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Outside of technology, US markets and ESG, it’s been a year many investors want to forget
Thursday 03 Dec 2020 Author: Martin Gamble

This year may be one that people wish to forget and instead look to next year when some sense of normality might return. However, it wasn’t all bad news with a few global stock markets and investment themes notching up stellar returns.

Heightened volatility has meant that the divergence between the winners and losers has been especially wide so far in 2020, with the best almost doubling and the worst dropping by almost a third. It also means that where you have been invested has mattered a lot more than usual.

KEY TRENDS

Before we look at some of the best performing open-ended funds (unit trusts and Oeics) it’s worth considering some of the underlying trends prevalent this year.

After all, there isn’t much merit in comparing a UK income manager, who has had to contend with a torrid headwind, with a global technology growth-oriented manager where conditions arguably couldn’t have been any better.

The technology-centric Nasdaq 100 index is up 37% year-to-date and the broad S&P 500 index is up 11%. Other notable winners this year include China with the SE Composite index gaining 10% and Japan’s Nikkei 225 which is 8% ahead.

All these markets are ahead of the FTSE World index which has gained just under 8%. Despite the UK’s poorly perceived attractions, the FTSE AIM All-Share index is up 7.5% after recently making new all-time highs.

At the other end of the spectrum is the Russian stock market which is down 19% and the FTSE 100, losing 16% so far. Also unloved in 2020 has been the Brazilian market, down almost 8%, while most European markets are in negative territory. One exception is Denmark with the OMC25 index generating a gain of 27%.

THE TOP PERFORMING FUND

The best performing fund in 2020 is the Baillie Gifford American Fund (0606196) which has more than doubled, up 106.8%, and compares with growth of 31.4% for its benchmark, the Russell 100 Growth index, based on Morningstar data.

It is also the best performing fund in the large cap equity growth category. The £5.2 billion fund doesn’t pay a dividend but has a very competitive ongoing charge of 0.51% a year.

Top holdings include Tesla representing almost 8% of the fund, while Shopify, Amazon and Wayfair each have weightings around 7%, or collectively around 30% of the fund.

IN SECOND PLACE

Technology was a clear winner even before the pandemic arrived, and the enforced global lockdowns accelerated existing trends towards e-commerce, providing a huge boost for online companies and the companies providing the technology.

The $1.4 billion BlackRock-managed BGF Next Generation Technology Fund (BG094W8) did very well in 2020 with a gain
of 92.6%.

Around half of the fund is invested in the US, with the UK making up 27% of assets and Greater Asia, comprising developed and developing Asia, representing around 17% of the fund.

The biggest holdings include Ming Yuan Cloud at 1.5% of the portfolio and Tesla representing 1.4%. Among the top 10 holdings is a position in recently listed Corsair Gaming which provides gear for gamers and content providers.

Despite opening 11% below the issue price of $17 on the first day of trading (23 September) Corsair’s shares have since risen 224% to $49.

BEST PERFORMING UK SMALLER COMPANIES FUNDS

LF Miton Smaller Companies (B8JWZP2) topped the smaller companies fund category in 2020 with a return of 51.7%.

Other top performing funds were Baillie Gifford British Smaller Companies (0593135) at 20.6% and ES River and Mercantile UK Equity Smaller Companies (B1DSZS0) with 12% return.

The latter £308 million fund is significantly ahead of the benchmark over the last decade having generated an average annual return of 16.2% compared with 9.8% for the benchmark. The fund has an ongoing charge of 0.87% a year.

Top holdings include Smart Metering Systems (SMS:AIM), Diversified Gas and Oil (DGOC) and gaming company Team 17 (TM17:AIM).

WORTHY MENTIONS

A somewhat surprising success in 2020 has been the strength of Chinese stocks which nobody was forecasting at the beginning of the year. Matthews China Small Companies Fund (BJN4L97) has delivered a return of 58.9%, handsomely beating the 22.6% benchmark return.

The fund is on the small side at $218 million and has relatively high running costs at 2.25% according to research group Morningstar. Top holdings include Silergy at 5.6% of the fund and Kingdee International Software also at 5.6% of assets. The top 10 holdings represent about a third of the portfolio which contains 52 holdings.

Another popular investment theme has been green and ethical investing and Schroder Global Energy Transition Fund (BK4Q6F0) stands out with its 67.5% return in 2020.

The $236 million fund focuses on companies that the manager believes are associated with the global transition towards lower carbon sources of energy.

Interestingly the fund has generated strong performance despite having nearly 60% of its portfolio invested inside the Eurozone and only 11% invested in the US.

Top holdings include Italian transmission system operator Terna which represents 3.6% of the portfolio, together with Danish manufacturer Vestas Wind Systems and Spanish electricity grid operator Red Electrica, both representing around 3% of the portfolio.

The fund has an ongoing annual investment charge of 0.7% a year according to Morningstar data.

WHICH FUNDS TO BUY OR AVOID?

While not impossible, it is unlikely that the Baillie Gifford American will double again in 2021. Doubling returns every year is extremely unusual. Secondly, US stock markets have looked through the deep slump in the economy. This has resulted in a stretched valuation relative to history and to other markets.

If the global economy experiences a rebound next year as many commentators expect, it more likely that markets which have lagged will play catch-up. Therefore, we wouldn’t rush to put money into the Baillie Gifford fund now, although we do acknowledge its attractions on a longer-term basis.

Instead, there is another fund which has greater appeal in the current climate and that’s Janus Henderson Global Sustainable Equity (B71DPP6). The sustainability theme still has a long runway and this fund has an excellent and consistent long-term track record with performance ahead of the benchmark and peers. It has achieved 27.9% return this year.

The £1.2 billion fund has a medium and smaller company tilt and an overweighting in economically sensitive sectors which should benefit from global reflation. Morningstar gives the fund its highest sustainability rating.

BEST PERFORMING UK INCOME FUND

In the UK Equity Income category, the LF Miton UK Multi-Cap Income Fund (B41NHD7) was the only fund in this space to achieve a positive return in 2021, at 2.8%.

This was enough for the £768 million fund co-managed by Gervais Williams and Martin Turner to be the best performing fund in the category where the average fund performance was -15.5% year-to-date.

The portfolio has a 62% weighting in cyclicals and a big underweighting in defensive sectors which represent only 12% of the fund compared with 31% for the benchmark.

The fund’s top holdings include financial companies CMC Markets (CMCX), Randall & Quilter (RQIH: AIM) and Admiral (ADM), representing almost 10% of the portfolio in aggregate.

The fund offers a dividend yield of 4.1%, paid quarterly, and the ongoing annual
charges are 0.82% according to Morningstar.

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