Investment management consultant MATTHEW FEARGRIEVE looks at the mutual fund winners of 2020 and suggests some picks for your investment portfolio in 2021.
In the first part of this blog, we looked at some reasonably-priced investment funds (mutual funds) that have had good historic returns and which would be compatible with the retail investor's aim of investing in an index-beating or index-tracking return at a reasonable cost, with a focus on UK, US and Global large-cap equities.
In the second part of this blog, we considered some worthy recipients for your savings in the sectors of European (ex-UK) equities and corporate bonds.
Now, as 2020 draws to a close, we review the investments that have weathered the market turmoil of 2020 and consider some candidates for investment in 2021.
As before, our objective is to identify fund managers who have delivered returns that have beaten or at least tracked the markets over the previous year, with investment products that have an OCF (the "ongoing charges figure", broadly speaking the annual fee you pay the manager) of less than 1.00% per year. Why? Because we consider any annual manager fee greater than 1.00% to be too much of a drag on likely future performance.
So let's start by reviewing 2020's Top Ten performers selected by Morningstar, ranked according to (i) performance to December 2020 and (ii) total return over three years. You will see that it is dominated (unsurprisingly) by managers who invest predominantly in US large-cap companies.
Baillie Gifford American (i) 121.2%, (ii) 218.6%
Baillie Gifford Long Term Global Growth Investment (i) 95.6%, (ii) 163.8%
Baillie Gifford Positive Change (i) 80.8%, (ii) 143.8%
Baillie Gifford Global Discovery (i) 70.3%, (ii) 125.6%
Lord Abbett Innovation Growth (i) 69.2%, (ii) 127.0%
Baillie Gifford Global Stewardship (i) 68.9%, (ii) 103.7%
T. Rowe Price Global Technology Equity (i) 67.7%, (ii) 104.9%
Morgan Stanley US Advantage (i) 67.3%, (ii) 117.1%
PGIM Jennison Global Equity Opportunities (i) 67.1%, (ii) 114.0%
Premier Miton US Smaller Companies (i) 66.2%.
We liked the Baillie Gifford American Fund back in June when we first mentioned it in this blog. The £6.3bn fund, in which Tesla is the top holding, was named Money Observer's Best North American Fund in 2018 and highly commended in 2019. It targets a modest annual return of 1.5% more than the S&P 500 over rolling five-year periods, and has been the top-performing fund in this sector over three and five years. It is invested in US large-cap stocks like Amazon, Tesla and Netflix, all of which have done well in a year of lockdown.
The fund is growth-oriented, so you should be prepared for setbacks in periods of market stress. Like now. And anyway, value stocks are looking distinctly peaky right now. A glance at the fund-versus-index graphic shows a decent performance in excess of the benchmark index (S&P500) and this comes with an attractive active-management OCF of 0.52%, which is a reasonable price to pay for a fund that performs and gives your portfolio exposure to the US large-cap companies in the S&P500.
The Morgan Stanley US Advantage fund can be coupled with the Morgan Stanley US Growth fund, an open-ended investment company (Oeic) that is up 122% over the past year. It managed this without Tesla, up 750%, but it owns all the other usual suspects, such as Zoom, Shopify, Amazon and Spotify. Both these US dollar-denominated funds, together with the Baillie Gifford American fund, have been outstanding investments for at least five years and are still worth buying as Joe Biden’s America rolls on.
If you wanted to look outside Morningstar's Top Ten for a low-fee, passively-managed US counterpart for your portfolio, you could do worse than to consider the UBS S&P500 Index Fund. This fund has a good 5 year record of tracking the index and has a low-impact OCF of 0.09%. For that price, you can't go wrong. An alternative product would be HSBC S&P500 UCITS ETF, but with a higher OCF of 0.12% and a performance graph that tracked the index a little less well, we preferred the UBS option. Both these funds give you decent, low-cost exposure to US large-caps.
We like the other funds managed by Baillie Gifford in Morningstar's Top Ten ranking for much the same reasons. They have a consistently good track record of performance over the last three to five years, and come with an agreeably low OCF. Most of them of them are awarded at least four stars by Morningstar.
Significant stakes in Tesla have helped Baillie Gifford claim the top four spots in these rankings. Even their small-cap Global Discovery fund has done well over 2020 when the FTSE250 and European SMEs in general have been significantly underwater.
The Premier Miton US Smaller Companies fund, up 66.2%, stands out for its success investing lower down the market cap scale, in a year when the best returns have often been generated by giant companies getting even bigger.
One market dynamic that caught everyone by surprise was the sustained inflows enjoyed by ESG (environmental, social and governance) funds; surprising because the market losses seemed set to drive flight capital towards more mainstream, sure-fire bets. Indeed, ESG investing has not just grabbed more attention this year but often seemed to safeguard stronger investment returns.
Baillie Gifford’s £1.7bn Positive Change fund is a case in point, taking in a net £1.1bn of fresh investor cash in 2020 while notching up an 80.8% return.
If you want to combine US exposure with an ESG overlay, have a look at Brown Advisory US Sustainable Growth Fund, which invests in businesses with a sustainable business advantage. It holds a relatively concentrated portfolio of 30-40 stocks. The managers have a strong valuation discipline, which prevents them paying over the odds, which is an important consideration in the US market as it continues to soar on the wings of Big Tech companies which are looking overpriced.
The Foresight UK Infrastructure Income Fund combines sustainability with a target 5% annual income, which it achieves by investing in other investment companies that own real assets in the renewable energy and infrastructure sectors. This is an attractive alternative asset class which should benefit from income investors diversifying their holdings away from shares and bonds. The fund might also provide some protection against inflation, were that to start to return next year. For the 2021 bond outlook and suggested bond funds, see our blog here.
Outside the Morningstar Top Ten, for some exposure to non-US markets, as global growth stagnates in the wake of the pandemic, the structural growth opportunities inherent in Emerging Markets could pose opportunities that developed markets, with their low interest rates and mounting fiscal deficits, cannot. Markets in Asia and other regions could outperform in the year ahead.
A regional, emerging market fund with a nice infusion of sustainability is the Stewart Investors Asia Pacific Leaders Sustainability Fund. Investing the majority of its holdings in Emerging Asia and having a sustainability focus on companies that contribute to, and benefit from, economically and environmentally sustainable development, this fund seeks out socially useful businesses, and manages risk by restricting its search to mainly large and mid-sized companies.
A country-specific emerging market suggestion is VinaCapital Vietnam Opportunity investment trust. Vietnam could be the world’s fastest growing developing market, boosted by mounting concerns over China’s supply chains, costs and political risks. The trust is up 27% over one year and trading on an 8% discount.
A holistic fund providing global proxy access to emerging markets is the Artemis Global Emerging Markets fund. The fund has most of its holdings in Emerging Asia, but also has exposure to Africa, Latin America and Emerging Europe.
We explored the fortunes of gold prices over 2020, and their unlikely "safe haven" pairing with Bitcoin in our earlier blog here.
Ninety One Global Gold 1 Acc is a globally invested OEIC owning shares of companies involved in gold mining and in related derivatives, is another holding, and is up 37% over 12 months.
A well-performing catch-all for gold and precious metals with Golden Prospect Precious Metals, which has an underlying investment split of 66% gold, and 25% silver, where producers are 64% and developers 24%. It is up 91% in one year and on a current discount of 16%.
My fund choices for 2021; and why Rebalancing is Important
Morningstar's Top Ten performers rankings are one thing, but which investment funds will I be sticking with, ditching and buying for 2021? You can read my suggestions for Getting your Portfolio Ready for 2021 here.
The New Year is a perfect time to recalibrate the asset, sector and geographic exposures that your portfolio will quite naturally have assumed over the preceding twelve months. You will be surprised how far its equity-debt weightings and other pre-set biases have changed since you set your investment objectives and risk tolerances earlier in the year (or, if you are lazy like me, two or more years previously!) You can read my guidance on how and when to rebalance your portfolio here.
Important information: the views expressed in this article are opinion only, and are not intended to be relied upon as financial advice or treated as a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.