The bounce-back of Money Observer Rated Funds savaged at the end of last year has been remarkable, with 86 funds beating the MSCI World index benchmark.
By and large, the first three months of 2019 have been very positive for investors in our 2019 Rated Funds. These are split into 15 easy-to-understand asset groups and are comprised of 201 actively managed funds and investment trusts, plus a further 66 passive index-tracking funds.
Some outstanding gains have been recorded, particularly among funds that were savaged in the final quarter of 2018. Moreover, 86 funds were ahead of the return from the wide-ranging MSCI World index benchmark – the iShares Core MSCI World ETF returned a few basis points short of 10%.
Tech rises to the top
That in itself is pretty good going, but investors with the courage to jump into certain Rated Funds at the start of the year have been rewarded with outsized gains.
Investment trust Allianz Technology (ATT) tops the leaderboard with a 25.4% uplift, as confidence returned to global technology stocks, particularly in the US.
Investors have also benefited from a 5 percentage point move in the discount to net asset value (NAV), which has now returned the trust to a small premium rating.
Just as investors piled back into ATT, so they have into the other two trusts at the head of the leaderboard: Fidelity China Special Situations (FCSS) and Edinburgh Worldwide (EWI). Very good gains at the portfolio level have been supplemented by similar discount contractions. FCSS’s 24.6% return is particularly notable when compared with the return from index-tracker Xtrackers MSCI China ETF (XCX6), which gained 15.2%; our open-ended China choice, Janus Henderson China Opportunities, is a whisker ahead of that, up 16.5%.
Edinburgh Worldwide’s bounce-back is also notable following the mauling it received in the fourth quarter of 2018. EWI’s 23.4% gain from its US-dominated global smaller companies portfolio compares very favourably with the 11.2% gain from the passive Rated Fund SPDR MSCI World Small Cap ETF.
Although EWI usually finds itself in the shade cast by its giant stablemate, Scottish Mortgage, its smaller size (its market capitalisation is £525 million) allows it to get stakes in smaller companies with bright futures that would be unlikely to make much impact on SMT, given its £7.4 billion size. EWI has sizeable exposure to the software, healthcare equipment & supplies and internet & direct marketing retail sectors, but the portfolio is most exposed to biotechnology stocks. Portfolio risk is minimised by holding between 75 and 125 companies, with exposure to a minimum of six countries and 15 industries.
While EWI’s exposure to biotechnology is a partial fillip, it is wholly beneficial for Polar Capital Biotechnology, which is up 16.2% in the first quarter, further cementing its record of beating the Nasdaq Biotechnology index over all time periods.
Perhaps the most surprising return to form is the sixth-best performer Shires Income (SHRS), which in the first quarter more than made up what it had lost in the whole of 2018.
Its 17.3% share price gain got a boost from a 5 percentage point move to a small premium to NAV. An income choice among our higher-risk mixed-asset selections, SHRS yields 4.9% even after the strong run in the first quarter.
It has an eclectic mix of holdings: the portfolio’s largest single exposure is to stablemate Aberdeen Smaller Companies Income trust, which gained 21% in the first quarter and accounts for around 9% of assets. The next top nine equity holdings are the sort of large dividend-paying blue chips that one would normally expect to see in an equity income fund. SHRS, however, also holds high-yield fixed interest stocks, accounting for 31% of the portfolio (factoring in its 20% gearing).
That level of gearing indicates that this is a trust for the braver income-seeking investor, but the extra risk is also leavened by the bond content. Echoing the views expressed in this column last month, manager Iain Pyle says: “With dividend yields approaching 25-year highs in the UK market, despite improving cash flows, income is attractive. There is also scope for yield compression once we finally resolve the issues around Brexit.”
Deep value shines
Falling just outside the top 10 with a 16% gain is another trust focused on delivering income from UK equities. Temple Bar’s contrarian, deep-value approach has certainly come into its own in 2019, with manager Alastair Mundy having reaped the rewards of pouncing on last year’s badly beaten-up stocks. Having previously been confined largely to investing in the UK, TMPL has the freedom now to invest up to 30% of assets overseas, including 10% in developing markets.
Another of our Specialist choices, BMO Overseas Equity-Linked UK Inflation, also makes it into the top 10, with a 17% gain. As with SHRS, that eclipsed the 10% loss it suffered last year. The fund employs a strategy popular among institutional investors, called liability-driven investment. The objective is to provide growth via a combination of overseas equity exposure (achieved by investing in global index futures) and inflation-linked UK government bonds.
Two funds with portfolios largely at opposite ends of the US stockmarket spectrum make up the first quarter’s 10 fastest-moving funds. Although Bailie Gifford American’s list of top holdings is dominated by familiar Big Tech names such as Amazon, Alphabet and Tesla, its ‘active share’ of 91% shows how very different its portfolio is from the companies that make up the benchmark S&P 500 index. (By way of comparison, a fund that tracks the S&P 500 has 0% active share).
Our other high-flying US fund is Brown Advisory US Smaller Companies, up 19.2% on the quarter. Unlike the larger Baillie Gifford fund, its portfolio is a concentrated mix of companies you’ve probably never heard of. Waste Connections, Bright Horizons Family Solutions and Mimecast are the top three names in around 80 holdings in this perennially decent performer. However, manager Christopher Berrier is concerned about the difficult earnings outlook that US companies will likely face as the year progresses.
The final, albeit brief, hat-tip goes to the exchange traded commodity ETFS Brent 1mth (OLBP), which gained 22.5% on the back of escalating tensions in Libya and between the US and Iran, coupled with a weaker reading for sterling against the dollar. Oil’s rebound seemingly has little to do with better prospects for global growth, as explained in the box-out.
In the table, we’ve highlighted the performance of the top 15 of the 267 Rated Funds. Where any asset groups have not fully participated in the first-quarter’s ‘risk-on’ rally, such as UK and global bond funds, and emerging markets funds, we’ve highlighted the best performers among these groups too. These Rated Fund stragglers could come into their own as the year progresses and risky assets pull back.
The author was editor of Money Observer from 1998 to 2015.
Rated Funds race away in 1st quarter flurry
|Return with income
|Top 15 Rated Funds||Asset group||3 mths (%)||1 yr (%)||3 yrs (%)||Yield (%)|
|Allianz Technology IT||Specialist||25.4||26.5||160.7|
|Fidelity China Special Sits IT||Asian equities||24.6||-0.3||79.7||1.5|
|Edinburgh Worldwide IT||Global growth||23.4||18.3||114.2|
|ETFS Brent 1mth GBP||Specialist||22.5||10.4||67.2|
|Brown Advisory US Smaller Cos||US equities||19.2||21.6||73.5|
|Shires Income IT||Mixed asset||17.3||8.0||54.5||4.8|
|BMO Oseas Equity-Linked UK Inf||Specialist||17.0||9.0||59.7|
|Janus Henderson China Opps||Asian equities||16.5||-1.1||72.4||1.1|
|Polar Capital Biotechnology||Specialist||16.2||15.6||87.7|
|Baillie Gifford American||US equities||16.1||26.6||107.3|
|Temple Bar IT||UK equity inc||16.0||11.6||44.1||3.5|
|T. Rowe Price Glbl Fcsd Grth Eq||Global growth||15.7||17.1||79.4|
|Fidelity Global Technology||Specialist||15.5||20.0||100.8|
|Monks IT||Global growth||15.4||10.0||103.6||0.2|
|Xtrackers MSCI China ETF||Asian equities||15.2||0.4||68.9|
|Best within other asset groups|
|Mercantile IT||UK growth||14.8||0.2||31.3||3.1|
|Baring Emerging Europe IT||Emerging mkts||14.4||-2.7||61.0||4.4|
|BlackRock Smaller Companies IT||UK smaller cos||13.8||3.5||66.7||2.0|
|Baillie Gifford Japan IT||Japan equities||12.0||-7.5||64.7||0.1|
|iShares Glbl Prop Secs Eq Index||Property||12.0||21.9||31.4||2.5|
|Fidelity European Values IT||Europe equities||10.3||9.0||45.4||2.8|
|JPMorgan Global Grth & Inc IT *||Global equity inc||10.1||5.1||69.5||3.9|
|Schroder ISF Global High Yield||Global bonds||7.1||1.7||18.1||4.8|
|Schroder High Yield Opps||UK bonds||6.0||1.7||23.1||6.2|
Notes: Performance data as at 1 April 2019, sorted by three month performance. * Trust has been placed under review following co-manager's retirement. Data source: FE Analytics.
Fund Choices magazine
Hi, just been reviewing my Stocks & Shares ISA against the picks in your magazine, which is very, very helpful. What would make it indispensible for me and many others, would be 1) a data comparison for all funds of the overall yield and the income and 2) frequency of payments information. Also, some ideas about making up income portfolios from quarterly/annually paying funds that would produce a regular monthly income would be great. Hope this helps.