Interactive Investor

Ethical and income funds top the charts over three and six months

17th August 2021 15:14

Kyle Caldwell from interactive investor

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We share the latest monthly update on how the five interactive investor model portfolios are faring. 

Over the past couple of months, short-term performance has picked up for ethical funds and, among our five model portfolios, it is ii Ethical Growth that has risen to the top of the table over one and three months.

The value rally, which since November has benefited funds and trusts that focus on shares that are more economically sensitive, has cooled over both those time periods. Instead, as we noted in last month’s review, investors are once again embracing growth shares, including technology shares.

Given that ethical funds tend to be underweight (hold less than the index), or completely avoid certain cyclical sectors on ethical grounds, such as big oil and mining companies, when value shares outperform, it is a headwind. When the opposite plays out, it is a tailwind.

However, investors have not been put off and figures for fund sales in July show that £9 in every £10 went into an environmental or ethical fund.

Yet, over six months, it is our two income portfolios (ii Active Income and ii Low-Cost Income) that are leading the pack. The funds and trusts in our two models are benefiting from companies returning to the dividend register.

In the UK, dividend payments for the second quarter of the year grew by 51.2% year-on-year, which beat expectations, according to the latest Link Dividend Monitor report.

Driving the growth of payments were those companies restarting their dividends. In the second quarter of 2021, around nine-tenths of the increase came from companies that had cancelled dividends in the same three-month period in 2020.

Below, we run through the fund winners and losers in July for all five of our models, including detailing how each portfolio performed. All performance figures are total return, the share price total return in respect of investment trusts.

No changes have been made (including no rebalancing) to the five models this month. 

Performance of our five models over 12-month time periods 

Discrete returns for the periods*:          
  01/08/2020 - 31/07/2021 01/08/2019 - 31/07/2020 01/08/2018 - 31/07/2019    
Growth Portfolios          
ii Active Growth 28.4 5.5 N/A    
ii Ethical Growth 30 N/A N/A    
ii Low-Cost Growth 25.4 -6.1 N/A    
Growth benchmark 23.5 -5.3 7.4    
Income portfolios          
ii Active Income 24.1 -14.6 N/A    
ii Low-Cost Income 20.3 -15.1 N/A    
Income benchmark 21.7 -15.1 6.1    
Morningstar GBP Adventurous Allocation average 22.5 -4.7 4.9    

Notes *as at 31 July 2021. Portfolio launch date (for monitoring purposes) was 1 January 2019, except Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.

Growth performance and top performers in July

As mentioned above, ii Ethical Growth took the top spot in July, as well as over the past three months. It has also risen to first place over the past year, returning 30% versus 28.4% and 25.4% for ii Active Growth and ii Low-Cost Growth.

Most of the 10 constituents in ii Ethical Growth produced positive returns in July. The three best-performing funds were Montanaro Better World, Baillie Gifford Positive Change and Royal London Sustainable Leaders, with returns of 5.1%, 3.2% and 2.9%.

Last month, interactive investor interviewed Mike Fox, who manages Royal London Sustainable Leaders. Fox explained the two tests he uses to find sustainable companies that have an edge over their competitors.

He said: “When we judge a company, we look at, first of all, its products and services. Some good examples of that are healthcare and technology versus oil and gas. Healthcare and technology, we would say, have products and services that do help environmental and social issues. We would argue oil and gas, for example, is problematic. So we would tend to choose the more sustainable sectors to invest in.

“Then, as another test, we would also look at their ESG standards – how they are managing their environmental, social and corporate governance issues.” 

There were just two funds in the red in July for ii Ethical Growth: Stewart Investors Global Emerging Market Sustainability and FP Foresight Global Real Infrastructure, which posted losses of 2.5% and 0.5%.

Our other two growth portfolios, ii Active Growth and ii Low-Cost Growth, returned 0.5% and 0% in July.

In ii Low-Cost Growth, most of the index funds and ETFs in the portfolio produced positive returns in July, but the portfolio return was flat due to losses from Fidelity Index Emerging Markets and Vanguard Global Small-Cap Index, down 7.1% and 1.3%. The best performer was the WisdomTree Enhanced Commodity ETF, which gained 3%.

In ii Active Growth, the trio that led the way were CFP SDL UK BuffettologyFundsmith Equity and Liontrust Special Situations, with gains of 4.8%, 3% and 2.9%. All three invest in growth shares.

Fundsmith’s Terry Smith recently gave his take on how the fund has performed during the value rally. He pointed out that the fund outperformed the MSCI World Index, which he said his investors may be rather surprised about if they had “been reading what investment commentators have been saying during this period”.

In his letter to investors, Smith said that “no amount of recovery or low valuation will turn a poor business into a good one and quality is the main determinant of long-term performance”.

Three of the 10 funds in ii Active Growth posted losses in July. Scottish Mortgage (LSE: SMT) gave up 1.1%, while JP Morgan Emerging Markets (LSE:JMG) declined by 4.9%. A more notable fall, of 10.1%, was Standard Life Private Equity (LSE:SLPE). The recent publication of the trust’s half-yearly results, to the end of March, showed its share price total return was 38.8% and its net asset value (NAV) total return was 14.9%. Over this period, the FTSE All-Share Index returned 18.5%. The trust backs “resilient sectors”, such as technology, healthcare and consumer staples, which it says paid off during the Covid-19 pandemic.

Performance of our three growth portfolios 

% total return (with income reinvested) as of 31 July 2021, after:          
  1 month 3 mths 6 mths 1 year Since inception*
Growth portfolios          
ii Active Growth 0.5 2.6 9 28.4 61.1
ii Ethical Growth 1.8 3.7 6.3 30 38**
ii Low-Cost Growth 0 2 9.5 25.4 38
Growth benchmark -0.2 2.5 10.6 23.5 37
Growth benchmark since 1 October 2019 (date ii Ethical Growth was launched)         17.9**
Morningstar GBP Adventurous Allocation average 0.1 1.9 8.6 22.5 35.7

Notes *as at 31 July 2021. Portfolio launch date (for monitoring purposes) was 1 January 2019, except **Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. past performance is not a reliable indicator of future results.

Income performance and top performers in July

ii Low-Cost Income had the upper hand over ii Active Income in July, returning 0.5% against -0.5%. It is also ahead over three months, but not over six months, one year, or since inception (1 January 2019).

The two standout contributors to performance over the month were the SPDR® S&P UK Dividend Aristocrats ETF and the WisdomTree Global Equity Dividend Growth ETF, with returns of 3.6% and 1.9%.

The Aristocrats ETF tracks the S&P UK High Yield Dividend Aristocrats Index, made up of the 40 highest dividend-paying UK companies, with a track record of maintaining or growing dividends for at least seven consecutive years. At the end of July, its top three holdings were Morrisons (LSE:MRW), Rio Tinto (LSE:RIO) and Jupiter Fund Management (LSE:JUP).

In ii Active Income, three of the 10 constituents posted losses in July, which weighed down the overall portfolio to post a small loss. Standard Life Private Equity Trust declined by 10.1%, while Utilico Emerging Markets (LSE:UEM) and Murray International (LSE:MYI) fell by 5.3% and 4.1%.

Bruce Stout, manager of Murray International, has sounded a note of caution about the dividend recovery.

While acknowledging that markets have been rising on the back of improving global economic growth and company profitability, Stout notes that “numerous companies remained very cautious when it came to returning improving cash flows to shareholders”.

He added: “Opting to reset dividends below pre-pandemic levels or to keep dividends unchanged until greater transparency emerges was commonplace against a backdrop of viral mutations and constantly changing directives from governments.

“The path to income recovery may take much longer for certain economic sectors and businesses this time around.”

The three top performers in ii Active Income in July were BMO Commercial Property Trust (LSE:BCPT), Bankers (LSE:BNKR) and Man GLG Income, with returns of 3.7%, 3.5% and 2%.

Performance of our two income portfolios

% total return (with income reinvested) as of 31 July 2021, after:          
  1 month 3 mths 6 mths 1 year Since inception*
Income portfolios          
ii Active Income -0.5 1.9 10.7 24.1 24
ii Low-Cost Income 0.5 2.4 10.5 20.3 16.4
Income benchmark -0.9 0.7 10 21.6 17.4
Morningstar GBP Adventurous Allocation average 0.1 1.9 8.6 22.5 35.7

Data source: Morningstar Direct. *Portfolio launch date (for monitoring purposes) was 1 January 2019. Past performance is not a reliable indicator of future results.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

These articles are provided for information purposes only. The information we provide in respect of the ii Model Portfoliosii Super60 or ACE40 is an opinion provided by ii or one of its partners on whether to buy a specific investment or portfolio. Please note that none of the opinions we provide are a “personal recommendation”, which means that we have not assessed your investing knowledge and experience, your financial situation or your investment objectives. Therefore, you should ensure that any investment decisions you make are suitable for your personal circumstances. If you are unsure about the suitability of a particular investment or think that you need a personal recommendation, you should speak to a suitably qualified financial advisor.

The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Any changes to the ii Model Portfolio constituents and the rationale behind those decisions will be communicated through the Quarterly Investment Outlook.

ii adheres to a strict code of conduct. Members of ii staff may hold shares or units in investments which make up the ii Model Portfolios, which could create a conflict of interest. Any member of staff intending to complete some research about any financial instrument in which they have an interest are required to disclose such interest to ii. We will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, staff involved in the production of the ii Model Portfolios are subject to a personal account dealing restriction. This prevents them from placing a transaction in these portfolios or the underlying specified constituents of each portfolio for five working days before and after an investment is included or amended and made public within the list. This is to avoid personal interests conflicting with the interests of the recipients of the ii Model Portfolio options

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