The past 12 months have been a game of two halves for investors. Taking the year as a whole, the winners are clear: the fastest growing companies have triumphed over their peers. That means those plugged into vast structural themes: clean energy, cloud computing, digitisation or ecommerce.
However, this picture is deceptive. Since the start of the year, the market mood has changed and a different type of manager has moved ahead. These managers are more focused on ‘value’ – the price paid for individual stocks. They have tended to hold many of the companies that were unloved during the pandemic. This is areas such as energy, financials or travel.
With this in mind, those fund groups that hang their hat on finding these long-term growth companies have done astonishingly well and still top the tables over 12 months. Of these, Baillie Gifford has been the stand-out winner. Of the top 10 funds in the IA global sector, three are Baillie Gifford funds (Global Stewardship, Long Term Global Growth and Positive Change).
It is also notable how many of the top-performing funds had a ‘sustainable’ tag. Money poured into this part of the market during 2020, with €233 billion flowing into sustainable open-ended funds and ETFs over the year. This was almost double the figure for 2019. Share prices for all companies with the hint of a climate solution rose as a result.
The market mood changed in November on positive vaccine news. Investors switched their allegiance from high growth, but expensive ‘Covid winners’ to those areas that had been beaten up during the economic disruption of the previous six months – financials, oil, energy, leisure.
There were two elements at work: the first was simple. If economic recovery was likely, the companies hit hardest would see their profits revive stronger than others; share prices had taken a nose dive and reflected maximum pessimism. The second was more nuanced, economic recovery, combined with huge government spending packages were likely to create higher inflation. Inflation is naturally bad for those assets with long term cash flows, such as – you’ve guessed it – technology.
The performance of two iShares funds neatly illustrated this change in market mood. Over 12 months, the iShares Global Clean Energy fund sits top of the Global Sector, having delivered a stonking 125.4% return. Recession? What recession? However, since the start of the year, it has sunk almost 15%. It has been replaced at the top of the table by the iShares Oil Exploration and Production ETF, which is up 30.8% since the start of January (nb. it was down 34% in 2020).
This change in market direction has brought new managers to the fore. Baillie Gifford has receded to the further reaches of the performance table, to be replaced by a group of capable ‘value’ managers. These brave souls have weathered a long period out of the spotlight (a decade or more), but now the Schroder Global Recovery, Jupiter Global Value and R&M Global Recovery teams are having a moment. The other areas that have done well are specialist funds in areas such as energy or financials: Guinness Global Energy.
It is notable that many sustainability funds have lost their lustre in this brave new world. While 12 month performance still looks good, many of last year’s winners are languishing for the year to date. The Baillie Gifford Global Stewardship, for example, is down 1% for the year to date. It’s a creditable performance, but it shows how much the tide has turned.
Few themes have thrived pre- and post-November. However, the one notable exception may be smaller companies. Smaller companies across the globe were hit hard by the pandemic. Everyone tends to assume that they will do badly at a time of economic weakness. It’s not necessarily the case, but they always tend to take a knock when investors are nervous.
However, since March 2020, they’ve flown out of the blocks. Invesco Global Smaller Companies is up 70.7% over the past 12 months, Kempen Global Small Cap is up 77.5%. Allianz Global Small Cap Equity has been another winner, up 63.5%. All of them had pretty dismal performance in the preceding 12 month period, but have more than made up for it in the recovery.
It’s the same picture in the UK. Over the past 12 months, the average UK small cap fund is up 61.1% (source: Trustnet, to 26 April) and it is the second best-performing sector (after US Smaller Companies). Over six months, it is top of the league tables, up 35.3%, reflecting a post-Brexit deal ‘relief’ rally for many UK stocks. Within the sector, a number of funds have managed to top the tables prior to November and subsequently – the Premier Miton UK Smaller Companies fund, for example. However, some more ‘value’ focused smaller companies’ managers have had a better time since the start of the year. This would include groups such as small cap specialist Aberforth.
Will this shift in markets last? It’s tough to know. Much will depend on the strength of the recovery, which in turn will depend on the continued success of the vaccine rollout. The virus has proved a highly effective combatant and it’s difficult to bet against it just yet.
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