Morningstar, which oversees the five interactive investor model portfolios, explains how performance fared in an extraordinary year for investors.
It is no understatement to say that 2022 was an extraordinary year in so many ways with dramatic changes in geopolitics, the global economy, and fiscal and monetary policies resulting in investors having to deal with numerous shocks and wild changes in the outlook across the investment landscape.
Unsurprisingly all asset classes were impacted, with all except commodities suffering negatively. Some of the trends that had started in 2021 were exacerbated, most notably the fall in bond prices from historic highs as inflation rose and investors demanded higher yields, and the relative outperformance of value-oriented investment styles over the more highly rated growth strategies that invest in sectors such as technology.
Against this backdrop all the models produced a negative absolute return over the year, although in the case of the Income models they were down only a modest amount. Unsurprisingly, the growth portfolios were hardest hit, particularly the Sustainable Growth model (formerly called Ethical Growth), where funds typically have a bias to growth factors. The Low-Cost Growth model fared better in relative terms as this model also has a less pronounced growth style bias.
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The performance differential between the active funds was stark, highlighting the extreme moves in markets across a number of factors, including growth and value as highlighted above, but also between large- and small-caps and among sectors. Energy stocks globally were the best performers, delivering a return of almost 50% in sterling terms, while at the other end of the spectrum, technology stocks globally declined by around 24% in sterling terms.
The top-performing model over the 12-month period was Active Income, which was only down 0.30%. This was followed closely by the Low-Cost Income model, which was down 0.84%. As highlighted above, the growth models fared significantly worst with the Sustainable Growth model down 17.75%, the Active Growth down 14.52% ,and the Low-Cost Growth down 6.54%.
Performance of models over 12-month time periods
|Discrete (%) returns for the periods*:|
|ii Active Growth||-14.52||14.13||22.11|
|ii Low Cost Growth||-6.54||15.51||6.87|
|ii Sustainable Growth||-17.75||13.34||24.32|
|ii Active Income||-0.30||15.09||-4.37|
|ii Low Cost Income||-0.84||15.26||-7.12|
|Morningstar 80%+ Equity Category Average||-9.98||13.47||6.79|
Notes *as at 31 Dec 2022. Portfolio launch date (for monitoring purposes) was 1 January 2019, except Sustainable Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.
Performance of the three growth model portfolios
|% total return (with income reinvested) as of 31 December 2022, after*:|
|1 Month||3 Month||6 Month||1 Year||2 Year||3 Year||Since Inception|
|ii Active Growth||-1.21||3.30||4.11||-14.52||-2.44||19.13||43.86|
|ii Low Cost Growth||-2.46||2.90||2.70||-6.54||7.95||15.36||35.33|
|ii Sustainable Growth||-1.84||3.22||3.00||-17.75||-6.78||15.89||17.42**|
|Growth benchmark since 1 October 2019 (date ii Sustainable Growth was launched)||18.11|
|Mornignstar 80%+ Equity Category Average||-1.46||2.78||1.87||-9.98||2.14||9.07||28.49|
Notes *Portfolio launch date (for monitoring purposes) was 1 January 2019 ** Sustainable Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.
How the three growth portfolios fared
The ii Sustainable Growth Model was the hardest hit over the course of the year, with sustainable funds typically having a greater bias to growth factors, as highlighted above, and in many cases also to smaller-cap stocks, which typically incur larger losses during periods of heightened uncertainty. The ii Active Growth Model, which also has a reasonable allocation to managers with a growth-style bias also incurred a significant loss and underperformed the benchmark.
In the ii Sustainable Growth Model, the key detractors were the allocations to the Montanaro Better World fund and the Liontrust UK Ethical fund. Montanaro Better World fell by over 29%. Its growth focus and the mid- and small-cap bias were significant headwinds in a market that generally favoured large-cap value. This is also true of the Liontrust UK Ethical fund, which fell by 25% over the year.
While none of the funds in the model produced a positive return over the year, faring slightly better in relative terms were the iShares MSCI USA SRI ETF (LSE:SUUS) (-8.4%) and the Stewart Investors Global Emerging Markets Sustainability fund (-8.8%). The Stewart Investors fund is typically underweight China and overweight India, which was a positive contributor to performance in 2022 as the Chinese market underperformed following the re-emergence of Covid-related lockdowns and the negative impact these had on the Chinese economy.
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Within the ii Active Growth model, Scottish Mortgage (LSE:SMT) was the worst performer. With uncertainty breeding caution throughout much of 2022, investors punished the high valuations of the “blue sky” growth companies that this fund has always sought. Such stocks require belief in high levels of growth over the longer term to justify their valuations and, in 2022, few investors had the confidence to take such views. The trust saw a share price decline of over 45% during 2022. However, despite this recent weakness it should be remembered that this fund has shown exceptionally strong returns in more favourable market conditions and performance remains well ahead of benchmark over the past three years.
We have highlighted in previous commentaries the significant impact that discount moves can have on the share price of investment trusts. To this end abrdn Private Equity Opportunities (LSE:APEO) delivered a negative return of 18.9% over the year, most of which occurred as a result of the widening of the trust’s discount. The trust invests into private equity and private equity funds and the discount at which it trades widened over the year as investors became increasingly concerned about the outlook for its primarily European-focused investments. Although in absolute terms the trust was one of the weaker performers in model, it is only held at a 5% allocation, reflecting the volatile nature of its return profile and thus had a smaller impact on the overall return of the model.
Offsetting this with positive performance were two of the funds that were added to the model earlier in the year, in part to offset some of the growth-style bias reflected in funds such as Scottish Mortgage. These include the Jupiter UK Special Situations fund and the LF Ruffer Diversified Return C GBP Acc fund. The Jupiter fund has both a large-cap and value style bias, which were beneficial in 2022, while the absolute return mindset and their cautious approach helped the Ruffer fund deliver positive returns in the face of weaker markets. Within equities, the managers favoured both stocks and countries that were attractive on valuation grounds and within fixed income their bias to short-duration bonds was helpful.
As highlighted above the ii Low-Cost Growth Model fared significantly better than the Active Growth and Sustainable Growth models and the standout performers in this model were the WisdomTree Enhanced Commodity ETF (LSE:WCOM) and the Fidelity Index UK, both of which produced positive returns for the year.
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The increase in many commodity prices benefited the Wisdom Tree Enhanced Commodity ETF, delivering an absolute return of 27% over 2022. This exchange-traded fund (ETF) provides investors with exposure to four broad commodity sectors, namely energy, agriculture, industrial metals, and precious metals (plus up to 5% in bitcoin), primarily through futures contracts. Energy, where the fund has approximately 31% exposure, was a significant contributor as supply was abruptly constrained by the war in Ukraine and prices soared. In addition, other areas of the portfolio also benefited from inflationary pressures.
Fidelity Index UK tracks the FTSE All-Share Index, which surprisingly was the best relative performer through 2022, managing to post a small positive return where all major markets fell close to 10%. The primary reason, in addition to the fact that it has a very low relative valuation, and was already unloved, is due to the make-up of the UK market. A relatively heavy exposure to the energy sector was a significant contributor to this outperformance as the sector went up by nearly 50% driven by surging energy prices, due to the effects of the Russian invasion.
In contrast, among the weaker performers in the model was the allocation to the Vanguard FTSE 250 ETF (LSE:VMID), which was hurt by the sell-off in mid- and small-cap stocks as previously highlighted. Also weighing on returns was the allocation to the iShares Environment & Low Carbon Tilt Real Estate Index Fund (UK). Real estate was caught up in the selling pressure as concerns rose over the real economic fallout from the inflation surge and consequent interest rate hikes, with the commercial, retail and residential property segments being hit.
In December, BlackRock announced a mandate change to the iShares Global Property Securities Equity Index Fund (UK), with the fund’s benchmark index changed to incorporate certain environmental, social and governance (“ESG”) related considerations and to change the name of the fund. To reflect the change of the fund’s benchmark index, the name of the fund was formally changed to iShares Environment & Low Carbon Tilt Real Estate Index Fund (UK).
We are currently reviewing the future impact of these changes and whether the fund continues to remain suitable for the models.
Performance of the two income model portfolios
|% total return (with income reinvested) as of 31 December 2022, after*:|
|Income Models||1 Month||3 Month||6 Month||1 Year||2 Year||3 Year||Since Inception|
|ii Active Income||-0.11||8.28||4.04||-0.30||14.75||9.74||31.09|
|ii Low Cost Income||-1.49||3.96||2.70||-0.84||14.29||6.15||21.68|
|Morningstar 80%+ Equity Category Average||-1.46||2.78||1.87||-9.98||2.14||9.07||28.49|
Notes * Portfolio launch date (for monitoring purposes) was 1 January 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.
How the two income portfolios fared
The standout performer in the ii Active Income model was Murray International (LSE:MYI). This global equity fund is managed by an experienced and extremely long-tenured team and offers investors a value-biased portfolio that emphasises income. These attributes have been favoured by the market over the past year, but the strength of the share price return has been considerably enhanced by demand for the shares.
This has seen the share price ending the year at a premium to NAV, having started 2022 at a discount, and has contributed over 10% to returns.
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Also producing a positive return were City of London (LSE:CTY) and Man GLG Income, both of which are UK Income funds and benefited from the move towards value stocks. City of London also benefited from a widening of the trust’s premium, which accounted for the bulk of performance. Overall, of the 11 funds held in the model, five produced positive absolute returns, which in the context of the prevailing market environment was an excellent result.
In contrast, funds which detracted from performance included abrdn Private Equity Opportunities (LSE:APEO) and Jupiter Strategic Bond. The latter highlighting the extremely tough market environment for fixed income investors, which came under pressure as investors woke up to the reality of inflation bursting upwards due to post-pandemic market tightness and the consequences of the Russian invasion of Ukraine.
Similar themes prevailed in the ii Low-Cost Income model where the top-performing funds included the Vanguard FTSE UK Equity Income Index fund and the Vanguard FTSE All World High Dividend Yield ETF (LSE:VHYL). At the other end of the spectrum, the laggards included the iShares Environment & Low Carbon Tilt REIT (UK) and the Vanguard Global Bond Index fund.
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