A typical claim from fund managers is that their investment process is so well grounded it can outperform in any market environment, but only 47 equity funds have actually managed this in 2019, 2020 and 2021, research by Trustnet has found.
The past three years have individually been some of the most polarised periods in markets. Going back to 2019, it was arguably the last year of ‘normality’ for markets and society.
The major market events included the Federal Reserve cutting interest rates an unprecedent three times down to 0.25-0.75%, which caused a strong, negative reaction from markets and made the central bank quickly flipflop on the agenda.
There were also several macroeconomic incidents including the US-China trade war, Brexit, the UK general election and protests in Hong Kong and throughout Europe.
But it was the then inconspicuous cases of a new, flu-like variant appearing in Wuhan towards the end of 2019 that would become the biggest driver for markets going forward.
The year after was a watershed year for markets, economies and society as coronavirus swept across the world with unprecedented consequences. Interest rates were cut to record lows and governments and central banks unleashed historic amounts of stimulus to support economies and businesses facing global lockdowns.
One thing that linked markets in 2019 and 2020 though was the returns of growth companies, particularly internet and technology names. This part of the market had already been ahead of more value and cyclical sectors for some years and the pandemic drove the gap between these two areas even wider, shown in the graph below.
Performance of MSCI ACWI Growth vs MSCI ACWI Value over 10yrs up to ‘Vaccine Monday’
Source: FE Analytics
That was until several effective vaccines were announced late 2020 – a catalyst for significant market rotation into value stocks, which led investors to try to cash in on the recovery from Covid.
Performance of MSCI ACWI Growth vs MSCI ACWI Value since ‘Vaccine Monday’
Source: FE Analytics
Recovery was the buzzword of 2022 and throughout the year market’s yo-yoed between growth and value as the Covid picture bettered and then worsened with mutating strains.
All of this has been enough to give investors whiplash, but for managers it has been a unique timeframe to see whether their portfolios can actually stand-up to very different market environments.
Looking at the major Investment Association (IA) equity sectors, 47 equity funds achieved a top quartile return in their respective sectors in 2019, 2020 and 2021.
Out of the three years cumulatively the Xtrackers MSCI USA Information Technology UCITS ETF was the best performer, making 169.7%.
The $1bn (£739m) tracker is based on the MSCI USA index which is comprised of large and mid-cap US companies but the ETF is filtered down to just the technology stocks. The combination of US and tech has been a very fruitful one long-term, with returns from this sector driving global markets and capturing a lot of investment.
Indeed the MSCI USA index has beaten the S&P 500, MSCI ACWI and FTSE 100 index throughout these three years, shown in the graph below.
Performance of indices since 1/1/2019
Source: FE Analytics
The ETF’s largest weighting is to Apple (21.3%), which became the first company to hit a $3trn valuation at the start of this week. Other holdings such as Microsoft, Visa and Nvidia have all generated big returns.
This focus on US growth stocks was common for several funds in the study, including the: Brown Advisory US Sustainable Growth and JPM US Select.
Although the ETF made the highest returns over three years, on average returns it was beaten by the Allianz China A-Shares fund, which averaged 41.2% across the three years.
It was the only fund from the IA China/Greater China sector in the study. Its total return across this time frame was 41.3%, second to the ETF.
The $12.6bn (£9.3bn) fund launched mid-2018 and since then has generated consistent relative outperformance, even in 2021 when Chinese equities had a tough year, eking out a small gain when the average peer lost 10.7%.
The sector faced several headwinds in the form of new government regulations targeting China’s technology and education stocks, which caused investors to move out of US-listed China stocks, and the ongoing Evergrande saga.
But prior to last year the IA China/Greater China sector had performed well, especially in 2020 when despite being the epicentre of the coronavirus pandemic its early handling of the crisis meant it was able to start its recovery well ahead of other emerging and developed markets.
Looking at the other sectors, in the IA Global only four funds met the criteria: Nordea 1 Global Climate and Environment, Pictet Premium Brands, Threadneedle Global Focus and LF Purisima Global Total Return PCG.
The Nordea 1 Global Climate and Environment fund was the largest one out of the four at £9.5bn and had the highest average returns over three years (28.4%). Cumulatively it made 25.8% during that time.
The fund taps into the growing trend of ethical investing, which picked up huge momentum in 2020 when the Covid pandemic shone a spotlight on social and environmental problems.
Consequently investors have been aligning their money with environmentally and socially responsible funds more, though the high returns of many of these ethical portfolios has also been also highly appealing.
Another ethical fund in the study was Royal London Sustainable Leaders Trust, which made 63.5% over three years.
The IA UK All Companies fund has an FE fundinfo Five Crown rating and is run by Alpha Manager Mike Fox, who seeks out UK companies which tackle ESG issues, with a main goal of transitioning to a more sustainable economy.
There were 14 other funds from the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sector in the study.
The best performer for total and average performance was Slater Artorius, making 116.1% and 29.6%, respectively, while Slater Recovery and Slater Growth also made the list. The funds follow manager Mark Slater’s style of a ‘growth at a reasonable price’ spread among a concentrated number of holdings.
Other UK funds featured were: Thesis Stonehage Fleming AIM, FP Octopus UK Multi Cap Income, Premier Miton UK Value Opportunities and LF Gresham House UK Multi Cap Income.
Source: FE Analytics