Central banks have reacted efficiently throughout the coronavirus crisis, but in the recovery hits to household income and rising unemployment could create a ‘fiscal cliff’, according to Carmignac’s Didier Saint-Georges.
Central bank stimulus across the world has been crucial in addressing the coronavirus crisis but a ‘fiscal cliff’ could be looming at the end of July, according to Carmignac’s Didier Saint-Georges.
Tax increases and spending cuts could be implemented during the recovery to deal with the rising level of corporate and household debt, warned Saint-Georges, head of portfolio advisors and member of Carmignac’s strategic investment committee.
He also outlined the growing uncertainty that the possibilities of further waves of the virus could spark in the equity market, in contrast to the relative predictability of the credit space.
Economically, the western world has acted efficiently to coronavirus, but growing cases in the US show it’s still struggling to curb the rate of infections. China, on the other hand, was swift in injecting stimulus and containing the virus.
This, according to Saint-Georges, is down to China’s experience of the SARS epidemic in 2003.
Though the estimates vary, the SARS outbreak in China cost the global economy about $40bn. Research from IHS Markit showed China accounted for 4.2 per cent of the world economy in 2003, whereas it now makes up 16.3 per cent.
“It witnessed a clean recovery and was able to crush the rate of infection completely before it opened up the economy,” he said.
However, it’s vastly different this time around as the contagion moved across the world to economies that have never imposed nationwide shutdowns.
“The economic cost of lockdowns became so heavy as opposed to 2003,” he said. “The re-opening of the economy needs to happen and is subsequently happening before the rate of new infections has been brought down to zero.”
As these economies lift restrictions, the chances of a winter Covid-19 spike pose further uncertainty over the equity space.
The head of portfolio advisors explains that the credit space is where some certainty can be found in these uncertain times.
“From an equity market standpoint, should you hold on to those cyclical stocks for recovery plays?” he asked.
“Or whether the very fact you have a strong resumption of consumption especially in the US raises the risk of infection or brings a second wave or continuation of the first wave, nobody can tell.”
Saint-Georges sees the potential in the credit space as an unfortunate reality of the times.
“The markets until March really priced such an economic space; it means a lot of defaults and bankruptcies in the credit space,” he said.
“The market, partly because of panic, partly because of lack of liquidity, has priced some of those issuers at high risk of defaults – that’s when a good credit researcher can make a difference.”
Performance of corporate bonds vs global equities year-to-date
Source: FE Analytics
While there is high visibility in the equity market, the credit market doesn’t hinge on when the economy starts booming again.
“Our sense is that hysteria will play out and its audacious to expect economic growth six months out that will not suffer from higher unemployment,” said Saint-Georges.
“Playing an economic recovery via the equity market is quite uncertain, whereas playing it through the value of the balance sheet of issuers is a safer bet.”
The risk of fiscal cliff at the end of July could be a real possibility, especially with an election year that pits two disparate philosophies vying for the presidency in the US.
Spending cuts and tax increases are the traditional two factors behind the ‘fiscal cliff’ which if allowed to happen simultaneously, have the propensity to spark a deep recession.
By cutting household incomes and seeing increased levels of unemployment, this both undermined consumer and investor confidence.
“Renew and increase stimulus policy to avoid this kind of cliff,” said Saint-Georges.
The market is expecting $1trn from the Federal Reserve, supporting the economy via that monetary boost.
“However, in Europe, it’s a different story because here the assumption is that the recovery plan is approved,” Saint-Georges said.
“In the meantime, the countries still must fund on its own budgets. But the European Central Bank [ECB] must continue doing the heavy lifting so it doesn’t translate into widening credit spreads.”
The targeted longer-term refinancing operations (TLTRO III) will continue to support bank lending into 2021 to help small and medium-sized businesses.
“Banks will be encouraged to buy more government bonds and while this is structurally an issue for the future,” the head of portfolio advisors explained. “These things will keep us going into 2021, without too much damage to the economy.”
However, he notes the potential dangers to the consumer side, which will see savings rate increase as the economy looks more unstable.
“The spending trend will be hampered, and the uncertainty will mean small and mid-cap expansion will be held off until confidence grows,” he said.
“This all should be enough to prevent us falling back into a complete collapse. But it’s a far cry from the position of the growth rate going into 2020.”
Alex Illingworth, manager on the Mid Wynd Investment Trust and Artemis Global Select fund, explains what investors should be looking for when selecting a sustainable investment fund.
It took the world more than 100 years to agree a generally accepted set of corporate accounting principles (GAAP). They are still not perfect, varying from country to country. But imagine what it would be like for investors if each company recorded its accounts in its own unique way. Worse still, imagine if every company used the same terms – operating profits, depreciation, capital expenditure – but each took them to mean subtly different things.
This is where we are with the language of sustainable and principled investing. Companies and fund managers use similar terminology, but the nuances differ from one to another. Fortuitously, you might think, many agencies now provide ESG (environmental, social and governance) scores for companies (and funds). But can you measure sustainability?
Scores are inevitably flawed for a number of reasons. Several hundred metrics can be applied in an analysis, and not all are relevant to the investment case. So when the results are aggregated into digestible scores, how meaningful are those numbers?
For instance, it is important to know how efficient Unilever is in its use of scarce water. It is even more important to know about pollution when you are assessing a chemical company like 3M, which is facing litigation over alleged contamination by polyfluoroalkyl. But are either as important for judging a property company like Equinix, which owns large data centres next to major internet hubs? You have to weigh how material each individual metric is from one business to another.
Any score will be based on often patchy, historical data. And attitudes change. I have a diesel car because 10 years ago the government encouraged me to buy one, saying it was better for the environment.
Scores sound impartial, but they require human judgment. For instance, ratings bodies will often have strict rules on acceptable lengths of tenure for a board and will score accordingly. We are a little more flexible.
We are likely to be sceptical if the average tenure is 12 years and a company is adopting a complete change of strategy without any changes to its board. But would we be so keen to move people on if the average tenure is 12 years, the board has done a brilliant job and more of the same is planned? Probably not. How do you incorporate that into a number?
In short, managers and investors have to operate a degree of pragmatism. We call it sense and sustainability.
These tips are not comprehensive, but they might help you in your fund selection if trying to be a good investor means as much to you as generating strong returns.
1. Don’t rely on scores alone
Funds are often scored on the sustainability of their underlying holdings, but these scores are as flawed as any – so use them with care. Active fund management is predominantly a qualitative process – does it make sense to tack on a quantitative scoring process?
2. Don’t rely on labels either
Try to understand what the labels mean to a manager. Just because a fund calls itself ethical, green or sustainable does not mean it matches your priorities. ESG is so embedded in the investment universe now that you may find a better performing fund that satisfies your needs, even if it doesn’t have a ‘sustainable’ label.
3. Look at the holding
Check out the top-10 list of companies owned by the fund (which usually appears on factsheets). We publish the top 30. Are you happy with these companies? Many funds that say they are ‘sustainable' own shares in Royal Dutch Shell, for example. The managers argue that Shell is more green than other oil companies. They might be right, but do you want to be invested in oil or not?
4. Check what is excluded
If a fund is excluding things on principle you should be able to find reference to this in its marketing literature and more information on the fund’s approach. We exclude munitions, tobacco, pornography, oil, coal and gas companies and avoid companies with poor governance. We limit exposure to countries with fragile or unreliable government – primarily emerging markets, like Russia. We try to invest in companies that we think contribute positively to society.
5. Be prepared to have your principles challenged
We are constantly being challenged ourselves. Making a paper bag uses 20x more water than making a plastic carrier bag and creates twice the carbon footprint. The fins on wind-powered electricity generators cannot currently be recycled and those rotating fins (particularly on offshore wind farms) can kill migrating birds which navigate by coastlines. Prepare to enter an ethical maze. Ultimately, we all have to make compromises.
6. Build a list of what is important for you and review it each year
For many investors, sustainability begins and ends with the environment. But as stewards of your money we think beyond that. As you research funds, you may come to realise that governance – factors like balance sheet management, how many women are on the board and executive pay – are vitally important too. In fact, in terms of materiality to share prices, governance is important in the ESG debate. We are all constantly learning new things. So your list of priorities will change over time and it should arguably change for the funds you are buying too.
7. Remember that ESG is dynamic
What was acceptable in the past may become unacceptable. Political risks can change rapidly, environmental standards and targets are shifting all the time. It can take time for this to be reflected in score mechanisms. Look for a manager you can trust to be proactive.
8. Don’t be afraid to ask a manager
A contentious suggestion that not all fund groups will welcome, but if you like a fund and are unsure of where it stands on an important matter of principle for you, do not be afraid to write to the manager and ask.
9. See if the managers invest in their own funds
For all three managers, the Mid Wynd Investment Trust and Artemis Global Select Fund are home to the bulk of our investable assets. It matters to us that it is managed sustainably, so you can be sure we will stick to our principles. After all, we hope to be able to pass on some of our holdings to our children and grandchildren.
10. Don’t forget performance
As long as you are not too restrictive, sustainable investing should not impair your performance. In fact, it has been positive for us during this crisis because it has helped us avoid sectors, like oil and airlines, that have been worst hit.
Alex Illingworth is manager on the Mid Wynd Investment Trust and Artemis Global Select fund. The views expressed above are his own and should not be taken as investment advice.
Fidelity Investment’s Aditya Khowala discusses the two-pronged approach he believes Donald Trump will take to win the US election.
Donald Trump is likely to ramp up his anti-China rhetoric and “throw the kitchen sink” at the US economy in a bid to win this year’s election, according to Fidelity’s Aditya Khowala, giving investors some uncertain conditions to navigate.
The US continues to see rising coronavirus infections and deaths. Last week, the country reported more than 40,000 daily cases on four occasions and had over 50,000 new cases in one day for the first time, according to Johns Hopkins university data.
With the US is set to hold its presidential election in November this year, incumbent president Donald Trump has started to lose ground in the polls to Democrat rival Joe Biden. The coronavirus crisis and its economic impact will loom large over the election.
It is very rare that an incumbent US president is re-elected when there’s a recession in the election year. No-one since Calvin Coolidge in 1924 has been re-elected when there was a recession within 24 months of the polling day.
Not that we didn’t see Trump defy election day odds during his first presidential campaign, as the day before the vote data compiled by The New York Times had his Democratic rival Hilary Clinton on an 85 per cent chance of winning.
The coronavirus crisis caused the fastest bear market in history, with US stocks dropping 20 per cent in just 16 days. However, asset prices have rebounded sharply due to central banks and policymakers pumping trillions worth of stimulus into the economy.
This rally, which started at the end of March, has been led by the mega-cap tech stocks which have dominated the market index for years. So far in 2020 the MSCI North America index has outperformed the MSCI World index, making 4.16 per cent versus 1.33 per cent.
Source: FE Analytics
But while US markets have almost recovered from the coronavirus sell-off, the economy is faring much worse. In June, the private non-profit research organisation National Bureau of Economic Research – which makes the call on the health of the US economy – said the country was officially in recession.
Aditya Khowala, manager of the $724.1m Fidelity American Growth fund, said Trump will have to factor this coronavirus-triggered recession in his 2020 presidential election campaign.
“The speed and depth of the Covid recession has thrown a big wrench in Donald Trump’s original strategy of campaigning on a very strong economy,” he said.
“I see Trump deploying a two-pronged strategy to try and beat the odds: first, re-escalate the trade war and dial up the rhetoric against China to position it as a scapegoat for the recession; and second, throw the kitchen sink at the economy to make sure that it is in full swing before November.”
Step one: Re-escalate the trade war with China
Back in 2019 the tensions created by the US-China trade war dominated headlines, as did the news of a ‘Phase One’ deal being signed at the start of this year. At the time, many said this would bolster Trump’s re-election odds.
But the outbreak of coronavirus changed that and the underlying political agenda of the trade war is being laid out in the open more than ever as Trump openly blames China for the coronavirus outbreak.
On this the Fidelity American Growth fund manager said: “Recent opinion polls clearly show that the majority of Americans blame China for the global pandemic, which has given the Trump administration a perfect scapegoat.
“Anecdotal evidence for this view can be seen in Trump’s recent and repeated references to the outbreak as a ‘China plague’ or US trade representative Robert Lighthizer haranguing US companies to move their supply chains out of places like China, which he accuses of unfair competition.
“It’s a strategy that appears to have worked so far for the administration, as the negative views of China continue to grow in the US. Relations between the world’s two biggest economies look set to get worse in the medium term.”
Step Two: Juice the economy through all means possible till November
Although Trump continues to shift the blame of the coronavirus very publicly onto China, this won’t be enough to win voters over during the harsh economic reality, Khowala said.
The US unemployment rate rose drastically to 14.7 per cent in April following the coronavirus outbreak. While June saw 4.8m new jobs created in the US and employees began going back to work with businesses reopening, unemployment rates are still well above pre-coronavirus levels at 11.1 per cent, according to the US Bureau of Labor Statistics.
Source: US Bureau of Labor Statistics
To rebuild the backbone of his re-election campaign – a thriving US economy – Trump has to do something unaccustomed to him, go along and work with the Fed.
“Trump knows that simply blaming China will not be sufficient for him to win re-election, and that he also needs the economy to stage a strong rebound by November,” Khowala said.
“I see this as a key reason why his administration has chosen to reopen large parts of the economy without waiting for clearer signs the outbreak was effectively suppressed, as was the precondition for easing lockdowns in many places in Asia and Europe.”
Although this might mean the US economy stages a faster short-term recovery, it also increases the risk of a second or third wave of infections.
Khowala also noted that Trump is getting “enormous help” from the Federal Reserve, which has essentially committed itself to unconventional policies such as helicopter money and ‘quantitative easing infinitum’. The central bank has indicated that rates will be kept at zero until at least 2022 and seems to be prioritising a recovery in the job market over the risks of exacerbating asset price bubbles.
In additional, US Congress has approved “exceptional measures” for fiscal support. The Fidelity manager noted that some workers are receiving unemployment benefits that are more than their wages, causing the household savings rate to shoot above 30 per cent – its highest rate in at least 60 years.
The upshot of all this is that Khowala thinks the US economy looks promising over the short term, but the full outlook remains unclear. “The trifecta of early reopening, helicopter monetary and fiscal policy has led to an extraordinary boost to consumer demand and recovery,” he said.
He pointed out that some forecasts have real US GDP increasing by more than 20 per cent in the third quarter because of the “unprecedented” policy response.
In terms of how investors should react, the manager said: “The conundrums of electioneering and engineering an economic recovery are creating great uncertainties, and markets are becoming lopsided as investors flock to established winners like tech sector giants and ‘work from home’ stocks, while occasionally trying to punt in extremely beaten down value stocks.
“Valuations of high growth stocks make little sense to me at these levels but they have momentum, while cheap stocks are often cheap for a reason. Against this backdrop, I have stuck with my approach of buying long-term growth stocks that stand to do well in a range of macro scenarios. I’ve also been slowly adding to growth cyclicals, buying on dips, as I feel that the US outlook for the next three years remains strong despite the noise of 2020.”
Within the Fidelity American Growth fund, Khowala looks for companies benefitting from long-term growth trends and have an ability to grow their cash flow. He typically runs a bias towards medium and small-cap companies.
Over the past five years the fund has made a total return of 85.24 per cent, outperforming the FO Equity – USA sector but has lagging behind the S&P 500.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
It has an ongoing charges figure (OCF) of 1.90 per cent and has an FE fundinfo Crown Rating of five.
After a volatile six months, Swiss private bank Lombard Odier reveals the 10 investment convictions that it thinks could unfold in 2020’s latter half.
Lombard Odier chief investment officer Stéphane Monier expects economies will likely return to a slow-growth, low-inflation environment with high debt and low-to-negative interest rates, after an initial spurt in activity in the second half of 2020.
After an unprecedented economic shock and rally in financial markets due to the coronavirus in the first half, Monier foresees a ‘square root’-shaped economic recovery over the next six months with a steep renewal in activity followed by a tailing-off as some sectors take longer to resume, particularly leisure, hospitality and tourism.
He also believes that Covid-19 accelerated four structural trends that have been changing the and therefore present investment opportunity.
These four trends are the world’s inescapable dependence on technology, the ongoing profound demographic changes, the continuing rise of China and the need to decarbonise quickly.
“The second half of the year will be dominated by the US presidential election as well as the evolution of the Covid-19 pandemic. As the US race unfolds and candidates unveil their programmes, we’ll be able to better assess the impact on financial markets,” Monier said.
“Asset allocations capable of managing more volatility will be crucial. The following 10 investment ideas are designed to help portfolios weather foreseeable, and less predictable, developments.”
The first conviction he outlined was the need to keep exposure to risk assets and to stay invested, or risk missing out the best days of the market.
“The sharp recovery following the pandemic-induced fall underlined the importance of staying invested in equities,” Monier said. “Investors should now make sure that they hold enough risk assets in their portfolios. In the circumstances, there is no substitute for preparing tactical responses to the inevitable surprises that will demand changes to portfolio risk profiles.”
Performance of global equities since 23 Mar 2020
Source: FE Analytics
This leads to his second conviction, which is to add defensive allocations. He said portfolios need defensive assets in the event of unwanted volatility and these can include US Treasury bonds, gold, Japanese yen or put options on equity indices.
Lombard Odier’s third conviction was the attractiveness of investment grade credit. Due to the asset class being directly supported by central bank backstops, he said it will continue to be an attractive area to generate yield compared to sovereign debt.
The opportunity to identify attractive high-yield fixed income given that defaults are already largely priced in was the firm’s fourth conviction. Monier said certain BB and B rated credit looks attractive, but transport, retail, leisure, US energy and emerging world debt outside of Asia should be avoided.
The fifth conviction was that sustainable equity growth, healthcare and information technology will outperform in 2020. That being said, Monier believes that due to the strength of the rally during the first half of the year, investors should still expect lower equity returns in the second half.
“We favour corporate stocks with sustainable growth prospects and resilient balance sheets, such as information technology and healthcare, which should outperform value stocks. We also like utilities that are working on sustainable solutions, offering attractive opportunities as state spending trickles down into infrastructure projects,2 he said.
“Post Covid-19, we expect the government spending splurge to increase investments in medical infrastructure and treatments. Medical technology, including tracking, testing and monitoring tools will all benefit. Information technology stocks more widely have excellent post-pandemic growth prospects, including in areas such as the internet’s physical architecture and security.”
The sixth conviction highlighted by the Lombard Odier chief investment officer was around Asian equities within emerging markets.
Due to China and Asia’s quicker return to economic and industrial activity, it makes for an attractive investment, he said. It will also be buoyed by the large fiscal and infrastructure spending taking place on telecommunications, power, transport and IT. He pointed out that China looks like it is heading towards a V-shaped recovery, driven by strong domestic demand.
Lombard Odier’s seventh conviction was the stability that real assets offer in turbulent markets.
In a slow-growth, low-rate environment, infrastructure should see support from government-backed investments, and real estate in high quality residential and logistics properties stand out in the US, Swiss and European market. Monier also said that private equity should not be overlooked, due to its additional portfolio diversification, exposure to the real economy and potential for enhanced returns.
The eighth investment conviction was a weaker US dollar. He anticipates that with activity recovering, the US dollar will be weaker compared to other G10 currencies, which are undervalued. He cited their exposure to China’s business cycle and generally favourable balance of payments, highlighting the Euro, Japanese yen and the Australian dollar specifically.
Monier’s ninth investment conviction was the volatile outlook for sterling. He said that the hit to the UK economy as a result of the pandemic in addition to the lack of Brexit progress means that the risk of a no-deal has risen and volatility for sterling will be likely. He believes that this will see the pound will get worse before they get better.
The tenth and final investment conviction Monier revealed was around the strength of particular emerging currencies against the US dollar.
While investors should remain selective, he said currencies with lower debt levels, decent external balances, and exposure to improving eurozone growth or China will do well. He highlighted the Czech koruna, Israeli shekel, Indonesian rupiah, Korean won, Taiwanese dollar and Chilean peso in particular.
Trustnet reviews the second quarter of 2020 through a variety of lenses, including investment style, fund sector and industry.
While the opening three months of 2020 saw stock markets plunge and investors scramble for safe havens, the most recent quarter witnessed a strong revival in risk appetite.
Although the coronavirus pandemic continues to spread, investors welcomed massive amounts of fiscal and monetary stimulus designed to shore up the global economy. Sentiment was further bolstered when some countries passed their first peak and started to ease their lockdowns.
Below, Trustnet reviews the performance of markets during 2020’s second quarter, looking at returns by asset class, geography, investment style and a range of other viewpoints.
In the first quarter of the year, the coronavirus crisis sparked a heavy sell-off in risk assets with the MSCI AC World index dropping 16 per cent and the commodities index plunging almost 40 per cent.
The most recent quarter, however, witnessed a strong snapback as stimulus measures were unveiled, coronavirus infection rates started to slow in some parts of the word and countries emerged from their lockdowns.
As a result, the MSCI AC World rose 19.64 per cent in the three-month period while commodities were up 10 per cent; government bonds made lower returns as risk appetite returned, but gold continued to attract money.
Neil Wilson, chief market analyst at Markets.com, said: “Stocks rallied so sharply in Q2 for a number of reasons – chiefly stimulus, both fiscal and monetary, as well as the reopening of economies and better virus rates in most countries, though this trend has somewhat come undone in the US in the last couple of weeks.
“The aggressive pullback in February and March also left stocks rather oversold on a short-term basis, when considering the stimulus and relative yields to government bonds. Meanwhile hopes of a vaccine are central if we are to see 2021 look more like 2019 than this year.
“For gains to be sustained in Q3 stocks require the continued support of stimulus, which remains on tap, as well as a better outlook on the virus spread and for the hard economic data to show a strong bounce from Q2, both of which could be more tricky.”
With risk assets rising strongly over the quarter, it shouldn’t be too much of a surprise to see that equities in all the major geographic regions were in positive territory at the end of 2020’s second quarter.
European equities were the place to be for sterling investors as the continent continued to open its economy after seeing a peak in new coronavirus cases, closely followed by the US despite its rising infection rates. The UK market, however, rose just half as much as these two.
Ben Yearsley, director at Fairview Investing, said: “It’s difficult to know whether to be optimistic or pessimistic about markets, however despite some new lockdowns and partial closures of UK, Germany and the US, developed world markets seem to have moved out of the coronavirus funk recording some of the best quarterly returns on record.
“In some parts of the developing world it is a different story unfortunately with Brazil still in the eye of the storm. Have markets got ahead of themselves? Maybe, but the worst of this phase of the coronavirus pandemic appears to have passed.”
Turning to investment style and it was yet another quarter when growth and quality stocks outperformed the value style by a significant margin. The underperformance of value has carried on for so long that some are questioning whether the style can ever return to outperformance.
Fiona Frick, chief executive at Unigestion, said: “Value style has experienced an extraordinary period of underperformance relative to growth investing, spanning more than 13 years. Value has become so cheap versus growth that its current valuation is in the 97th percentile of its historical distribution. A number of narratives have been offered to explain why the value factor’s poor relative performance may be the ‘new normal’. One such theory is that the value definition has become obsolete.
“It is true that value can no longer be defined solely as book value, as proposed by the Fama-French model, but for every definition of value we examine in measuring relative cheapness – price-to-book, price-to-earnings, price-to-sales and price-to-dividends – it has underperformed growth since 2008. Furthermore, the definition of ‘cheap’ is no longer limited to industrial companies, cyclical stocks or financials.
“We believe that there is no reason why the value premium should have disappeared. Such a lost decade is not unprecedented in history and variations are still well within the range that may be expected statistically. Indeed, value performance in the 2010s was remarkably similar to the 1990s, which is perhaps unsurprising since both these decades also saw double-digit excess returns for the equity market. Factor premia, including value, still exist and should deliver long-term performance. However, their performance in the short term can be quite cyclical and extreme.”
On a sector level, tech stocks continued their strong run over 2020’s second quarter. This sector led the decade-long bull market that followed the financial crisis and has built on these gains during the coronavirus pandemic as greater working from home and social distanced led to more reliance on products such as video conferencing, media streaming and online gaming.
Adrian Lowcock, head of personal investing at Willis Owen said: “The demand for technology stocks has rocketed this year as investors see them as winners of the chaos caused by Covid-19, with wider social and business trends being accelerated.”
The above table also highlights something of a turnaround for more cyclical sectors over the past three months, as investor sentiment towards the health of the global economy started to improve as lockdowns were eased and some data points came back better than expected.
The MSCI ACWI/Energy index, for example, dropped more than 40 per cent in 2020’s opening quarter as the price of oil sank and demand plummeted. But it rose 18.22 per cent last quarter on the back of improving demand and rising prices.
In keeping with growing risk appetites, there was also a reversal in the market cap of companies that led last quarter’s gains.
In the UK, smaller companies had a strong quarter with the FTSE SmallCap ex ITs index gaining 17.06 per cent. This was the worst performing part of the market in Q1 with a fall of 32.43 per cent.
Large-caps lagged behind in the second quarter, however, with the FTSE 100 posting a total return of just 9.15 per cent.
While all UK stocks have had the headwind of the country being among the worst affected by the coronavirus pandemic, the FTSE 100 has been hit especially hard by widespread dividend cuts. As of the end of June, 48 members of the index had cut, deferred or cancelled their dividend.
A look at the performance of equity funds highlights many of the themes discussed above.
The smaller companies sectors performed the strongest in the second quarter, with IA North American Smaller Companies, IA European Smaller Companies and IA Japanese Smaller Companies all seeing their average member return more than 20 per cent.
And it was the UK bringing up the rear, with IA UK Equity Income sitting at the bottom thanks to those dividend cuts.
Willis Owen’s Lowcock said: “The rate of dividend cuts in the UK is unprecedented. Many dividend paying companies have lagged in the rally as they sat in areas of the markets not set to benefit from any short-term changes in people’s behaviour - such as energy, financials and insurance. Whilst we expect more to come, the worst is probably over, as British companies acted fast to cut dividends.”
In the bond sectors, IA Global EM Bonds Hard Currency led with an average return of 14.41 per cent and the other two emerging market debt sectors were close behind.
Sonja Laud, chief investment officer at Legal and General Investment Management, said: “There is also a significantly higher yield available from hard-currency emerging-market debt at the moment, with that part of the universe paying around 6.5 per cent compared with less than 5 per cent for local-currency bonds.”
The worst performing bond sector was IA UK Gilts, reflecting the fall in demand for safe havens as investors embraced risk over the quarter.
A look at the multi-asset and more specialist sectors has IA Technology & Telecommunications at the top by a clear margin.
IA Specialist is in second place, with gold funds leading the way. Although the demand for safe havens eased, gold continued to perform strongly with MFM Junior Gold rising 94.34 per cent last quarter, followed by LF Ruffer Gold (64.48 per cent) and ES Gold and Precious Metals (61.50 per cent).
IA UK Direct Property was the worst performing sector over the quarter. Several of its members are suspended because of outflows and liquidity concerns.
IA Targeted Absolute Return funds also had a lacklustre quarter on average, although there was a big variance in returns from its members. LF Odey Absolute Return, for example, was up 21.30 per cent over the three-month period while BlackRock Emerging Markets Absolute Alpha was down 7.29 per cent.
The BlackRock Investment Institute explains why it’s had to completely change its approach to forecasting during the Covid-19 pandemic.
The coronavirus pandemic has brought trends that were five to 10 years away forward, making it more important than ever that investors start to rebuild portfolios, according to BlackRock.
Jean Boivin (pictured), head of the BlackRock Investment Institute – which carries out research to help the asset management house's clients and fund managers – said Covid-19 has warranted a complete reassessment of its outlook for markets and the global economy.
He said: “We used to worry and frame things – up until this year – around where we were in the business cycle and how late we were in the cycle. This is not the story anymore.
“Much of our focus is – and understandably so – is on what the evolution of the virus will be and how activity will be restarted. This is the main driver of markets and will continue to be.”
Indeed, the coronavirus is likely to have both a near-term impact on the structure of the investment environment as well as longer-term implications for investor outcomes, said Boivin.
“That will require a deeper rethink of how we build portfolios,” he said. “And the time to do that, in our view, is now.
“The future is running at us. The shock is accelerating the trends that were already in place, it’s pushing us closer to structural limits that we were seeing on the horizon, maybe over the next five to 10 years. But, in fact, it’s pushing us towards those much more quickly.”
These ‘limits’ are structural trends that were already reshaping the investment environment and outcomes, comprising inequality, globalisation, macroeconomic policy and sustainability.
Rising inequality was an outcome of the global financial crisis and the policy response has been behind the rise of populism in recent years. Globalisation, meanwhile, has increasingly come under attack with the global market becoming increasingly fragmented.
The macroeconomic policy toolkit will need significant innovation to deal with the next economic crisis, added Boivin, while sustainability is a burgeoning trend but one that will become increasingly important.
As such, investors need to begin reviewing their strategic asset allocations to make sure their portfolios are resilient enough to withstand or take advantage of these “supercharged” trends.
And there are three investment themes that BlackRock will be focusing on for the remainder of the year: ‘activity restart’, ‘policy revolution’ and ‘real resilience’.
On ‘activity restart’, head of macro research Elga Bartsch (pictured) highlighted the real impact of the coronavirus on the economy.
“We need to be clear: this is not a recession and what we’re going to see is not a recovery, it’s a restart,” she said. “It’s a restart after a major exogenous shock akin to a natural disaster.
“So, the first message for investors is that standard business cycle analysis and data are not really relevant here. What matters more is the cumulative size of the shock to the economy.”
In normal conditions, Bartsch said, BlackRock strategists would be looking at business data and news flow to assess the extent of a downturn. However, the Covid-19 crisis has been “very visible” and as such the extent of the damage can be calibrated very quickly.
While the near-term contraction in growth has been one of the sharpest and deepest on record, the policy response has – so far – prevented it from becoming a full-blown financial crisis.
As such, current forecasts suggest a cumulative loss in GDP “that is only a fraction of that of the global financial crisis”, said Bartsch, and BlackRock has positioned itself as “moderately pro-risk” expressed in an overweight to credit.
The second trend – ‘policy revolution’ – highlights the huge amount of support that was needed to prevent the “devastating and deflationary impact of the virus shock”.
“What we have seen in terms of speed and size [of the policy response] goes well beyond all the stimulus we had seen over several years during the global financial crisis,” said Bartsch.
“What is even more important is the close coordination of monetary and fiscal policy and that was really predicated on the need to put money directly into the hands of private households and into the hands of companies.
“And that policy response was really good news in the near term because it was helpful in preventing some of the permanent scars you would have seen in if this escalated into a full-blown financial crisis.”
But while has been positive for risk assets, it has had an impact on government bonds – where BlackRock is now underweight – as yields have fallen.
There is also the potential for inflation, prompting the asset manager to move overweight to inflation-linked sovereign bonds, particularly as central banks become more tolerant during in the long-term due to huge government borrowing.
Finally, ‘real resilience’ concerns the supercharged trends the asset manager had already highlighted coming into the crisis.
These trends, said BlackRock global chief investment strategist Mike Pyle (pictured), have changed the nature of portfolio diversification, making it less an asset allocation decision and more about geographies and sectors.
“When we think about what it means to build portfolios that have resilience in the face of those real transformations [in the market],” he said.
“There is a tremendous amount of room to think about building portfolios through sustainable and ESG [environmental, social & governance] exposures that are much more resilient to the world that is coming into being.
“Secondly, around deglobalisation, increasingly across a range of dimension, the country is going to be a fundamental unit of analysis. That’s true because the country level is where policy takes place about economic policy and of course we’re seeing on the health side through public health policies as well.”
He finished: “So what we mean by real resilience is that the kind of traditional financial concept gives way – due to the changing nature of government bonds – [to] building resilience that’s mindful and alert to the underlying transformations of play in the global economy.”
Orbis Global Balanced manager Alec Cutler Manager of Orbis Investments’ Global Balanced portfolio explains why the popularity of the US and dislike of the UK are as temporary as the coronavirus.
‘This too shall pass’ is a phrase Orbis Investments’ Alec Cutler first heard whilst studying at business school, quickly teaching him about the good and bad weeks investor have in markets.
Repeated by a colleague some years later, Cutler said it taught him that “everything is temporary”, a fact he has held onto during the past few months as Covid-19 upended normality and caused a sharp market moves.
“We should always resist the urge to think that whatever it is today is what it’s always going to be,” the manager said.
“And I feel kind of at a crossroads from a market standpoint, where people are convinced that interest rates are going to stay low forever, that government bond yields are going to stay low forever and that the FAANGs are never going to get knocked off the block.
“And the world changes and that’s what makes it super exciting. Now flash forward and think about Covid and this too shall pass.”
This idea that nothing in markets will remain stagnant and trends will shift needs to be re-remembered, according to Cutler, especially when it comes to the US.
“The US equity market has been the place to be for the past 10 years. It’s been an absolute freight train,” the Orbis manager said, especially during the Covid-19 crisis as investors piled into the growth FAANG stocks [Facebook, Apple, Amazon, Netflix, Google-parent Alphabet].
Source: Orbis Investments
The FAANGs now make up over 20 per cent of the S&P 500 index, according to Orbis.
In the same way that the FAANGs dominate the US index, the US in turn dominates the global market too, with the country accounting for 48 per cent of the global market today, according Cutler.
However, he noted that the US’ share of global GDP declined in recent decades – falling from 28 per cent in 2000 to 24 per cent today.
Source: Orbis Investments
“The US level of production and global output has dropped since 2000 while its percentage of the world’s equities has only risen,” he said.
While the dominance of US and growth equities has been the ‘norm’ for some time, so has the unpopularity of UK equities. Cutler described the UK as “the most hated market in the world”.
“It’s the second most hated theme to energy and you can imagine how hated energy is. But they’re not that far apart,” he added.
But, the manager firmly believes that just as Covid-19 will pass so too will the popularity of the US and the unpopularity of the UK.
Such dominance has happened before but with a different market. Back in the early 1990s, prior to the Japan asset price bubble burst and consequential recession, Japan was 40 per cent of the world index and only 10 per cent of GDP, Cutler said.
“This is when the Japanese were going to continue to dominate the world because they were such wizards at manufacturing. But you don’t hear about that much anymore now,” the manager (pictured) said.
“At that time in the 90s Japan was the be-all and end-all and no one could see any possibility to reason or how that could change. Just as they are today with the US,” he said.
And this view is reflected in Cutler’s £41.7m Orbis Global Balanced fund, which is run with a contrarian approach. While it does invest in the US, it has a strong position in the UK with holdings such as Bank of Ireland, AIB, Balfour Beatty, Domino’s, Drax and Headlam.
Cutler has a 20 per cent allocation to the US in the fund but he prefers Chinese internet companies over the popular US options because of three things.
One is valuation because they’re much cheaper, according to Cutler, while the second reason is “technological leadership”.
“Everyone thinks and assumes with a Western superiority complex that Google, Facebook, Microsoft have superior technologies to the Chinese equivalents but that is not true anymore. Tencent and Alibaba are now leading the way,” Cutler said.
And thirdly, unlike the US government, the Chinese authorities will support the big names as they develop a monopolies, making them more dominant.
Cutler concluded: “Think long term, don’t overreact and keep in mind that this too shall pass.”
Orbis Global Balanced has made a total return of 42.44 per cent over the past five years, outperforming the IA Mixed Investment 40-85% Shares sector but underperforming against the MSCI World index.
Source: FE Analytics
The fund has no up-front charges but does have a performance fee of 50 per cent of the outperformance of the fund over the MSCI World benchmark.
Trustnet finds out which global funds posted both top ranked returns and low volatility during the first half of 2020.
Financial markets in the first half of 2020 have experienced extraordinary volatility due to the coronavirus pandemic and widespread economic lockdowns.
In March, global equities crashed and lost about three years’ worth of gains in a few weeks but have since made them back over the span of a few months.
High returns usually coincide with high volatility and, as such, the five highest returning members of the IA Global sector – Baillie Gifford Long Term Global Growth Investment, Baillie Gifford Global Discovery, Baillie Gifford Positive Change, Baillie Gifford Global Stewardship and Aubrey Global Conviction – are all in the eighth, ninth or 10th decile for volatility.
However, this is not always the case and a select number of funds have managed to combine some of the sector’s highest returns with the lowest volatility over the turbulent six months that have marked 2020 so far.
In this research, Trustnet has looked for IA Global funds that were in the top quintile for both high returns and low volatility during the opening six months of 2020.
The table below are the 16 funds ranked by their first-half returns, filtered for those which delivered first quintile returns and first quintile (or lower) volatility. Where available, the five-year return is also shown.
Source: FE Analytics
The Fundsmith Equity fund, run by FE fundinfo Alpha Manager Terry Smith, made the list with H1 returns of 7.46 per cent and annualised volatility of 25.96 per cent.
Despite being at the lower end of the list for H1 performance, it has the highest five-year return of 147.58 per cent thanks its quality-growth approach. It is also the largest fund in the table with £20.2bn under management.
However, several of Fundsmith Equity’s peers have delivered higher returns with lower volatility over this period.
Of the 345 funds in the sector, three delivered first decile returns while also ranking first decile for low volatility.
H1 2020 performance of top decile funds vs sector
Source: FE Analytics
The £159m New Capital Global Equity Conviction fund is the first of these three. The fund looks for 40 to 50 high-quality stocks globally, finding stocks that trade on a cheaper valuation than they believe it deserves, but also where the company’s growth potential is higher than consensus estimates.
It returned 17.5 per cent in H1 and has almost half of the portfolio allocated to US equities, with top three holdings that include Microsoft, S&P Global and Mastercard. However, the fund’s next biggest weighting is in Chinese equities, where it has a 16.2 per cent exposure, including a large position in Chinese e-commerce giant Alibaba.
Next is the £266.3m Morgan Stanley Emerging Leaders Equity fund which returned 13.52 per cent in H1, also ranked highly. It has a focus on global quality companies, but has a heavier weighting to companies within China and India.
It has a 29.2 per cent weighting to Chinese equities, and a 21.29 per cent weighting to Indian equities. It has two of its largest holdings in Chinese tech giants Alibaba and Tencent, and a large position in India’s Kotak Mahindra Bank.
It comes as little surprise that one of the top-performing global funds during a pandemic is one that invests into healthcare and medical-related companies.
The £363.9m Schroder Global Healthcare fund, which returned 12.51 per cent, is the only healthcare-focused fund in the list and the final strategy to appear in the top decile for returns and volatility.
There are several other funds worth noting also.
At the top of the list for total returns is the AMP Capital Global Companies fund. It invests in a concentrated portfolio of 25 to 35 global companies but is not widely available for sale to investors in the UK.
Like Fundsmith Equity, several funds that appear on the list have a quality-growth approach – which has not only thrived over the past decade but continued to outperform during the coronavirus crisis.
The £731.4m Comgest Growth World fund is one. It has the third highest five-year return, delivering 110.18 per cent, and the lowest volatility of the all funds in the table.
The fund has a higher weighting to the consumer products, healthcare, and technology sectors, compared to its peers, and has only a 38 per cent weighting into North America compared to the peer average of 50.41 per cent.
The £321.2m Trojan Global Equity fund is another notable fund on the list. Like all of the Troy Asset Management’s strategies, it is run with capital preservation at the heart of its process, as well as a preference for quality-growth stocks.
The reason for placing an emphasis on volatility is because it essentially measures the risk an investor takes in the search for return. The volatility can show how stable a fund returns’ are, allowing investors to get a better gauge of risk-adjusted returns.
If a fund is fluctuating with highly volatile returns, performance is likely to be higher, but on the flipside of that, the risk of loss is also higher.
Lower volatility of returns gives an investor smoother and more predictable returns, and can also speak to the consistency of returns.
While a lot of funds delivered exceptional returns during the first half of the year, what makes the funds in the table unique are the top-ranked performance combined with low volatility during one of the most volatile periods of recent financial history.
The Invesco Asia manager says the market looks undervalued both on a historical basis and compared with its peers, but warns any rebound from here is likely to be concentrated in value stocks.
There have been just two points in the past 15 years when Asian equities have been cheaper than current levels – which suggests the region could be about to embark on a period of powerful performance.
This is according to Ian Hargreaves, who runs the Invesco Asia Trust. The manager said that not only is Asia cheap on a historical basis, with its price-to-book (P/B) ratio of 1.6x one standard deviation beneath its average, it is also cheap on a relative basis, comparing favourably with 2.2x from the rest of the world and 3.4x with the S&P 500.
Yet while he believes such low starting valuations bode well for an investor buying in at this point, he warned they need to be selective if they want to tap into the recovery.
“There are two big things going on in markets,” said Hargreaves. “One is the coronavirus, the other is the divergence between value and growth. It is important to note that the divergence had been going on for quite a while before the coronavirus and when it struck, it just accelerated.
“We thought that when the market hit the trough at the end of March, it was too cheap overall. Now it has bounced back 25 to 30 per cent, we wouldn't really say that.
“But what we would say is the opportunities in investing in Asia are now more about this big discrepancy between value and growth, rather than opportunities to just simply ride the wave of the market going up.”
Of course, many managers warned at the start of the year that the growth versus value dispersion had reached such an extreme, a reversion was inevitable – yet in the end, the opposite was true.
Hargreaves admitted it was possible the divergence could go even further, but said in such a scenario he could bring the value/growth split in his portfolio up to 60:40 from its current 50:50 level.
While the manager does not believe the growth names in his portfolio are expensive, any movement far above what he regards as fair value would see him trim these positions in anticipation of a catalyst to spark a value revival.
“So what's the catalyst for a value rotation? It’s the other way around to the way we think, as we are bottom-up: we see where the value is in the market and buy accordingly, then think about top-down,” he added.
“Obviously there are plenty of arguments, such as inflation kicking in. But when we look back at previous changes of leadership, I think sometimes you can point to valuation being the catalyst and I think we're approaching that point.”
While Hargreaves is not a value manager, his process involves investing in companies that he believes are worth considerably more than their valuation suggests.
He said this is possible because a company’s share price is typically more volatile than the fair value of the underlying business. Company fundamentals continuously move and because the market has a tendency to extrapolate both positive and negative shifts into the future, it is possible to gain an edge when it overreaches itself.
“There are a few key elements of the process,” he explained. “Firstly, we often look in unloved parts of the market for new ideas. We then bring our team skill and experience to bear to really get to grips with the fundamentals of the companies we're looking at and to develop an understanding of where we believe the market might be wrong in how it's valuing the business.
“This requires an ability to think long term and often necessitates the courage to move against mainstream thinking.”
One example of this process in action was the investment in Mediatek, a Taiwanese designer of silicon chips that power consumer electronics products such as flat-screen televisions, smartphones and voice assistant devices such as Amazon Echo.
Hargreaves said the company has a strong record of growth and profitability, generating positive free cash flow in every one of the last 20 years. However, when he started to look at it in January 2017, it had fallen on hard times and its share price was about 50 per cent below its all-time high.
“The problem was that it underestimated how quickly the market in China would transition from 3G smartphones to 4G and its 4G product just wasn't mature at the time, which led to low selling prices,” the manager continued.
“Along with high manufacturing costs, this resulted in a double hit to its margins and profits.
“What got us interested initially in January 2017 was that pretty much 50 per cent of the market cap was backed by cash on the balance sheet and investments it had.
“Even excluding that cash, the company was trading on a low-teens multiple but on earnings that were on margins 50 per cent below historical levels. A low multiple of trough earnings, in essence.”
Hargreaves said that, along with his knowledge of the company’s track record, talks with Mediatek’s management convinced him this was primarily a timing issue that would be addressed by new product launches later in 2017, rather than a fundamental problem with the company's technology.
However, because sell-side analysts were focused more on weak sales in the first half of the year, he was able to invest in the knowledge that the new products would allow gross margins to recover to more normal levels, driving “a leveraged improvement in profit”.
“The downside support from the cash balance and the low multiples strengthened our belief in the significant undervaluation, but what was really important here was our focus on the medium term rather than the short-term weakness in earnings,” he continued.
“If you fast-forward to today, you can see the share price did recover: the 4G chips led to an improvement in margins. More recently, the share price has had another leg-up and that has been driven by a re-rating as it became clear that Mediatek is also well placed in 5G and can benefit from the problems that Huawei is currently experiencing.
“But in our view, it's beginning to approach fair value and so our shareholding has been coming down. This is a very typical pattern that you see in our investments: there's an inverse relationship between the share price and our shareholding.”
Data from FE Analytics shows the Invesco Asia Trust has made 109.82 per cent since Hargreaves took charge in February 2011, compared with 107.16 per cent from its IT Asia Pacific sector and 89.07 per cent from the MSCI AC Asia ex Japan index.
Performance of trust vs sector and index under manager
Source: FE Analytics
The trust is on a discount of 12.68 per cent, compared with 11.4 and 11.44 per cent from its one- and three-year averages.
It is 4 per cent geared and has ongoing charges of 1.02 per cent.
This month’s data hub focuses on the all-or-nothing approach of picking up stocks that have plummeted in value.
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Darius McDermott, managing director of Chelsea Financial Services, highlights four multi-asset strategies using investment trusts to bolster returns.
One of the things we’ve looked to do since the launch of our own fund of fund range in 2017, is to find new ideas and sources of growth and income returns. This drive has seen us find numerous opportunities within specialist investment trusts.
Crucially, these trusts have allowed us to diversify our portfolios and reduce the risks from the wider global economy. In a world of low-interest rates, they have also delivered reliable yields at a time when investors have been crying out for them, with the noise getting louder in recent months.
Areas we’ve looked at include the likes of investment trusts investing in renewable energies, such as wind farms or solar panels, which have been taking advantage of government subsidies and the drive towards a carbon-neutral economy.
Challenges during the sell-off – but also big opportunities
In the recent sell-off, the level of volatility of these trusts rose markedly. There were days when the market was down 4-5 per cent and they were down 10 per cent – effectively indicating that they were geared to the market. Some of the sell-off was not even to with the trusts themselves, but because people were ruthlessly selling the UK mid-cap index, where a number of these specialist vehicles reside.
We still believe there are big gains to be made from investing in these trusts and the past few months, while tumultuous – have reinforced our views. Why should an investment trust that trades based on whether the wind blows or not – or indeed whether the sun shines or not – go down by 40 per cent in three or four weeks? It shouldn’t, but it did.
And this led to some stark opportunities: we ended up cutting positions in some holdings we really like, in favour of trusts that were on significant discounts – some had fallen 50 per cent with no rationale whatsoever.
And we’re not alone. Other providers have also been using investment trusts to bolster returns. Below are four multi-asset examples.
TB Wise Multi-Asset Growth
Managed by Tony Yarrow and Vincent Ropers, TB Wise Multi-Asset Growth invests in around 30-60 underlying funds and investment trusts, with a preference for out-of-favour areas. The managers take high conviction positions, while turnover in the fund tends to be low. The fund uses a number of investment trusts such as the Ecofin Global Utilities & Infrastructure Trust.
VT Seneca Diversified Income
This Liverpool-based asset house adopts a strong, value-based approach to multi-asset investing. The four-strong investment team behind VT Seneca Diversified Income execute their ideas via a mix of funds and direct securities. Using both alternative and traditional asset classes enables the team to achieve true diversification, while also delivering a monthly income. The team also uses a number of investment trusts in areas like infrastructure and debt.
Premier Multi-Asset Monthly Income
Premier Multi-Asset Monthly Income is designed to produce a high and sustainable income and has risk management at its core. Manager David Hambidge aims to generate equity-like returns, with less volatility via a multi-asset, multi-manager portfolio. The portfolio, which has a historical yield of 5.8 per cent (as at 30 April), has typically had exposure to a number of specialist investment trusts in the likes of the property, healthcare and lending sectors.
Brooks Macdonald Defensive Capital
Managed by Niall O’Connor, Brooks Macdonald Defensive Capitalholds a number of instruments, such as convertible bonds, preference shares, structured notes, bond and loan assets, and discounted assets. It aims to deliver positive absolute returns over rolling three-year periods, in a range of market conditions. The fund also has access to specialist investment trusts, such as Hipgnosis Songs (which gives exposure to songs and associated musical intellectual property rights) and Greencoat UK Wind.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.
Trustnet finds out which funds have been the top performing for the 100-day period since the lockdown started.
The economic disruption caused by the coronavirus pandemic has been dubbed the “The Great Lockdown” by market commentators and the International Monetary Fund (IMF).
Investors are still trying to assess how much of the damage is temporary and how much is permanent, however the IMF has said it is likely to cause the worst economic downturn since the 1929 Great Depression.
In late February, before lockdown, financial markets crashed in an unprecedented wave of selling that caused most asset classes worldwide to fall, followed by an equally unprecedented rapid bull market.
One hundred days have passed since the lockdown in the UK began on 23 March, and Trustnet has looked at 25 of the highest returning funds since this period began. Where available, the five-year return for each fund was also included.
Source: FE Analytics
Gold and precious metal funds accounted for 10 of the top-25 in the list.
The top performing fund in the list was the £23.2m MFM Junior Gold fund which has more than doubled since lockdown began, returning 114.54 per cent.
Two of the largest gold funds also made the list, with the £1.4bn BlackRock Gold & General fund run by Evy Hambro and FE fundinfo Alpha Manager Tom Holl coming in seventh.
The £1.32bn LF Ruffer Gold fund came in 15th, but has delivered a 268 per cent five-year return, the highest of all the gold-focused funds.
Investor appetite for gold this year has been largely driven by the central bank measures and fiscal spending around the world to fight the pandemic’s economic fallout.
The precious metal is favoured amongst investors for its hedging properties in the event of market downturns, and as a store of value if government spending causes currency debasement and runaway inflation.
Gold – as represented by the Bloomberg Gold Sub index below – has rallied 15.79 per cent year-to-date, in US dollar terms. However, investing in gold mining companies which produce and sell gold for profit are considered a more leveraged bet on the gold price, and as the below chart shows the FTSE Gold Mines index – a benchmark of mining companies deriving most of their revenues from mined gold – is up by 28.93 per cent so far this year.
Performance of indices year-to-date (USD)
Source: FE Analytics
Seven of the top-25 funds in the list were US equity-focused funds.
Many US technology companies have seen the adoption of their products or services accelerated by the lockdown and coronavirus pandemic.
The top performing US funds have been those which are overweight the technology companies seen to be benefiting from the growing adoption of e-commerce and cloud software.
In third place was the £4bn Baillie Gifford American fund, which delivered a 70.75 per cent return over the period and 294.67 per cent over five years, the highest of the top-25 with a long-enough track record. The fund’s top three holdings include e-commerce providers Shopify and Amazon, as well as electric vehicle and clean energy company Tesla. It is co-managed by Tom Slater, who also co-manages the Scottish Mortgage Investment Trust.
Lower down in eighth place was the £3.2bn Morgan Stanley US Growth fund, which returned 64.88 per cent over the period. Its top three holdings include Amazon and Shopify, as well as Okta, a cloud-based identity management software company.
The accelerated adoption of technology has also driven the performance of the £168m LF Miton US Smaller Companies fund, which is heavily invested into smaller US tech companies. Two of its top holdings include Everbridge, a company that sells communications services for notifications of emergencies, and Teladoc, a telemedicine and virtual healthcare company.
Of the five UK funds that made the top-25, two were UK smaller companies funds.
The £5.9m MFM Techinvest Special Situations fund, which also focuses on growth technology businesses, returned 68.92 per cent over the period.
The £53.8m LF Miton UK Smaller Companies fund run by Gervais Williams, has also made a strong comeback since the beginning of lockdown, returning 59.34 per cent over the period. The fund’s largest holding is in Avacta, a Cambridge-based biotherapeutics and reagents firm which is currently developing a potential Covid-19 therapy.
The other two UK funds that made the list were FTSE 250-focused funds, one being the £2.8bn Merian UK Mid Cap fund run by FE fundinfo Alpha Manager Richard Watts, which has over 12 per cent invested in online retailer Boohoo Group.
Some of the poorest performers since lockdown began were property strategies, many of which have been gated due to their lack of liquidity and to halt outflows, withthe £411m Aviva Inv UK Property and the £343m LF Canlife UK Property ACS funds standing out.
BMO Global Asset Management’s Kelly Prior explains why companies could start to be run for bond holders not equity owners and which funds she thinks are best placed for this changing environment.
The post-coronavirus world could see the return of a “proper” corporate bond market, according to BMO Global Asset Management’s Kelly Prior, following a decade of “distortion” by central banks.
In a previous Trustnet article, BMO co-head of multi-manager Rob Burdett argued that events such as the coronavirus crisis often lead to “some form of regime change” that can have an impact on economic conditions, politics, fund management styles, consumer attitudes or corporate behaviours.
Kelly Prior, a member of BMO’s multi-manager people team, believes that one area where this regime change will be seen is the corporate bond market.
As central banks lowered interest rates in response to 2008’s global financial crisis, business took advantage of this by raising money in the bond market to fund aggressive balance sheet management, such as carrying out share buy-backs.
Data from the Securities Industry and Financial Markets Association shows the US corporate bond market was $5.3trn in size in 2008 but had grown to $9.6trn by the end of 2019.
US outstanding fixed income
Source: Securities Industry and Financial Markets Association
However, this period has also seen an increase in the number of businesses that are unable to service their debt, or so-called 'zombie companies'. Prior said that 4 per cent of US companies were ‘zombies’ in 2007-8 but this is now “terrifyingly” closer to 20 per cent.
“It just shows you the sort of the things that have actually been happening through this distorted period we've been through this for the last 10 or 12 years. And now this is going to come home to roost,” she said.
“Everybody has sort of forgotten about the structure of how companies and how they are actually run. Equity is worth nothing if you can't service your debt.”
Corporate bonds were hit hard by the coronavirus sell-off in the first quarter of 2020. In March, the iBoxx Sterling Corporate index lost 7.52 per cent – beating the 10.89 per cent drop in global equities (represented by the MSCI AC World index) but far behind the rally in safe havens like government bonds and gold.
Performance of indices in Mar 2020
Source: FE Analytics
“Now things are really going to change because if you've chosen to have more debt, you're likely to be charged more for that because ultimately you're going to be a risky company,” Prior added.
“There are many facets to this but essentially companies now are going to be run more for the benefit of bond holders than equity holders. There is going to be this want to be able to service your debt.”
The BMO multi-manager added that the distortion of the past decade means many investors have forgotten that companies which show capital discipline and make prudent use of the money they’ve borrowed should be rewarded for this over the longer term.
On the flipside, companies that are over-leveraged and have poor management should be made to pay for that, in a functioning corporate bond market.
“It's almost a proper market now. I think the corporate bond world is going to become, hopefully, a proper market. Good companies that are conservative are going to be OK but we are going to see defaults pick up. It might be painful, but that’s normal” she said.
“It’s going to change corporate behaviour for sure and that can only be a good thing.”
Against this backdrop and amid the improving yields on offer, Rob Burdett and Gary Potter’s team has been increasing the corporate bond exposure of its multi-manager funds.
At the end of March, the team started a position in Jonathan Golan’s £916.5m Schroder Sterling Corporate Bond fund. The fund is the eighth highest returner of the 99 funds in the IA Sterling Corporate Bond sector, as well as being a top-quartile performer over one, three and five years.
Prior said: “It's something that we've been watching for a while: just a lovely vanilla corporate bond fund. [Golan] was able to take advantage of this real shift in markets and buy some great credits. He really extended the spread duration of that product through that time. And has managed to lock in some fabulous credits.”
Performance of funds in 2020
Source: FE Analytics
The team also recently bought Chris Bowie’s £1.4bn TwentyFour Corporate Bond fund. It is fourth quartile in the IA Sterling Corporate Bond sector over three months but has beaten its average peer over three and five years.
“We've known Chris for a very long time; we used to own him when he was at Britannic [Asset Management],” Prior said. “He has a very intellectual way of thinking about risk and return. But again, nothing rock'n'roll. It's just looking at good quality credits and it paid for the risk that you're actually taking.”
The BMO multi-manager team also has a longstanding position in Janus Henderson Strategic Bond, which is managed by John Pattullo and Jenna Barnard. The £3bn fund has made a second-quartile 9.49 per cent total return over the past three months and is in the IA Sterling Strategic Bond sector’s first quartile over one, three and five years.
“It made a fabulous shift into US investment grade through this period and it benefited from taking advantage of the moves in terms of available credits,” Prior finished.
“This is a true strategic fund and it’s been interesting to see how they've adapted their strategy. They did incredibly well last year through their duration. This year, it's been about US investment grade. They are really shifting where they're taking their risk, which is exactly what you want to see.”
We look at what could happen to mortgages, savings, shares and bonds if UK interest rates turn negative.
Trustnet talks to five industry experts about what impact the US presidential election could have on markets.
An election can be lost in the televised debates and unfavourable media coverage during the course of a campaign. However, this is not a normal year and not a normal campaign.
Politically and socially, the US is in distress and president Donald Trump’s approval ratings are at a low point due to his handling of Covid-19 and nationwide protests over the killing of George Floyd.
Estimated electoral college votes
Source: The Economist
As of 1 July, data from The Economist predicts the likelihood of a Biden victory at 89 per cent, winning 343 electoral college votes, more than the 270 needed to take the presidency.
However, it’s likely that markets and businesses would prefer a victory for pro-business incumbent than his Democrat rival Joe Biden.
The issue of the US-China trade war also looms, while the possibility of rising infections in the winter months could cause further uncertainty.
Below, Trustnet talks to five market experts on their views and where this election may be won and lost.
Jason Hollands, Tilney Investment Management Services
While the election is important, said Jason Hollands, managing directorof Tilney Investment Management Services, the fiscal stimulus packages in the US show that its deeply divided politics can come together, offering hope for more cohesive relationships in the future.
“The US Congress has repeatedly managed to reach bipartisan agreements on fiscal stimulus measures and notably, at greater speed than the EU has,” he said. “The Fed have been swift in responding to the crisis through an unlimited commitment to purchase assets and supply copious amounts of liquidity.”
Trump’s poll ratings leave little to be desired, but the trade tensions with China offer a chance to show strength in the face of growing expansionary policies.
“This will motivate the Republican base that the administration will make good on the balance of trade and repatriating American manufacturing jobs, as well as national security concerns,” he explained.
The Tilney managing director is clear that this isn’t solely about China, the US Treasury has opened a one-month comment period on proposed $3bn of tariffs on EU imports.
“Technically this is a World Trade Organization-permissible response to illegal Airbus subsidies by the EU,” he said. “But the timing coincides with the US also considering aluminium tariffs on Canada and the EU deciding to ban US visitors.”
However, these actions have caused increasing concern about global trade uncertainties.
“There are of course big policy differences over things like policing reform and healthcare, but a lot of Democrats are also hawkish on China and both parties have advocated major infrastructure spending,” Hollands said.
“Despite misgivings around Trump, the markets would probably marginally prefer a Republican win, as the Republicans are in favour of tax cuts and are less aggressive in their attention to drug pricing controls.”
Simon King, Vermeer Partners
“Despite what we might like to think, the US election definitely does matter,” said Vermeer Partners chief investment officer Simon King.
King noted that amid a burgeoning global recovery, a presidential election in one of the key players is instrumental in leading that recovery.
“Given that the US is likely to deteriorate in the coming months as its hit by a potential second and third wave of Covid-19,” he said. “The Trump administration turns its attentions to try and win the election, whoever wins that election will probably face an even worse starting position.”
While Biden is a favourite in betting markets, Trump’s original election and Brexit show how woefully inaccurate predictions can be.
“Biden represents a somewhat underwhelming candidate to many in the US,” said King.
“We would expect the rhetoric on trade wars to be toned down and while he may not return to the days of Obama’s laissez-faire attitude to trade deals, he will not be as combative.”
Trade wars with the EU and China will likely feature prominently in debates over the next few months, and China will favour another term of Trump over Biden, who has voiced concerns over Chinese more recently.
King said Biden may have to make concessions to the left wing of the party, but while healthcare could be an obvious target, he doesn’t pose the kind of threat to big pharmaceutical that a Bernie Sanders-type candidate would.
“We do not expect him to have any major impact on Fed stimulus, but his actions on fiscal issues will hopefully be more co-ordinated and predictable than Trump which would be useful for markets,” he said.
Andy Merricks, independent fund strategist
Merricks, manager of the 8am Global fund and independent fund strategist, said the US elections could have a significant effect on the markets as we get nearer November.
He echoed Simon King’s thoughts that the Chinese may value Trump’s protectionism as oppose to Biden’s willingness to work with Europe.
“Either way, a second wave is a worry – not of the virus in this case, but of the US-China trade war,” he said.
Considering that the US is still struggling to contain the virus in parts of the country, the timing of the election could put a self-limiting factor into the current equity rally.
“In the short term it may fret that a Biden win would lead to tax hikes, higher wages, and an increase in regulation,” said Merricks.
Opinion in the US point to the fact that only two of the past six presidents have lost their bid to re-election. Those two, Jimmy Carter and George H.W. Bush lost their bids for a second term in similar fashions, witnessing a slide in popularity due to their handling of crises.
A Trump re-election, said Merricks, may rally right through November but then correct around December.
“It will come with the realisation that relations between the US and China and an escalation in tariffs are likely going to get a lot worse,” he added. “2021 could get off to a rocky start.”
Didier Saint-Georges, Carmignac
Moving into the second part of the year, Carmignac’s managing director and strategist Didier Saint-Georges said uncertainty will matter more for markets as policymakers have already gone out of their way to support the economy. The outcome of the US presidential election is one of those uncertainties.
Trump faces serious questions about his handling of the Covid-19 crisis and a country in a recession, painful for a president who based so much of his 2016 campaign on restoring economic prosperity.
“The link between his mismanagement of the virus and the economic downturn is inescapable and therefore also constitutes a headwind for an incumbent who hoped to base his campaign on his economic achievement,” he said.
Since Trump was elected on 9 November 2016, the Dow Jones Industrial Average index – which Trump often uses as a benchmark for the success of his presidency – has returned 38.86 per cent in US dollar price terms –recovering well from the sell-off in March. However, critics have argued that protectionism and corporation tax cuts is responsible for the record highs of 2019.
Performance of the Dow Jones index throughout Trump’s presidency
Source: FE Analytics
The election aside, Republicans face a situation in that their majority in the Senate could be at risk during congressional elections due to take place at the same time, said Saint-Georges.
“A Democrat sweep has become a realistic possibility, which would open the way to a broad implementation of the Democrat economic platform, favouring Main Street over Wall Street.”
“Markets will certainly adapt to any winner over time,” he said. “But historically, a losing incumbent is rarely well received by investors, and given the circumstances, it is unlikely to be different this time.”
Saint-Georges said uncertainty between now and election day could affect the US dollar and equity markets, however, Biden’s choice of running mate could assuage market concerns.
“The choice of the younger and well-respected California senator Kamala Harris, rather than a more radical profile would certainly be perceived as reassuring by markets,” he added.
Rob Morgan, Charles Stanley Direct
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, said that without Covid-19 the US presidential election would probably have been the most significant geopolitical event of the year.
“It’s still going to be highly influential, as the two candidates are offering very different economic approaches, which will have different impacts on the stock market as a whole and on individual sectors and companies,” he said.
Biden, said Morgan, offers a significantly different domestic outlook to Trump’s ‘America First’ policies. This includes tax increases, green policies that will hit the already troubled oil & gas industries and an extension of Obamacare.
The extent of Biden’s tax reform priorities is vast, proposing a $4trn tax rise over the next 10 years, and a massive green energy transformation. He has outlined plans to increase the rate of corporation tax from 21 per cent to 28 per cent and to impose a 12.4 per cent social security tax on incomes over $400,000.
“None of this would be much liked by Wall Street and investors,” said Morgan. “The US stock market advanced strongly under the early months of Trump’s presidency based on the large tax cuts he proposed making company income more valuable for shareholders.”
Undoing a large amount of Trump’s presidency would likely characterise the early years of a Biden presidency, noted the Charles Stanley Direct analyst. He would likely start his presidency by getting the US to re-join the Paris climate Treaty, which means pledging to make the US carbon neutral with 100 per cent clean energy by 2050. This combined with greener automobile and energy efforts would cause considerable impact to numerous industries in and outside the US.
“This is truly radical stuff if carried out, and a major departure from the status quo that will create substantial winners and losers at a corporate level,” said Morgan.
“If the US votes Biden in, it will be a decisive shift in the world approach to fossil fuels, with the US changing from being a proponent, to the leading advocate of their closure.”
This would no doubt dismantle traditional cyclical stocks but may be more suited to a structurally different world post-Covid-19.
“There will be some great opportunities for innovative businesses that can help fulfil Biden’s vision of a greener America,” he concluded.
The TB Wise Multi Asset Income co-manager says there is a “once-in-a-generation opportunity” for anyone willing to look beyond the safer areas of the market.
Yields of up to 20 per cent are now available on certain value stocks – and this is even after factoring in a pessimistic forecast of how the coronavirus will affect the underlying businesses, according to Philip Matthews of the TB Wise Multi-Asset Income fund.
The growth stocks responsible for much of the gains in world markets in the recent past have continued to power ahead this year, while their value counterparts have borne the brunt of the economic lockdown.
Performance of indices in 2020
Source: FE Analytics
Yet Matthews said this diversion means there is now a “once-in-a-generation opportunity” for anyone willing to look to areas of the market where there is a higher degree of uncertainty about the outlook to profits.
“At its low point in March/April, that dispersion between value and growth had never ever been as wide,” he explained. “That's a pretty good starting point to think about value.
“People don't like investing into increasingly bad news, although sometimes that's the best time to do it, because everyone is panicking. The stage we're at at the moment, valuations are very attractive in absolute terms as well as being even more attractive on a relative basis.
“There is a high degree of disruption, but businesses are trading on incredibly distressed valuations and if things return to normal, there is significant scope for share price appreciation.
“Our job is to make sure we're picking the companies that have got the balance sheets to weather this particular storm, where we think they can come out of this without being permanently impaired and can grow over the medium term.”
As an example of the extreme valuation discrepancies currently available, Matthews pointed to NewRiver, a REIT that owns retail and leisure assets such as shopping centres, retail parks and pubs.
Unsurprisingly, it has run into difficulties this year, with a number of retailers failing to pay their rent and the income from the pubs side of the business completely drying up. Yet despite these problems, Matthews said the market still appeared to have priced in an overly pessimistic scenario.
Performance of index in 2020
Source: FE Analytics
“Looking at a reasonable assessment of where things may go from here, even if it has to sell some assets to reduce the gearing levels in its business and assuming it loses some rent in the process, you're getting up to a 20 per cent yield on the share price at the moment,” he continued.
“And that feels to us to be way too high given the risks of what it is doing and the alternative-use value that sits within that portfolio.”
A period of reduced or non-existent earnings during the economic lockdown is not the only risk currently faced by value stocks. A perennial problem for bottom-fishing managers is ensuring they invest in a company that is being underestimated by the market and not a value-trap – a threat that has become more prevalent recently due to the heightened risk of disruption.
However, Matthews’ process involves looking for a number of tell-tale signs that indicate a company is falling behind the competition.
“A good starting point is, ‘has that business been able to grow it earnings over the past decade?’ as these forces of change have been very powerful over this time,” the manager explained.
“And a really good one to look at is, ‘just what percentage of profits has it actually converted into cash?’
“What you will see from a lot of potential value investments is that they tell you they're earning one level of profit, but actually because so much change is happening in that marketplace, they're constantly having to restructure and access that capital base they had beforehand to reposition for a new future.”
Matthews has seen examples in the past where the amount of cash a company was generating was less than half the level of profit it claimed. The manager said this was the case with Thomas Cook.
“It said it was earning one thing and I'm pretty sure that there was a period where I looked at it and cumulatively over a decade it had delivered no cash, because it was just constantly restructuring and it had a big pension fund deficit and stuff like that,” he added.
“Value investors have got to be highly cognisant that there is an awful lot of disruption taking place at the moment which is massively changing business models.
“But equally there are some businesses that are able to adapt and there are some businesses that have got cyclical earnings and, at a point in time when cyclical profits are in a trough, the market can be overly pessimistic towards them and you can buy them on incredibly low valuations.”
Data from FE Analytics shows TB Wise Multi-Asset Income has made 8.93 per cent over the past five years, compared with 27.35 per cent from the IA Flexible Investment sector and 10.82 per cent from the CBOE UK All Companies index.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The £85.5m fund has ongoing charges of 0.88 per cent and is yielding 6.7 per cent.
Andrew Mattock of the Matthews China fund says the size of the country’s domestic market and the growth of its middle class mean it does not have to wait for the rest of the world to re-open.
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Trustnet looks at the best and worst performing funds and sectors from the Investment Association universe and what this reveals about a tumultuous six months.
The first six months of the year will likely be remembered as one of the most unprecedented periods in financial market history. This was not a typical downturn, and no one could have foreseen the scale of its impact in early January.
The outbreak of the Covid-19 coronavirus in Wuhan, China soon became a global pandemic and the ensuing lockdowns brought businesses to a standstill.
A broad-based market sell-off in March was one of the worst since the global financial crisis of 2008, and investors flocked to the relative safe havens of government bonds and gold.
Governments and central banks quickly embarked on fiscal and monetary policies to ease the shock to the economy and the decisive action allowed the market to rebound during April.
Since the sell-off, debate has centred around what shape the recovery might take, having been led by technology stocks as lockdown conditions have increased demand for services catering to those working from home and those who have been furloughed.
Top-10 best-performing IA sectors
Source: FE Analytics
As such, it is no surprise that the top-performing sector was IA Technology & Telecommunications.
Not only has technology allowed businesses and families to communicate effectively during lockdowns, they have seen profits surge.
Many of the funds in the sector have exposure to the technology giants in the US equity market, such as Microsoft, Apple and Amazon.
In second place was the IA UK Index Linked Gilts sector, where strategies invest at least 95 per cent of their assets in sterling-denominated AAA-rated, UK government backed index-linked securities.
Performance has been bolstered by two interest rate cuts and substantial quantitative easing programmes, increasing expectations of inflation.
In third was the IA China/ Greater China sector returning 12.97 per cent year-to-date. Despite being the epicentre of the virus, the lockdown and subsequent recovery was swift in comparison to the rest of the world. This allowed Chinese businesses to get back on their feet and encouraged consumers to start spending.
The latest growth predictions from the International Monetary Fund’s World Economic Outlook revealed the China would be the only major economy to grow in 2020, albeit by just 1 per cent. Meanwhile the outlook for the UK was more negative with the economy expected to shrink by 10.2 per cent.
Indeed, the three worst-performing sectors were focused on the UK: IA UK Equity Income (down 20.19 per cent), IA UK All Companies (-17.69 per cent),and IA UK Smaller Companies (-16.59 per cent).
The UK has been one of the hardest-hit nations in Europe, having delayed lockdown, while its traditional role in portfolios as a dividend stronghold for investors has been damaged following high-profile dividend suspensions.
Despite being at bottom for performance during the first half, the three UK sectors have performed well since the market bottom on 23 March.
IA UK Smaller Companies funds have performed particularly strongly, with the sector up by 32.8 per cent. While the lower-end of the market cap scale includes many domestically-focused cyclical industries – such as industrials, financials and consumer goods – there are also growth companies in sectors such as telecommunications and technology.
Top 25 best-performing funds
Source: FE Analytics
On an individual fund basis, Morgan Stanley US Growth had the highest return at 64.17 per cent, one of many US equity strategies among the top performers, including Baillie Gifford American, Morgan Stanley US Advantage and New Capital US Future Leaders.
Despite the US struggling to control virus cases and ongoing political and social divisions, it remains a well-loved region for investors and the Federal Reserve has injected huge sums into the system in an effort to stabilise the economy.
The $4bn, five FE fundinfo Crown-rated Morgan Stanley fund has also benefited from the strong performance of technology and media platforms and includes online retailer Amazon, music streaming service Spotify and e-commerce platform Shopify among its top holdings.
The technology boom has in part been responsible for this rise in US stocks, but how quickly the market rebounded after the sell-off was key.
Considering the strong performance of the IA China/ Greater China sector, it is unsurprising to see Matthews China Small Companies within the top three performing funds of H1.
Managed by Tiffany Hsiao and Lydia So, the $218.4m fund has returned 63.23 per cent in the first half of the year.
Chinese president Xi Jingping prioritised labour output, which allowed several smaller companies focused on software, automation and AI to resume production.
“Small businesses make up the bulk of companies of China’s private sector today,” said Hsiao. “Yet only about 2 per cent of the MSCI China index consists of small businesses. Chinese small companies remain an untapped universe that can offer genuine diversification benefits.”
Gold historically does well in a crisis, with fears of recession and inflation leading investors to turn to the yellow metal.
Inflation was what policymakers had hoped to avoid in the early days of stimulus, however in recent weeks disinflation and deflation has also emerged as a realistic possibility, weakening confidence in traditional currencies.
Amidst this backdrop and with fears of a second wave or prolonged continuation of the first wave, the price of gold rose to $1,800 per ounce, its highest level since 2011.
As such, the LF Ruffer Gold fund seems to have benefited from more bullish sentiment toward gold that has continued during the recovery returning 53.52 per cent.
Top 10 worst-performing funds
Source: FE Analytics
The theme among the worst performing funds is the presence of energy funds and those from Latin America, and more specifically Brazil, the largest market in the region.
Brazil has suffered the worst outbreak behind the US and faced similar criticism of its leadership to contain the virus and reveal testing data.
As such countries with large overweights to Brazil such as Invesco Latin American, MFS Meridian Latin America and Brazilian equity strategy HSBC Brazil Equity were among the first half’s worst performers.
However, the worst performing fund of the first half was the ASI UK Unconstrained Equity fund, the £275.2m fund overseen by Wesley McCoy, which made a loss of 33.36 per cent.
As mentioned, energy firms have also experienced a difficult period as first US-Iran relations worsened and an oil price war between Russia and Saudi Arabia made markets more volatile and saw oil prices crash as the Covid-19 pandemic took hold.
As such, Schroder ISF Global Energy and Guinness Global Energy are among some of the worst performers, making losses of 39.74 per cent and 36.41 per cent respectively.In addition, the energy sector is also undergoing somewhat of a structural change as investors’ ESG (environmental, social & governance) concerns take centre stage and companies usher in a new era of renewable energy that threatens the oil & gas industry.
Trustnet looks at the best and worst performing funds and sectors as the world continues to emerge from the coronavirus lockdown.
June appeared to be a turnaround month for some fund sectors, as what had flourished in May now languishes at the bottom of the returns table and vice versa.
Last month saw investors continue to put risk back on the table as many parts of the world continued to ease their lockdowns amid falling infection rates. Given this, June saw global equities and commodities make higher returns that defensive assets like government bonds and gold.
When it comes to how the Investment Association peer groups performed last month, the IA China/Greater China sector had the best performance for June with an average total return of 10.62 per cent.
Source: FE Analytics
The Chinese government launched a $500bn fiscal stimulus package last month and the country may now be feeling the positive effects of that, combined with its economy reopening from a prolonged lockdown period ahead of others.
This is despite China not announcing a target for its annual GDP growth for the first time in almost 20 years. This follow a contraction in the Chinese economy in the first quarter of 2020, the first time this has occurred since the country started reporting quarterly GDP in 1992.
Ben Yearsley, co-founder of Fairview Investing, said: “June was another risk on month with Asia and emerging markets firmly in the spotlight. China was the best performing fund sector, closely followed by Asia, emerging markets and more Asia.
“A multitude of factors is at play but having the virus early (and many countries handling it better) combined with much better debt and demographic numbers are all relevant to investment markets.”
Source: FE Analytics
At the other end of the table, the IA Japanese Smaller Companies sector was the worst performer in June as its average member made a loss of 1.14 per cent. It was the only equity sector to post a negative return in June and is a reversal from May, when it was the best-performing sector.
The IA Japan sector also featured low down the table with an average return of just 0.33 per cent.
Another poorly performing sector was IA UK Smaller Companies, which had a total return of 0.26 per cent. Although a large number of non-essential UK businesses were allowed to reopen in June the country remains under lockdown – with some easing – and remains persistently unpopular with investors.
Yearsley said: “It’s difficult to know whether to be optimistic or pessimistic about markets, however despite some new lockdowns and partial closures of UK, Germany and the US, developed world markets seem to have moved out of the coronavirus funk recording some of the best quarterly returns on record.”
Moving onto the individual funds and the sector story is very much reflected as China focused portfolios dominated the top of the table.
Source: FE Analytics
Its manager use an all-cap process to invest in what call a ‘flexible investment universe’, which covers domestic Hong Kong listed, onshore Chinese (A-shares), Taiwanese and multinational companies with significant exposure to China.
Other high performing funds that focus on this part of the world included GAM Star China Equity (12.71 per cent), Allianz China Equity (12.83 per cent) and Invesco China Equity (UK) (13.08 per cent), to name a few.
Breaking up the top performing China funds are numerous emerging market funds, namely driven by a strong performance from Brazil.
Brazil is the largest and most liquid market in Latin America, making up more than 60 per cent of the MSCI Emerging Markets Latin America index, which outperformed the MSCI World index in June. But MSCI Brazil beat both of these broader indices in June with a 7.45 per cent return.
Coming into the crisis, Brazil had strict statutory limitations on fiscal spending had to be overcome. But the country announced a $30bn fiscal stimulus package in March while last month Congress granted the Banco Central do Brasil (BCB) crisis powers which would allow it to buy a range of private and public assets to shore up on liquidity.
This strong performance in Brazil shown through funds like FP Carmignac Emerging Markets (13.65 per cent) and Janus Henderson Latin America (12.44 per cent) funds featuring amongst the top performers.
Source: FE Analytics
Last year, the investment firm and fund that carried manager Neil Woodford’s name was closed following a period of disappointing performance, a flurry of redemption requests and concerns over illiquid holdings.
It was handed over to BlackRock and brokerage Park Hill by administrator Link Fund Solutions. Park Hill wrote to investors last week after an agreement to sell a significant portion of the remaining assets in the LF Equity Income fund was reached.
Adrian Lowcock, head of personal investing at Willis Owen, said: “The sum is below the $300m that was speculated, and only accounts for about 50 per cent of the market value of the fund as of 3 June.
“Rather disappointingly there is no detail on what was sold, for how much and what the losses were on those investments. Investors should be given an idea of what the costs incurred for this deal are and what they could expect to see back. It would also help to have an update on the progress with the remaining investments, but these are most likely the ones that the fund will find hardest to sell.
“Investors should find out by the end July how much they can expect to get paid in the third distribution and when that will be paid to them, possibly in August.”
Lowcock added: “It is frustrating for investors in Woodford, but unfortunately winding up funds is a messy business, especially when it involves illiquid assets at a time when the UK faces the deepest recession in history.”
Other funds at the bottom of the table reflected the sector pattern of Japan and UK underperformance, with funds such as Polar Capital Japan Value, M&G Japan Smaller Companies, Ardevora UK Equity and Aviva Inv UK Property all making a loss in June.
It’s worth noting that, on the fund side specifically, those with a value investment bias fared worse off as the gap between value and growth continues to widen with growth continuing its outperformance after another rally.
Indeed, comparing the two throughout 2020 so far and MSCI World Growth index has made a total return of 13.39 per cent, whereas the MSCI World Value index has made a loss of 12.03 per cent.
Trustnet finds out which funds the professionals were researching in June, as markets continued to recover from the coronavirus crash.
Funds that invest in Asian equities and those that specialise in responsible investment were of greater interest to professional investors last month, Trustnet analysis suggests.
In this regular series, Trustnet identifies the recent fund research trends of the independent financial advisers, wealth managers and other professional investors who use FE Analytics.
To do this, we examine the change in the share of research that each fund has received over the past month compared with a ‘baseline’ from the previous 12 months.
After collating funds by their Investment Association sector, it is clear that there was a big uptick in interest in IA Asia Pacific Excluding Japan funds in June.
Change in sector research in Jun 2020
Source: FE Analytics Market Intel Tool
Over the 12 months to the end of May 2020, the IA Asia Pacific Excluding Japan sector accounted for 3.23 per cent of all research carried out into the Investment Association universe but this jumped to 4.38 per cent in June.
The sector has performed strongly over the past month, with its average member posting a total return of 7.87 per cent. This makes it the second highest returning fund sector, after IA China/Greater China’s 10.23 per cent gain.
While Asia was the region to be first hit by the coronavirus pandemic, it had more experience than the West in dealing with such outbreak after its previous brushes with the likes of SARS and came out of lockdown first.
The IMF also expects the region’s economy to be much stronger than the developed world; its latest estimates say emerging Asia’s GDP will contract by 0.8 per cent this year, compared with a 8 per cent fall for developed economies.
Schroder Asian Income, BNY Mellon Asian Income and Schroder Asian Alpha Plus are the most researched members of this sector, but the funds with the biggest increase in their research share were Guinness Asian Equity Income, Fidelity Asian Special Situations and Baillie Gifford Pacific.
Turning to individual funds and it was Baillie Gifford Positive Change that benefitted from the biggest increase in FE Analytics research in June – a position that it also held in May.
Source: FE Analytics Market Intel Tool
The fund invests in companies that can deliver positive social change in one of four areas: social inclusion and education, environment and resource needs, healthcare and quality of life, and base of the pyramid, or addressing the needs of the world's poorest populations.
Baillie Gifford Positive Change’s recent performance has been very strong. Its 32.56 per cent total return in 2020 so far is the third highest in the IA Global sector (where the average member is down 0.07 per cent). It’s also the peer group’s second best fund over one and three years.
This performance, alongside inflows, means the fund’s asset under management have climbed from less than £200m at the start of 2020 to around £700m today.
In May’s article on research trends, Trustnet noted how many of the funds that are being looked at more often were, like Baillie Gifford Positive Change, those with an environmental, social, and governance (ESG) approach.
This trend remained in play during June as a notable amount of the funds that were being researched by professional took this approach.
These included Royal London Sustainable Leaders Trust, Kames Ethical Corporate Bond, Unicorn UK Ethical Income, Royal London Ethical Bond, Rathbone Ethical Bond, Premier Ethical, Stewart Investors Asia Pacific Sustainability and EdenTree Amity UK.
However, the above list shows that some fund groups also seem to have benefited from more attention in FE Analytics.
Of the 30 funds we’ve shown in the table, five are run by Baillie Gifford. This firm has a strong long-term track record and many of its funds are currently in the top quartile of their respective peer groups over one, three, five and 10 years.
Royal London also has four funds on the above list, a reflection of its own strong track record when it comes to ESG investing.
Guinness Global Equity Income is the fund with the second highest increase in its FE Analytics research share in June. This is another fund that is in the top quartile of its sector in 2020, as well as over cumulative one-, three- and five-year periods.
Allianz Strategic Bond is in third place. This is another fund that has delivered high returns this year – it’s 25.83 per cent return is well above the 0.97 per cent made by its average peer and it’s the highest returning strategic bond fund over one, three and five years.
Source: FE Analytics Market Intel Tool
The above list shows the funds that had the biggest falls in their research share on FE Analytics last month.
Topping it is Invesco High Income (UK), which has suffered a run of lacklustre performance and outflows in recent years. Manager Mark Barnett, who took over the fund from Neil Woodford, recently resigned from Invesco.