“However, we’re not getting too carried away,” he said. “So, while our UK weighting may increase over the coming months, we don’t expect a dramatic return to pre-Brexit weighting [25 per cent] – that’s way off – as we still have a long list of US and European ideas.”

Ken Wotton, who runs the Strategic Equity Capital fund, added that for UK small caps especially the trade deal could acts as “a catalyst to revive investor interest in the UK”.

Wotton said with UK companies now able to plan ahead more clearly, combined with a return of overseas investors, we should start to see the discounts on UK assets narrowing.

He said: “And so all else being equal – which is a pretty big caveat given Covid – those discounts, both the UK versus other markets, and also UK small-cap versus the rest of the UK market should start to narrow.

“And that’s certainly how we’re anticipating this year to pan out.

“It’s very anecdotal, but I’m certainly getting the sense that some asset allocators are starting to look again at the UK as sort of good value. And although it’s hard to be definitive if we do start to see material inflows that that should help those discounts to narrow.”

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Richard Colwell, fund manager and head of UK equities at Columbia Threadneedle, also believed the UK discount could start to narrow.

According to the manager, the opportunity in the UK was shown by the market’s reaction to the Pfizer and BioNTech vaccine in November, which saw months of growth stocks outperformance undone as value names surged.

“We continue to firmly believe in the UK, but trends often go on for longer than predicted,” he said. “This creates the opportunity we see today, as it amplifies the impact when the switch in momentum finally occurs.

“However, the window on unlocking this potential value is closing. While sentiment about the UK economy has been hurt by both Covid-19 and Brexit, the equity market does not need a great recovery to perform better.”

Forecasting a “reasonable recovery in 2021”, Columbia Threadneedle’s Colwell (pictured) said there was a limited window to take advantage of the UK opportunity.

He said: “As the UK’s double discount starts to narrow, following the greater clarity that Brexit should bring and as vaccines progress, 2021 and into 2022 could be exciting for the UK equity market.

“Even the UK’s quality growth companies like Unilever are a lot cheaper than their rivals globally. We believe it’s not just one or two areas of the UK market that are cheap; the whole market is cheap.”

Taking advantage of these current discounts in the UK, Nick Kirrage – co-head of the Schroder Global Value team – said the value-oriented portfolio will be looking for those opportunities in 2021.

He said: “Despite a strong rebound in the autumn, the UK remains one of the cheapest developed stock markets globally. We see real opportunities in the banks, energy and food retail where we feel valuations are too cynical and dismiss economic reality.

“While the vaccine programme and a conclusion to the Brexit negotiations remove some of the uncertainty investors have been grappling with when looking at the investment case for UK plc, we believe the biggest returns will come from those unloved companies that many are dismissing.

“We will continue trying to capitalise despite the bad headlines, using our disciplined valuation-based approach.”

But while Brexit has been a major issue for UK equities the biggest challenge will be the ongoing pandemic, according to Gresham House’s Wotton.

He said: “To be honest, Covid has been a much bigger test of this than Brexit. As [with] Brexit you’ve had time to get used to the idea to think through the risks and the opportunities and to plan for it. Covid was much more stark and much more rapid.

“I think it’s been a real test of managements. And actually, it’s been a sort of diligence to assess the quality management over the past 12 months.”

Going forward he said that he’s more focused on his fund’s positioning around Covid and the impact it’s had, which he thinks is more significant for the UK market.

A third national lockdown to deal with a new strain of Covid-19 has not dampened the tailwinds of a Brexit trade deal and vaccines for UK equities for UK investment trust managers.

With investors finally getting the long-awaited UK-EU trade deal on Christmas Eve, much of the uncertainty about the post-Brexit relationship has been removed.

Nevertheless, the UK continues to deal with the impact of Covid-19 and the emergence of a more virulent strain which has forced it into a third national lockdown.

As such, the Association of Investment Companies (AIC) asked the managers of several UK-focused investment trusts which sectors and stocks they believe will be the winners and losers in the current environment.

Guy Anderson, The Mercantile Investment Trust

The Mercantile Investment Trust’s Guy Anderson said while companies have had several years to prepare for various outcomes, the trade deal allowed the continuation of tariff and quota-free trade in goods between the UK and EU, which “will be welcomed by many”. 

He said companies that source goods or material inputs from the EU should benefit from low-friction trade and a strong sterling.

Nevertheless, there were some Brexit challenges highlighted by the manager.

“Although the trade deal ensures tariff-free trade in goods for the foreseeable future, an end to freedom of movement could impact labour availability in some sectors that employed large numbers of EU citizens,” he said. “This could include retail and food production, for example.”

Regarding Covid-19, Anderson said the holdings in The Mercantile Investment Trust are well-positioned for the third national lockdown, highlighting ‘stay-at-home-winners’ like Pets at Home and discount store B&M.

“Given lessons from previous lockdowns, most companies are now familiar with the necessary operational protocols and, in many cases, better positioned,” he said.

Abbie Glennie, Standard Life UK Smaller Companies Trust

“Further lockdowns are disappointing and a drain on the UK economy,” said Abbie Glennie, investment director of Standard Life UK Smaller Companies Trust.

“Some sectors such as construction are less impacted than previously, and for some companies lockdowns may even be helpful. We think the disparity between winners and losers in certain sectors will continue to accelerate.”

On the Brexit deal, Glennie was increasingly optimistic about the prospects for the economy.

“It may be a catalyst to encourage asset flows into UK equities, with many investors having been standing on the sidelines,” she said.

David Smith, Henderson High Income Trust

“Equity markets hate uncertainty and there has been a lot to worry about over the last few years,” said David Smith, manager of the Henderson High Income Trust, said highlighting not just Brexit, but the pandemic and US-China trade relations.

“This year there is less uncertainty and with effective vaccines being rolled out there is a credible path to life returning to some form of normality sooner rather than later,” he said. 

With less uncertainty and continuing fiscal and monetary support, Smith (pictured) is optimistic about the outlook for UK equities.

“The biggest fear was the potential disruption caused by a no-deal Brexit,” he said. “As the worst of that disruption has been avoided, although I would still expect an increase in friction of trade moving between the UK and Europe.

“The backdrop is positive especially given that the starting valuation is attractive both in absolute terms and relative to other developed markets.”

One company that Smith said is better prepared for this lockdown than the previous two was publisher Informa.

“Informa, a professional publisher and events business, raised equity, cut costs and refinanced their debt so that even if the company couldn’t run physical events outside of China in 2021, they would still be able to generate positive cash flow from the rest of the business,” he said. “This puts the company in a good position to not only survive in the short term but thrive in the longer term given there is a credible path to recovery now there are effective vaccines.”

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Margaret Lawson, SVM UK Emerging Fund

“It’s too soon to tell if the trade deal will materially help trading in our portfolio companies,” noted Margaret Lawson, lead manager of the SVM UK Emerging fund. “The last four years have seen international investors reduce UK exposure and many UK wealth managers also rebalance to be more global resulting in UK equities lagging other main markets.”

This, she explained, represents a clear opportunity to catch up.

Many of the fund’s portfolio companies are focused on enterprise services using cloud support or e-commerce, while others are helped by sustainability trends.

“I expect investment in supporting business resilience and strengthening supply chains to continue,” said Lawson. “The UK economic recovery is likely to be led by government encouragement for sustainability and environmental improvement.”

She explained that some government stimulus will continue and there is a need for many companies to replenish inventory and make further capital investment.

Consumers too, who have been able to continue working will have higher levels of savings.

“I believe this will trigger pent-up consumer demand for travel and hospitality and a sharp recovery,” said Lawson. “Corporate buyers may be the first to spot the value in UK listed companies.”

Alex Wright, Fidelity Special Values

“My views remain unchanged post the Brexit deal,” said Alex Wright, manager of the Fidelity Special Values fund. “The UK stock market and particularly UK domestic-facing stocks look very attractively priced, with many having strong fundamentals.” 

He said the virus will probably start to abate by Easter or summer in the developed world and is therefore making few changes to the portfolio – just adding to some domestic and virus-exposed names at the margin.

“I believe both the Brexit deal and Covid vaccines wil]l quickly increase the interest in UK equities from domestic and foreign investors and from corporates, as we are already seeing with increased M&A [merger & acquisition activity in the UK market,” said Wright (pictured).

“Now these two key uncertainties have passed, the incredible value in UK equities cannot be ignored much longer.”

What is all the excitement about?

Renewable energy can and will decarbonise power generation. Renewable energy and batteries can and will decarbonise the automotive sector. But these technologies will not be as viable for aviation, shipping, commercial vehicles, steel or fertiliser manufacturing. In all of these vital industries it looks as though hydrogen will be needed, or at least that hydrogen will be one of the most viable solutions, for decarbonisation.

Hydrogen can be burnt in a combustion engine or boiler for transportation and heating; used to power a fuel cell for transportation or heating; or used as a reduction agent for iron to make steel. It can also be used as an energy storage agent by using excess solar energy in the summer to produce hydrogen, which can then be stored and converted back to electricity for use in the winter.  All of these processes have zero or much lower CO2 emissions than current alternatives.

How much hydrogen will we need?

Hydrogen is already used in a few large scale industrial processes, such as oil refining ammonia and nitrogen fertiliser production. However, if hydrogen fulfils its potential in these new end markets of heating, industrial, transportation and energy storage, the production and consumption of hydrogen volumes would need to expand 7-10x from current levels. The chart below was produced by the Hydrogen Council, a consortium of industry and energy groups to highlight the potential market growth if all of the above use cases for hydrogen materialise.

Doesn’t hydrogen production create its own emissions?

Yes. 95% of existing hydrogen production is exceptionally polluting, being produced from natural gas (10kg CO2 per 1kg of hydrogen produced) or coal gasification (20kg of CO2 per 1kg of hydrogen produced). However, hydrogen can be produced CO2-free by electrolysis of water. If renewable energy is used to produce the electricity, the hydrogen can essentially be made CO2-free.

What are the respective costs of these different production methods?

Today, renewable hydrogen is a lot more expensive than fossil fuel hydrogen. However, this is expected to change, and by 2030 renewable hydrogen should cross over and become the cheapest method of production, at which point there is really no need to persist with alternative production methods. The situation is very similar to where electric vehicles (EVs) and renewable energy itself were 5-10 years ago.

The chart below compares the costs of ‘blue’ hydrogen (made from natural gas) at different gas prices to renewable hydrogen. While very cheap gas with carbon capture and storage might still be slightly cheaper than solar produced hydrogen in 2030, the difference will be fairly small. There are also others who forecast renewable hydrogen costs to fall faster than this.

How big could the market for green hydrogen be?

This really depends on whether policy makers can be convinced by the natural gas industry that carbon capture and storage is a viable solution. In theory, making hydrogen from natural gas and then storing the CO2 underground could remain cost competitive with renewable produced hydrogen. However, currently no-one is really doing this at scale, and there are all sorts of legal and environmental problems with storing tens of billions of tonnes of CO2 underground.

The costs of renewable derived hydrogen are going to fall dramatically as shown above, driven by economies of scale and the ever falling costs of renewables, and this makes it quite likely, in our view, that green hydrogen will overwhelm fossil-derived hydrogen in 10 years' time. Given that green hydrogen is only 1% of the hydrogen market today, the potential is huge. In a blue sky scenario, taking 100% share of a market that will be 8x larger means that green hydrogen production would be 800x larger than it is today in 2050!

What regulatory support is there for this transition?

The European Union (EU) is the furthest along in its planning for the transition to a zero emission economy, and it has recognised the need to develop a strong hydrogen industry to enable decarbonisation in industry, transport and heating. In July, the EU announced its hydrogen strategy, targeting at least 40GW of renewable hydrogen electrolysers and the production of 10mt of renewable hydrogen by 2030. The analysis anticipates the need for €24-42 billion of capital investment for electrolyser capacity up to 2030.

What will be the investment consequences of this transition?

There will, of course, be many investment consequences. There will be opportunities for energy companies and industrial engineering companies to build and operate all the new green hydrogen facilities. There will also need to be hundreds of gigawatts of new renewable energy capacity to supply electricity to the electrolysers, and these new renewable energy volumes are not yet built into market forecasts for the wind and solar industry suppliers.

However, perhaps the simplest business and investment opportunity will be the growth that comes to the companies that can capture the equipment market for all the new electrolysers that will be deployed. Electrolyser equipment sales are a truly tiny market today, at only approximately $250m revenues in 2020.

Building out the required scale of green hydrogen to decarbonise all these industries globally would require an annual electrolyser market of closer to $25 billion in the peak years of construction. In that context, the fact that there are only a handful of leading electrolyser players today makes this a very interesting industry, as while there could be some new entrants, the technology is not simple and the established players are rapidly forming alliances and customer relationships with developers and energy groups. This will give them economies of scale and help them drive down costs.

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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.

The recent fall of Lindsell Train Global Equity from the top quartile of its sector towards the bottom should not necessarily be cause for holders to sell out, fund pickers believe.

Michael Lindsell & Nick Train’s flagship fund has strong long-term track record thanks to its quality-growth approach, posting a total return of 361.79 per cent since its launch in March 2011.

This compares with 210.68 per cent from the MSCI World index and ranks its eighth out of 185 funds in the IA Global sector, where the average member is up 164.61 per cent.

The £8.2bn fund was also among the top 10 best performers in its peer group in 2015, 2017 and 2018, leading to top-quartile rankings over three and five years.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

However, over the last year performance has started to wane.

Lindsell Train Global Equity has dipped into the third quartile over a one year and is in the fourth quartile over the last six months.

It has also underperformed its benchmark over both of these periods.

Performance of fund vs sector and benchmark over 1yr

 

Source: FE Analytics

In addition to this, analysis by Trustnet suggests shows flows into the fund have slowed over the last year, especially when compared with the high inflows captured in 2019.

The below table shows the approximate monthly contribution to the fund’s assets under management that came from both performance and flows.

Approx. monthly contribution of performance and flows on AUM

 

Source: Trustnet

While some of this will be down to the coronavirus crisis, part could also be down to Hargreaves Lansdown’s decision to cut Lindsell Train Global Equity from its Wealth 50 ‘buy list’ in July 2019 during an overhaul following the fallout from the collapse of the Woodford Equity Income fund.

At the time, Hargreaves Lansdown said its decision was not due to a change in its view of the managers or their performance, but because the fund had been accumulating a large stake in Hargreaves Lansdown stock and could be seen as a conflict of interest.

But some of the slowdown of inflows may also partly be due a ‘quieter’ year of performance, according to Chelsea Financial Services’ Darius McDermott.

“When you're performing well, people give you money,” he explained. “You would like to think people give you money before you return well, but due to human nature, the better you perform, the more assets you get.”

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McDermott praised the long-term performance of Lindsell Train Global Equity and said one soft year is not enough in itself to panic and sell.

“To my mind, the main factor in Lindsell Train being a bit behind the index by a few per cent is not a disaster. It was a quieter year rather than a bad year,” he said.

“They invest in quality companies that can compound earnings and keep on growing. They don’t have to be mega-growth companies, but they are steady, stable, high cash generative type of businesses.

“The one thing which Lindsell Train generally do not do and have never done is act as huge investors in the technology sector.”

This explains some of the underperformance over the last year as many technology stocks have rallied dramatically after the initial sell-off during March 2020.

McDermott continued: “For instance, something like Tesla, which was up 700 per cent in the last year, is a business that's not super cash generative, it's not super profitable, it can't really invest in itself to grow. It just doesn't fit [Lindsell and Train’s] remit.”

He explained that when Tesla’s incredible rally is one of the driving forces for returns for the global equity benchmark, funds that don’t own it will underperform.

“Lindsell Train are not benchmark investors. They have index-busting returns over the longer term,” McDermott said.

“If you are an investor that wants high exposure to technology, then Lindsell Train Global Equity is not the vehicle for you. If that quality-growth approach to investing is what you look for, Lindsell Train Global Equity is as good as any.”

The fund has a roughly 9 per cent weighting to technology, which is underweight compared to the average fund in the sector with a 26 per cent weighting.

Indeed, Michael Lindsell told investors in a December update: “Here at Lindsell Train we are not known as tech investors.

“The fast pace of change and consequent paucity of heritage-rich constituents means the sector is not a natural home for us. We consciously underweight it – at least as defined by most index providers.”

Teodor Dilov, fund analyst at interactive investor, agreed that Lindsell Train Global Equity’s lack of technology stocks was a drag to performance last year.

He said: “The devil is in the detail and looking on a portfolio level, the continuous underweight in technology has been a big detractor for the strategy.

“That combined with an underweight in healthcare and being invested in some sports stocks that to greater extend rely on live performance such as Celtic FC, Juventus FC and World Wrestling Entertainment led to an offset of the great performance of the fund’s digital businesses – Pay Pal, Nintendo, Intuit and eBay.”

Another point to note, according to Dilov, is that Lindsell Train Global Equity has a large underweight in the surging US and large overweight to the UK, which has been out of favour for some time due to uncertainty around Brexit.

He said: “It is up to the individual’s objectives and risk appetite to decide on what strategy to pick for their global exposure.

“We like Fundsmith Equity, which on the contrary has 69 per cent of the entire portfolio invested in the US, while also maintaining around 10 per cent overweight in the UK.

“The fund has larger exposure to healthcare and technology and smaller than the global equity peer group average positions in more cyclical areas of the market such as financials and consumer discretionary.”

The UK economy contracted by 2.6 per cent in November as the country went into its second national lockdown to prevent the spread of coronavirus, official figures show.

The fall in output is better than many analysts had expected but still raises the prospect of the UK enduring a ‘double-dip’ recession. This would mean the country is looking at a W-shaped recovery from the pandemic, rather than the hoped-for V-shaped recovery.

The Office for National Statistics’ (ONS’) monthly GDP estimate shows November’s 2.6 per cent contraction came after six consecutive monthly increases, including an upwardly revised 0.6 per cent increase in October.

Monthly GDP index, Jan 2007 to Nov 2020

 
Source: ONS

November GDP fell back to 8.5 per cent below the levels seen in February 2020, when the coronavirus pandemic started, compared with 6.1 per cent below in October 2020.

Rupert Thompson, chief investment officer at Kingswood, said: “UK GDP held up better than expected in the face of the lockdown in November, declining 2.6 per cent over the month rather than the 5.7 per cent which had been expected.

“The economy will clearly shrink further this quarter but the November numbers highlight that the size of the hit from the current lockdown will be much smaller than that seen last spring. This is both because the economy is better prepared and the lockdown is less severe than a year ago.”

Services, which are the dominant element of the UK economy, were the main drag on growth in November. There was a 3.4 per cent fall in service sector output over the month as activity was restricted during lockdown, leaving the services sector 9.9 per cent below the level of February 2020.

All 14 service sub-sectors witnessed a contraction, with the biggest coming from accommodation & food service activities, followed by wholesale & retail trade, other service activities and arts, entertainment & recreation.

These four sub-sectors accounted for nearly 80 per cent of the fall in services.

The production sector also fell marginally by 0.1 per cent in November 2020, remaining 4.7 per cent below its February 2020 level, while construction saw positive growth of 1.9 per cent, recovering to 0.6 per cent above February’s level.

Contribution to monthly GDP, percentage points, Nov 2020

 

Source: ONS

Robert Alster, chief investment officer at Close Brothers Asset Management said: “General consensus is that the UK economy is going to get worse before it gets better, which is reflected in November’s GDP plummet after several months of tentative growth. The lockdown at the end of 2020 almost feels like old news as we undergo our third round of shutdown.

“A double-dip recession is increasingly on the cards for Britain. Virus cases continue to climb, leaving policymakers grappling with establishing an effective health policy whilst providing enough financial support for both individuals and businesses.

“With no set end-date for the current restrictions, investors will be hoping that the rapid vaccine roll-out programme across the nation will get the UK economy up and running again, meaning there is light at the end of the tunnel.”

Low inflation has become a mainstay of economic policies and financial markets over the last decade. It explains how central banks have been able to cut interest rates and buy up large amount of government bonds and why huge amounts of fiscal relief in response to Covid-19 can be spent without moving the inflation needle too much.

In this period of large-scale quantitative easing and expanding government debt, a new era of monetary policy has emerged – one in which deficits and debt burdens are allowed to run financed by central banks purchases. 

However, this continual debt monetisation is dangerous for long-term faith in developed market currencies and may have implications for the velocity of money – the rate at which money is exchanged in economies – in future generations. 

While it stands to reason that there should be a short-term surge in inflation eventually, owing to pent-up consumer demand that has been building since last year, David Jane (pictured) – manager in the Premier Miton Investors macro-thematic, multi-asset team – does not think this will change the long-term inflationary outlook.

He explained: “I really don’t buy into the concept that there’s a change in the long-term trend of growth and inflation when you have an economy with such relatively low structural growth rates.” 

He conceded that while bond yields are where they are because of central bank purchasing, that is another short-term feature.

“The reality is you can’t manipulate the bond market to that degree in the long-run,” he added. “They have to reflect the price.”

There’s a worry that a small surge in inflation would reveal the full cost of government debt and central bank liabilities, given that in the US, Britain, Japan and the eurozone, central bank balance sheets have risen by more than 20 per cent of their combined GDP since the crisis began.

“The question then becomes whether you can issue money forever and what this does to the theoretical relationship between bond yields and economic growth?” asked Jane.

Another theoretical relationship lies between the amount of government debt and how that affects the long-term growth of the economy.

“If you issue too much government debt, then [short-term] bold yields go higher because there’s no market for them,” said Jane.

“But there’s a crossing over point whereby issuing too much government debt sends [long-term] bond yields lower and then it becomes less attractive to invest in the real economy because the expectations are that it will contract over long periods of time and that’s where we’ve got to in Japan, Europe and the west generally.”

“There may not be the demand for the government debt that you would hope, but at the same time bond yields are truly reflecting the fact the government has crowded out the private sector,” he said.

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There’s also an argument that governments could use a surge in inflation to reduce the real value of that long-term debt and ease the strain on balance sheets.

“We’ve moved into a new era of monetary policy,” said Premier Miton’s Jane. “The old way of looking at the world – wherein government debt is a burden on future generations which will have to be paid back by increasing taxation or inflation – is maybe redundant now.”

Indeed, in theory, if the government runs a deficit forever and their own central bank buys the debt, then that debt is continuously monetised.

“If that is the case, modern version of money printing, which always used to be inflationary in the long run is not proving to be inflationary in the short-term and if you can just issue debt, does it matter?” Jane asked.

Modern monetary theory would suggest that taxation is an optional policy tool rather than a funding mechanism, but if you can print money forever “then you only have to tax people as a social policy, not a fiscal policy”, said Jane.

“It’s reasonable to suggest that modern monetary theory and the massive deficits will ultimately lead to a lack of confidence in currency and that will ultimately lead to inflation in the real economy,” he noted.

The huge increase in the money supply over recent months has not led to rising inflation because money velocity has fallen in lockstep with the stagnating real economy.

Considering, though, that nearly one-fifth of all US dollars in existence have been created this year, what happens when the money velocity picks up?

“That money is sitting in consumers and company balance sheets and that’s causing the lack of structural growth at the moment,” the multi-asset manager said.

“Where you’re seeing it now is in real assets like gold and bitcoin, investors are adjusting their financial portfolios to represent the lack of confidence in currency, but it’s not leading to inflation in the traditional sense.”

While there appears to be a growing decline in the confidence in money – people are still hoarding it in anticipation of a return to normality later this year.

Jane explained that when money velocity picks up and the money goes from financial markets back into the real economy, that could prove to be headwind for financial markets.

“In the same way that it’s so easy to park excess cash in the stock market,” he finished. “At the margin you can imagine money pulling away from financial markets.”

I think I can speak for everyone on the planet when I say good riddance to 2020. However, not wanting to dwell on the past and instead looking to the future, in this article six analysts at Kepler Trust Intelligence, a leading research company in the investment trust space, discuss their standout opportunities for the year ahead, including the catalysts for growth and the potential for investor returns!

Pascal Dowling – Invesco Perpetual UK Smaller Companies

I choose Invesco Perpetual UK Smaller Companies (IPU) as my top performer for 2021. The UK has been at the bottom of the heap for investors for a long time, and the true impact of the coronavirus in economic terms is yet to be felt here as elsewhere, but we are, in my view, in better shape than most to move forward once the vaccine becomes widespread, with the vast, insoluble uncertainty that was the Brexit deal now resolved.

Against that backdrop, in my view, IPU’s discount (circa 8 per cent) could be a significant attraction for investors, having been savaged in 2020 after a long period of trading at a premium to its peers. While that discount has come in somewhat recently, we believe that the fundamental factors meriting its historic premium rating relative to peers have not changed. The trust continues to offer a relatively secure dividend stream which offers a significant yield premium to peers. Certainly, the short-term performance has not matched some ‘growthier’ peers. However, investors mustn’t forget that this is likely a characteristic of the conservative, risk-averse investment process which, in our view, has enabled the managers to deliver on their objective of top quartile performance but with below-average volatility over the long term.

William Heathcoat Amory – Oakley Capital Investment

Growth trusts were in favour last year, so it is hard to find many with tempting discounts. However, in my view, Oakley Capital Investment (OCI) could fit the bill and is my pick for 2021. OCI is a listed private equity trust that has a highly concentrated portfolio exposed to the sectors that manager Oakley Capital focuses on; technology, education and consumer. In their most recent report, the team stated that 12 out of their 15 companies are forecast to meet or beat their budget for 2020, or have returned to budgeted run rates in H2. In our view, this gives reassurance that the majority of the portfolio should prove resilient through 2020/21.

OCI trades on a discount to NAV of 19 per cent currently, but this is to historic valuations (June 2020). Equity markets have moved on considerably from here, and peers in the listed private equity sector have also reported strong valuation gains and realisation activity since June. This gives us confidence that the real discount is likely to be wider than 19 per cent. We believe that OCI’s historic performance, its narrow sector focus in areas which have proved resilient to Covid-19, and its significant cash balances giving it plenty of room for manoeuvre. The upcoming NAV announcement at the end of January (30 December valuations) should give more colour on how the portfolio has performed over the second half of 2020 and could be a catalyst towards a re-rating.

Thomas McMahon – Henderson Opportunities Trust

Risk appetite has been picking up in the world and the market seems optimistic about 2021. I am going to follow Nick Train’s advice and be biased towards optimism. In my view, Henderson Opportunities Trust (HOT) could do very well this year. It is a significantly geared portfolio of UK stocks biased to the mid- and small-cap space. James Henderson and Laura Foll have built a portfolio balanced between Covid winners and Covid losers, with value and growth exposure. Historically it has done extremely well in cyclical UK recoveries, and its discount has remained wider than many of its peers, meaning there is good potential for the share price to catch up next year in my view. Once the vaccine is rolled out, I expect the UK to do well and HOT is well placed to benefit.

Callum Stokeld – Golden Prospect Precious Metals

My pick for 2021 is Golden Prospect Precious Metals (GPM). My starting point is that we entered a multi-year bull market for commodities in late 2015. Fiscal repression is coming and the Fed will hold bond yields at (increasingly) negative inflation-adjusted levels. This provides a strong boost to gold spot prices. Yet silver looks even more attractive on a relative basis. The silver to gold ratio suggests support to silver is cheap. ‘Green’ infrastructure spend will require vast amounts of silver, and Goldman Sachs and Citi have both published very bullish estimates on the silver spot price. S&P exploration reports, as well as more anecdotal evidence, continue to suggest supply discipline in exploration budgets. With mining majors exhibiting substantial positive free cash flow, M&A activity around junior miners could be an attractive way for them to increase production, which should benefit GPM.

In 2021, whilst there may be some volatility, looking at underlying gold and silver miners, the correlation to rising spot prices is supremely compelling to me.

William Sobczak – Miton UK MicroCap Trust

My stock pick for 2021 is Miton UK MicroCap Trust (MINI). Launched in 2015 and managed by small caps veteran Gervais Williams. It invests predominantly in a portfolio of smaller UK companies, typically with a market capitalisation below £150m. The trust has been the strongest performer in the AIC UK Smaller Companies sector over the past one month, six months and one year. Despite this, it trades on a 13.1 per cent discount, relative to a sector average of 2.8 per cent.

I believe that there is plenty of room for the trust to run in 2021, given the underperformance of the UK equity market since 2016. The resolution of Brexit is likely to produce a significant rebound in the UK economy, particularly in the small-cap area, allowing the trust to fully participate both in terms of NAV and the narrowing of the discount.

David Johnson – Scottish Mortgage Trust

My choice for 2021 is Scottish Mortgage Trust (SMT).

SMT had a stellar year in 2020 with a NAV return of 108 per cent. but I still see strong tailwinds supporting this growth-stock champion. In my opinion, the biggest factor underpinning the expensive valuations for many of SMT’s holdings is the rock bottom yields bonds offer currently, which reduces the opportunity cost for holding equities.

I see little chance for a 2021 economic recovery sufficient to push yields higher, especially given the ongoing need for lockdowns.

The prospects of SMT’s underlying holdings, the majority of which are technology names, remain good. While Covid-19 has led to a huge surge in demand for many of their services, I do not believe it will simply dissipate with its eventual resolution. Even Tesla, SMT’s largest and possibly most optimistic holding, only missed its production target by 50 cars, surpassing analyst expectations in the process.

Pascal Dowling is a partner at Kepler Trust Intelligence. The views expressed above are his own and should not be taken as investment advice.

While the global economy is expected to continue its transition “from hurting to healing” this year, there are several risks that could challenge this economic recovery, according to PIMCO’s Joachim Fels and Andrew Balls.

Global economic adviser Fels and chief investment officer – global fixed income Balls believe the global economy will make good progress in 2021 as vaccines are rolled out while fiscal and monetary policy support remain in place.

“Coming off a low base, world GDP growth in 2021 is expected to be the highest in more than a decade,” said the pair.

“We forecast economic activity in the US to reach pre-recession peak levels during the second half of this year, while Europe, due to its current double-dip, is unlikely to fully make up the output losses until the middle of 2022 despite the sharp growth bounce we expect from the second quarter.”

Inflation is likely to increase only moderately and remain below central bank targets, despite a forecasted sharp growth rebound, as output and demand continue to operate below normal levels for some time given the depth of the recession and unemployment.

“Central banks will remain hostage to inflation running below target and the need to keep borrowing costs low in order to enable ongoing fiscal support for years to come,” they said.

“Thus, policy rates are likely to remain at present levels in the foreseeable future or could even be reduced further in some countries.”

Furthermore, central bank asset purchases – or quantitative easing – are likely to continue throughout 2021, “and likely well beyond”.

Nevertheless, they warned that there are risks to the global growth outlook.

One risk that faces some advanced economies, the pair warned, is ‘fiscal fatigue’.

Although PIMCO's base case assumes continued fiscal policy support – aided by loose monetary policy – they warned any sign of ‘fiscal fatigue’ would be a significant risk to the economic recovery.

 

“Aided by monetary policies that keep funding costs low, most governments are likely to keep propping up household incomes via transfers and supporting companies via loan guarantees, subsidies, and tax breaks,” they said.

However, such fiscal support should not be taken for granted.

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“In the US, while additional fiscal support this year looks likely after the Democrats secured a slim majority in the Senate with the Georgia run-off, later this year the focus may well shift to potential increases in corporate and top personal income taxes to be enacted in 2022,” said Fels and Balls.

While fiscal stimulus is “largely backed in the cake for 2021” in Europe as a result of already agreed national budgets and upcoming disbursements from the EU Next Generation Fund, the reality of large deficits could affect policymakers’ willingness to “stay the course” and launch additional stimulus if needed.

“The budget season for the following year traditionally starts after the summer in Europe, and a change in the fiscal policy course for 2022 could thus come into view by the second half of this year,” said Balls and Fels.

“This will be aggravated by the debt brake in the German constitution, which was temporarily waived for 2020 and 2021 but will require budget cuts in 2022 and beyond.

“Expectations of future fiscal belt-tightening via spending cuts and tax hikes may well start to affect consumer and corporate spending plans in the course of this year.”

The second risk to the global recovery in 2021 is the transition of China from credit easing to tightening.

While growth was “a decidedly sub-par 2 per cent or so last year”, PIMCO is anticipating the Chinese economy to grow by 8 per cent or more in 2021.

Having rebounded strongly from the initial impact of Covid-19, Chinese authorities may decide to focus on deleveraging this year to avoid further credit bubbles and ensure long-term growth sustainability.

Although such a move could impact its near-term growth outlook.

“Calibrating just the right amount of credit easing or tightening in a highly leveraged $14trn economy is fraught with difficulties, which implies a real risk of overtightening causing a sharper-than-expected growth slowdown with negative global repercussions in economies and sectors heavily dependent on demand from China,” they said.

Finally, the pair said ‘economic scarring’ could pose a further risk to the recovery preventing a return to pre-pandemic levels of activity.

“Given the unprecedented nature and size of the Covid-19 shock, it is hard to gauge the behavioural changes of households and firms,” they said.

Although they expect significant pent-up demand to be unleashed this year as the roll-out of vaccines opens up economies, there is a significant risk that “private households and firms remain more cautious in their spending and investment patterns for longer”.

Furthermore, labour force participation, which declined in many countries during 2020 as the pandemic spread and forced more people to stay at home, may not recover quickly.

Fels and Balls added: “Lasting damage to corporate balance sheets and business models could only become apparent during the recovery as government support expires over time.”

Notwithstanding its more positive base case for 2021, the pair said the overall low level of yields, tight credit spreads and low volatility means it will place “significant emphasis” on capital preservation and liquidity management.

“We will look to be patient and flexible, to guard against a rise in market volatility, and seek to add alpha in more difficult market conditions,” they concluded.

“While risk markets can continue to perform well over the coming months in response to broadening vaccine rollout and policy stimulus, investors may have become too complacent as reflected by the bullish consensus positioning. As these risk factors [outlined above] underline, we see this as a time for careful portfolio positioning and not for excessive optimism or risk-taking.”

Sustainable investing is not just about a company’s financial success, but how it achieves that success. The importance of considering all stakeholders is intrinsic to the approach.

Those stakeholders range from employees to shareholders to wider society. The Covid-19 pandemic has shone a spotlight on how companies treat their employees, protect their customers, and help guide their suppliers through a time of crisis.

With vaccines on the way, the effects of the pandemic should – hopefully – start to fade. We ask three sustainable investors how the pandemic has changed the conversation around sustainable investing, and what they expect the long-term impact to be.

Has the pandemic changed how you, as investors, speak to companies?

Nicholette MacDonald-Brown, Head of European Blend (NMB): “As sustainable investors, our engagement with companies for a long time now has included questions about how they treat all their stakeholders. But if I think back to the 2008 global financial crisis, the conversations then were very different to the conversations we’re having now. Back then, it was all about profit margins and balance sheets whereas now those things are discussed in partnership with the treatment of employees and suppliers.”

Katherine Davidson, Global and International Equity Portfolio Manager (KD): “The dialogue has changed between investors and companies. ESG (environmental, social, governance) concerns used to be mainly discussed in terms of the “E” but this year it’s become very clear that the social aspect is just as important. This is a broad conversation that’s happening in the media and wider society as well. How companies treat their staff, manage their supply chains and keep their customers safe is not solely of interest to investors.”

Will this focus on sustainability last?

NMB: “I think it will last and in simple terms it’s largely down to investment performance. The relative success of sustainable funds this year is very important because it was their first big test. This shows that sustainability isn’t a ‘luxury’ that investors can only afford to think about in the good times; it’s crucial in tough economic times too. Looking just at the European benchmarks, the MSCI Europe ESG leaders index returned -1.9% year-to-date compared to -5.6% for the broad MSCI Europe index (source: Morningstar, as at 30 November 2020). For me, this shows the sustainability debate will persist.”

Saida Eggerstedt, Head of Sustainable Credit, (SE): “I think the pressure for companies to demonstrate good practice has gone up. After all, there is plenty of choice for investors: the economic difficulties of this year have seen many companies seek new funding by issuing debt or equity. Investors can therefore be selective. Let’s not forget the role of governments and regulators in this too: many companies have sought some kind of state support, whether via loans or access to furlough schemes. Governments want to see high standards from companies in terms of social and environmental behaviour if they are going to get state help and this will extend beyond the current crisis.”

KD: “We’re starting to call it a new social contract, in that a company’s place in its community and wider society is changing. This is important for clients too. The latest Schroders Global Investor Study showed how people expect companies to prioritise the actions that have an impact on the wider environment and society.”

How have companies reacted to questions about sustainability?

SE: “In some ways, the sharp market falls in the early days of the pandemic offered a good opportunity for investors like us to engage with companies over their response. It can be easier and more effective to press for best practice or greater transparency at a time of crisis, rather than when everything seems to be going well.”

KD: “One of the positives of the crisis is that it has enabled us to start engaging with companies who previously hadn’t seen the business case for sustainability. This year, capital markets have rewarded companies that are active on sustainability issues. We’ve also seen customers vote with their feet and brand perceptions fall if a company is seen to be a ‘bad actor’ in the crisis. This is the kind of thing that gets noticed by senior executives.”

NMB: “As an investor in Europe, I’m fortunate that many of the companies I speak to are already thinking about sustainability issues. But it still gets their attention if I say that doubts over a sustainability issue make a company less investable, in the same way as doubts about their profit margins. What’s also very interesting is that we’re starting to see companies come to us and ask for advice about best practice on sustainability. The recognition that companies should put sustainability targets alongside financial targets is definitely growing.”

Do you think clients will increasingly seek out sustainable investments?

KD: “The pandemic has caused a lot of people to consider their values and what is most important to them. This has big implications for investing. For example, our latest Global Investor Study found that 77% of retail investors won’t invest in something if it’s against their personal beliefs.”

NMB: “There’s often a misconception that there’s a narrow audience for sustainable products, or that only young people are concerned about sustainability. Perhaps that used to be true but it’s certainly not now. More traditional investors like insurance companies also care about sustainability and are starting to drive the conversation. The growing evidence that you can achieve your investment goals without compromising your beliefs is crucial in this regard.”

Where do you see sustainable investing opportunities in the wake of Covid-19?

NMB: “There are certainly plenty of opportunities for returns. We could look at those companies that have been left behind because any thought of their long-term prospects has been overwhelmed by the virus and lockdowns. And from a sustainability perspective, this kind of crisis is exactly when companies need their investors. So we should still be demanding in terms of sustainability targets.”

SE: “It’s also encouraging to see the stimulus coming from governments in terms of recovery from the crisis. We are seeing many countries issue green bonds or social bonds. These are long-term commitments which are designed to address environmental issues, promote jobs growth and improve resilience in the face of any similar future crisis.”

KD: “And I think there’s a real opportunity for us as active investors, who can choose which companies we invest in, to keep the pressure on and make sure sustainability remains high up the agenda as the recovery comes through.”

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The events of 6 January, in which protestors stormed the US Capitol, has led to a second impeachment of president Donald Trump. However, given the limited time Trump has left in office it is unlikely to impact markets significantly.

Trump stands accused of inciting the armed riot in a speech given at the White House earlier on 6 January, when the US president "repeatedly issued false statements asserting that the presidential election results were fraudulent and should not be accepted”.

"President Trump gravely endangered the security of the US and its institutions of government, threatened the integrity of the democratic system, interfered with the peaceful transition of power, and imperilled a coequal branch of government,” the article of impeachment noted.

US House votes to impeach Donald Trump for a second time

 

Source: United States House of Representatives

The House of Representatives voted 232 to 197 in favour of impeachment, with 10 Republicans joining the Democrats. Contrastingly, when Trump was impeached for the first time over a year ago it was done so without a single Republican vote.

“Today, in a bipartisan way, the House demonstrated that no one is above the law, not even the president,” said Nancy Pelosi, the Democratic speaker of the House.

But Mitch McConnell, the Senate’s senior Republican, said he did not intend to reconvene the upper chamber of Congress before 19 January, one day before Joe Biden’s inauguration.

With a week left in his term, Trump will not become the first president to be removed from office through impeachment. However, during the trial over the next couple of months, senators can vote to bar Trump from holding public office again, casting doubts over his plans to run again in 2024.

Craig Erlam, senior market analyst at OANDA Europe, noted that “there's a lot of US political noise now as far as the markets are concerned”, following the riot on Capitol Hill and Trump’s historic second impeachment.

“But it’s having minimal impact on the markets,” he added. “Investors are far more concerned with the incoming administration and what that means for stimulus prospects and inflation. Soothing words from Fed policy makers over the last 48 hours have helped take the edge off the yield moves, which could provide some relief. I guess we'll see in the coming days just how much.

“Should we see the 10-year drop back below 1 per cent, it would suggest investors are far more at ease with the Democrats stimulus plans and could be bullish for stock markets, no longer held back by the prospect of premature Fed tightening.

“The political distraction will likely remain ahead of the inauguration next week as security is ramped up. Any hopes of an impeachment trial in the Senate over the next week have been quashed by majority leader Mitch McConnell who dismissed the idea of reconvening for a trial before Trump leaves office.”

The £10.6bn Vanguard LifeStrategy 60% Equity fund was one of the most popular funds with investors last year and is one of the adviser market’s ‘go to’ funds from a portfolio construction perspective.

The Vanguard LifeStrategy 60% Equity fund runs a ‘classic split’ portfolio of 60 per cent equities to 40 per cent bonds and last year took in around

It was the second most viewed fund on Trustnet and attracted inflows of £2bn in the 12 months to 31 November, as investors sought out low-cost, multi-asset options for their portfolios.

This popularity with investors has been underpinned by its performance which has seen it outperform the IA Mixed Investment 40-85% peer group’s 40.85 per cent gain since it launched in 2011.

Performance of fund vs sector since launch

 

Source: FE Analytics

Therefore, Trustnet asked market experts what investors could hold alongside Vanguard LifeStrategy 60% Equity fund in their portfolios.

 

ASI Global Smaller Companies

The first pick was the £1.4bn ASI Global Smaller Companies fund overseen by FE fundinfo Alpha Manager Harry Nimmo and Kirsty Desson.

As the Vanguard strategy provides investors with immediate diversification in their portfolios, due to its equity-bond split, investors should look for a fund which complements that strategy and “brings something new to the portfolio,” said AJ Bell’s head of active portfolios Ryan Hughes.

This is what the five FE fundinfo Crown-rated ASI Global Smaller Companies fund does, according to Hughes, with its “clear focus” on a concentrated portfolio of smaller companies from around the world able to grow faster than the market.

The fund was previously managed by Alan Rowsell who stepped down last year to launch a similar strategy at Premier Miton Investors.

But this hasn’t ‘interrupted’ the fund, so to speak, according to Hughes, since Nimmo managed the fund when it first launched in 2012, while Desson began working on the fund just over a year ago.

This means that while there is technically a ‘new’ management team in charge of the fund, it has a “strong continuity approach”, Hughes said.

The fund was also picked by Adrian Lowcock, head of personal investing at Willis Owen, who added that the small cap focused fund will “nicely complement”, the US large-cap exposed Vanguard option.

“Active management is essential for successful investing in smaller companies as most companies either fail to grow or just fail,” he explained. “For this reason, I have selected a fund where the manager [Nimmo] has a proven and successful strategy.”

Nimmo uses the Aberdeen Standard Investments’ proprietary Matrix process, which ranks companies on a number of factors – including growth, momentum, quality and value – with the team then focusing on companies with the highest scores to find investment ideas, Lowcock said.

He added: “Unlike many smaller company managers, Nimmo also believes in riding his winners and will back companies all the way as they grow from small to large businesses.”

The ASI Global Smaller Companies fund has made top-quartile returns over several time frames, including three and five years, and also performed strongly during 2020.

Performance of fund vs sector over 3yrs

 

Source: FE Analytics

Over the past three years it’s made a total return of 46.56 per cent, outperforming the IA Global sector (33.41 per cent). It has an ongoing charges figure (OCF) of 1.05 per cent.

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Personal Assets Trust

The next fund pick comes from Rob Morgan, pensions and investments analyst at Charles Stanley Direct, who selected the closed-ended Personal Assets Trust.

The Personal Assets Trust has broadly the same objectives as an investor looking for traditional 60/40 fund, according to Morgan, but with some differentiation to the Vanguard LifeStrategy at a stock level.

“It has an approach that balances growth and wealth preservation, which should resonate with investors seeking steady [and] less-volatile returns,” he said. “Yet, it also provides diversification and brings something different to a portfolio through individual stock selection and active asset allocation – in contrast to the passive approach of Vanguard LifeStrategy.”

The £1.4bn Personal Assets Trust is run by FE fundinfo Alpha Manager Sebastian Lyon, whose primary investing principle “is not losing money – rather than being concerned with relative performance against a benchmark”, Morgan said.

Indeed, a core element to the fund’s process is to make the highest returns possible while avoiding any level of risk which is significantly higher than the FTSE All Share index.

Looking at the trust’s volatility over several time frames and it has consistently been one of the least volatile portfolios in the IT Flexible Investment sector. Over 10 years it had the lowest cumulative.

Like all of Troy’s funds, the Personal Assets Trust puts capital preservation at its core, doing so by investing in quality blue-chip equities, index-linked bonds, gold and cash.

Focusing on these four main areas has worked well for the fund, according to Morgan.

He said: “This has proved a resilient combination as returns from these areas tend to move independently of each other rather than up and down in tandem. It is the sort of resilient holding that could be considered for part of the more stable core of a long-term portfolio.”

Launched in 1983, the Personal Assets Trust has made a total of 14.39 per cent over the past three years, outperforming both the IT Flexible Investment sector and the FTSE All Share.

Performance of fund vs sector and index over 3yrs

 

Source: FE Analytics

It currently has no gearing and is trading at a 1.1 per cent premium to net asset value (NAV). The trust has a 1.2 per cent dividend yield and ongoing charges of 0.86 per cent.

Baillie Gifford Global Discovery

The final fund pick comes from GDIM investment manager Tom Sparke, who chose the £2.2bn Baillie Gifford Global Discovery fund.

Sparke said that while the Vanguard LifeStrategy fund has generated good returns and is an “excellent, one-stop shop for a multi-asset portfolio,” it is missing out on some of the “real hidden gems of the investment world”, since it allocates based on market capitalisation.

These ‘hidden gems’ can instead be filled by the Baillie Gifford Global Discovery fund.

“Holding the Baillie Gifford Global Discovery fund alongside this would provide numerous benefits, not least diversification, active management and a long-term view,” said Sparke.

“The Global Discovery fund would provide access to smaller, faster growing companies as it seeks to invest in companies with innovative technologies or who have the potential to revolutionise the industries in which they operate.”

Following the ‘Baillie Gifford style’, the fund is growth focused, with a distinct bias to technology.

“While the risk in this fund is relatively high, the returns have shown that investors have been rewarded generously for holding the fund over the years, not least the last 12 months in which returns have been exceptional,” Sparke said.

Indeed, the Baillie Gifford fund was the eighth best performing fund across all sectors in 2020.

The fund has been run by FE fundinfo Alpha Manager Douglas Brodie since launch in 2011, with deputy managers Luke Ward and Svetland Viteva joining in 2018.

Performance of fund vs sector & benchmark over 3yrs

 

Source: FE Analytics

Over three years the fund has significantly outperformed its IA Global peer group, returning 133.41 per cent. With an FE fundinfo Crown rating of five it has an OCF of 0.78 per cent.

More than half of the active funds in 33 sectors beat their benchmark in 2020, research by Trustnet has found, with some peer groups seeing almost every active strategy outperform.

While last year’s coronavirus pandemic and global lockdown created some unprecedented conditions for fund managers to operate in, massive amounts of stimulus and the discovery of several effective vaccines meant it ended up being a positive year for most markets.

But how did active managers fare in this environment? In this research, Trustnet has compared the performance of every active fund in the Investment Association universe with its stated benchmark to determine if 2020 had been a successful year for active management.

Our research found that 1,426 of the 2,419 funds that declare a benchmark – or 58.9 per cent – made a total return that was higher than the index. This, of course, left 993 funds that failed to beat their benchmark.

While good news for active managers, 2020’s figures mark a slight retreat from 2019 when 61.6 per cent of Investment Association funds outperformed. But they are a significant improvement on 2018 – that year, just 32.9 per cent of funds made a higher return than their benchmark.

The sector with the greatest proportion of outperforming funds was IA UK Equity & Bond Income where all four of its members that state a benchmark - LF IM UK Equity & Bond Income, Threadneedle Monthly Extra Income, LF Canlife UK Equity and Bond Income and M&G UK Income Distribution – were able to beat it last year.

As shown in the table below, which reveals the 25 sectors where 60 per cent or more active members outperformed their benchmark, IA Asia Pacific Including Japan, IA UK Index Linked Gilts and IA Global EM Bonds - Hard Currency were also especially strong areas for active managers.

Source: FinXL

It’s worth noting that the IA UK All Companies sector – one of the largest peer groups but one that has been unloved for some time – has made it onto this list as two-thirds of its active members beat the index last year,

Those outpacing their benchmark by the widest margin were Baillie Gifford UK Equity Focus, MI Chelverton UK Equity Growth, Premier Miton Ethical, Scottish Friendly UK Growth and Premier Miton UK Growth.

But the IA Global sector – which has been very popular with investors over recent years – failed to make the table. Some 54.4 per cent of its active funds were ahead of their benchmarks in 2020.

Baillie Gifford Long Term Global Growth Investment offered the strongest outperformance in this peer group – it’s 95.62 per cent total return was 83.19 percentage points ahead of its FTSE All World benchmark.

Baillie Gifford Positive Change, Guinness Sustainable Energy, Baillie Gifford Global Stewardship and PGIM Jennison Global Equity Opportunities were next best.

However, there were six Investment Association sectors where the majority of active funds did not beat their benchmark last year.

The worst offender was IA Global Equity Income, where only 20.5 per cent of members outperformed. The IA UK Direct Property, IA UK Equity Income, IA Sterling High Yield, IA North America and IA Mixed Investment 20-60% Shares sectors also offered a lacklustre year for active investors as more than half of their members did not beat the benchmark.

That said, the IA North America sector is home to the fund that outperformed its benchmark by the greatest margin. Baillie Gifford American was 107.72 percentage points ahead of the S&P 500 with its total return of 121.84 per cent – the highest return of the entire Investment Association universe for 2020.

  

Source: FinXL

Of course, the number of outperforming active funds might matter very little if they only beat the index by a couple of basis points. The above table shows the average level of outperformance or underperformance in each sector, along with the relative return of the average outperforming and underperforming funds – so what extent they beat the index or trailed it.

IA Asia Pacific Including Japan sits at the top after the average active fund outpaced their benchmark by 13.89 percentage points last year. The average outperformer ended 2020 some 17.60 percentage points higher than the index, while the average underperformer lagged behind it by 12.05 per cent.

The IA Japanese Smaller Companies and IA Technology & Telecommunications sectors are among those that proved to be especially fruitful areas for active managers, as the outperformers exceeded the index by a significant margin while the laggards weren’t that far behind.

On the other hand, areas like IA Global Equity Income, IA UK Equity Income and IA UK Direct Property, which were among the hardest hit by the coronavirus crisis, saw their average fund fall behind the benchmark for the year.