In part two of our Rated Funds review, we examine how our regional funds, bond funds, property funds and specialist funds fared in first quarter of 2020.
In part two of our Rated Funds review we examine how our regional funds, bond funds, property funds and specialist funds fared in first quarter of 2020.
Part one, which details how UK and global funds fared for both growth and income investors, can be found here.
Dollar strength against sterling over the latter half of the first quarter meant losses in the US markets were more muted for sterling investors. The strength of underlying holdings in Ballie Gifford American early in the quarter meant that it was able to post a small positive result (up 1.5%) for the quarter as a whole. In terms of passives, the Nasdaq 100 tracker was resilient, posting a relatively small 4.2% loss.
The Brown Advisory US Sustainable Growth fund, in common with other such funds that adopt environmental, social and governance (ESG) investment principles, meaningfully outperformed (-4.2%), as did Loomis Sayles US Equity Leaders (-5.1%). In contrast, the S&P 500 index declined -14.5%.
Elsewhere, the total return strategy employed by M&G North American Dividend (-15.3%) was marginally more successful than the higher yielding JPM US Equity Income fund (-18%), and significantly better than North American Income investment trust (-28.4%), which saw a number of its more cyclically focused stock picks negatively impact performance, but most notably its 25% allocation to financial services businesses.
The final point of note is that the iShares Edge S&P 500 Minimum Volatility ETF (-14%) provided little relative upside compared with the underlying S&P 500 index, as it is exposed to dividend paying companies, which have been sold down by investors.
In Europe funds that focus on larger companies fared better than those targeting ‘tomorrow’s winners’. The three top performers were Man GLG European Growth (-9.8%), Liontrust Sustainable Future European Growth (-10.8%) and LF Miton European Opportunities (-10.9%). The MSCI Europe ex UK lost -17.5% over the period.
TR European Growth trust, which primarily invests in small and medium-sized firms, was the worst performer, down -35.6%. Manager Ollie Beckett has a value focus, which over the quarter was firmly out of favour.
All three investment trust picks were the worst performers and ended the period on higher discounts to NAV than earlier in the quarter. The three-month biggest losers were: Baillie Gifford Shin Nippon (-21.6%), Ballie Gifford Japan (-23.5%) and Fidelity Japan (-25.1%).
Shin Nippon is proving to be the biggest relative disappointment over a one-year period, but remains ahead of the MSCI Japan Small Cap index over three years.
Overall in this group funds with higher exposure to developed Asia lagged, while those exposed to China fared better. The top two active funds were Fidelity China Special Situations (-6.1%) and Janus Henderson China Opportunities (-8.6%). The Janus Henderson fund recently announced its long standing fund manager, Charlie Awdry, will depart in the summer, so as a result we will be moving the fund onto performance watch and keep an eye on how his replacement (May Ling Wee, who has been deputy manager since 2015) fares when she steps up.
The worst performer was Aberdeen Standard Asia Focus (31.2%), which invests in smaller companies. Aberdeen New India investment trust (-30.2%) was second from bottom, and notably underperformed Stewart Investors Indian Subcontinent Sustainability (-20.3%).
Again, as in line with other asset groups, funds that adopt a quality growth focus held up relatively well, with the two top performers Stewart Investors Global Emerging Markets Sustainability (-13.1%) and Fundsmith Emerging Equities Trust (-14.9%).
At the foot of the table was BlackRock Frontiers investment trust (-36.7%). Its performance now looks similarly painful on a three-year view (-35.3%). Its yield has ballooned out to 7.3%. Nevertheless, it is performing better than peers over three to five years, on both an absolute and risk-adjusted basis. Frontier markets in general have been an unloved asset class for some years, but continue to deserve a place in a diversified portfolio, due to their uncorrelated performance to developed market equities and bonds.
The second worst performer in this category was Utilico Emerging Markets (-31.2%), owing in part to having half of its portfolio exposure to shares listed in Brazil. The country’s Bovespa index was the world’s worst-performing major equity market in the first quarter, losing -51%, as investors reduced risk in response to coronavirus and the falling oil price. In March the board move to reassure shareholders it will use its dividend reserves to maintain its scheduled quarterly dividend payments throughout 2020. The prospective yield is 4.8% at a share price of 160p.
The strong rally in UK gilts saw Vanguard UK Government Bond Index return (7.4%). Among active funds the conservatively managed Jupiter Strategic Bond fund performed best (-2%), while the uncorrelated Threadneedle Social Bond (-3.4%) also escaped the wider carnage in credit.
At the other end of the table those funds seeking to provide investors with higher yields (only available by going up the risk curve and down the credit ratings) performed worst of all, including Royal London Sterling Extra Yield Bond (-15.7%) and City Merchants High Yield Trust (-18.8%).
Ben Yearsley, of Shore Financial Panning, notes: “Gilts at least acted as a diversifier with the IA UK Gilt sector the only positive performer during the month of March. However, that didn’t help sterling corporate bond funds, with investment grade spreads widening as the risk of defaults increased dramatically. High yield bond funds, as you would expect, acted more like equities and posted the biggest losses.”
One of the few relative bright spots, but hedged versions of global bond funds have not fared quite so well due to dollar strength. Funds exposed to high yield and non-investment grade bonds have suffered the most. But that is the price of wanting a higher yield in a potential credit crisis.
iShares Global Government Bond ETF was, understandably, the best performing fund with a return of 9.3%. The actively managed M&G Global Macro Bond fund, which also favours government bonds, was not far behind, returning 7.4%.
Twentyfour Select Monthly Income was the worst performer, down -15.9%. Exposure to banks in the UK and Europe hurt performance, but the comfort of a monthly income (the yield is now 8.2%) has seen the discount that appeared on the shares in March swiftly evaporate.
Physical property has not provided the stability or diversification that investors would hope for when wider risk assets such as equities suffer a serious correction.
Investment trust discounts slumped notably during the sell-off as investors rushed for the exit, amid concerns over the impact coronavirus will have on the economy, particularly over the short-term given the lockdown measures in place in the UK and across the globe.
Commercial property is a bellwether for the wider economy, so is an economically sensitive asset class. The commercial property market is made up primarily of shops, industrial buildings such as warehouses, and offices.
Among investment trusts that invest in physical property, the share price falls are not reflected in the performance of the underlying holdings. Although the net asset value performance of trusts are likely to suffer some form of impairment as tenants struggle to meet rental agreements and lower demand potentially leads to prices cooling off, the indiscriminate selling of shares in Tritax Big Box Reit (-23.6%) and BMO Commercial Property (-34.6%) were probably overdone. At one stage, BMO Commercial Property fell to a 66% discount to its last published NAV, which was at the end of December.
Various open-ended property funds have put suspensions in place, which once again raises question marks as to whether the open-ended, daily dealing structure is appropriate for illiquid investments. Our Rated Funds list does not include open-ended property funds for this reason.
But, while the upshot with open-ended commercial property funds is that investors cannot access their money, panic-selling is a comparable problem for investment trusts. The managers are not forced to sell property to redeem investors, but the market can take a dim view of the outlook and force share prices down, as is happening at present.
At Shore Financial Planning, Yearsley’s general view is those that can should “do nothing and ride this out”. He adds: “The stock market is taking a very negative view of property currently – will working from home be the norm for many sectors in the future?
“If the crisis continues, trusts will have similar problems to open-ended funds if valuers cannot put a value on a building or warehouse.”
Funds that invest in property shares have also had a miserable first quarter. TR Property (-34.8%), which invests in a mixed portfolio of pan-European property shares, was hardest hit, with its share ending the period at a 10% discount to NAV, having traded at a 5% premium in January.
Although dividend payments will potentially come under pressure, some investors may view some of the yields on offer as looking appealing, even if they do fall from here in the event of dividend cuts being made. BMO Commercial Property and Impact Healthcare are yielding 7.8% and 5.6% respectively. TR Property, which has been growing income for the best part of 20 years, yields 4.2%.
Mixed asset funds
Active funds geared to capital preservation did relatively well, including Capital Gearing Trust (-4.2%). The other big winners were funds that invest in a sustainable fashion, with Royal London Sustainable World (-7.8%) the standout performer, given that it tends to have a high weighting to equities.
Other worthy mentions include Sarasin Global Equity Real Return and Baillie Gifford Managed, both down 10%, particularly as they also have high equity weightings and sit in the 61-100% equities group.
In terms of the losers over the first quarter distribution funds that have high exposure to equity income (particularly UK) were badly hit, including Wise Multi-Asset Income (-35.3%).
The two Rated Funds that specialise in buying investment trusts, Miton Global Opportunities and Unicorn Mastertrust, both fell by 28%, reflecting the fortunes of their underlying trust holdings as well as wider discounts to NAV across the investment trust universe.
As mentioned in the winners section (in part one), physical gold was the star performer in the first quarter.
Funds and investment trusts that specialise in technology, biotech and healthcare, clean energy and infrastructure have also done relatively well: Allianz Technology (up 3.1%), HICL Infrastructure (-4%), Syncona (-5%), Worldwide Healthcare Trust (-6.7%), Polar Capital Biotechnology (-7.3%) and Fidelity Global Technology (-8.1%).
Energy and metals-focused funds prop up the performance table, with the passively managed Brent ETF worst of all (-57%) over the three-month period.
Elsewhere, private equity was another major laggard, amid the flight to safety, hit our two Rated Funds in this space: Pantheon International (-34.8%) and Standard Life Private Equity Trust (-25.9%). Both have fallen to discounts of around 40% to their stated NAVs, which are by their nature subjective in any case. However, we do favour private equity trusts that apply conservative valuations to unquoted holdings.
Looking ahead, Investec Global Gold (down 14%) may prove to be a relatively good performer in the medium term should the underlying gold price retain its recent popularity, which seems highly likely, and assuming gold mines resume full production after coronavirus lockdowns.