The funds delivering when both growth and value stocks do well

These funds have stood out from the crowd in two different market environments, but experts caution against trying to pick funds for all markets.

Whipsawing stock markets since the pandemic have meant that only a tiny proportion of funds have managed to maintain their place at the top of the performance charts.

BMO Global Asset Management calculated that in the first quarter of 2022, just five funds out of 1,115 (0.45%) managed to be in the top quartile of funds (in the top 25% of performers) for three consecutive years.

This is the lowest number recorded since the survey began in 2008 and is well below the historic average of between 2 and 4 per cent. 

This is because markets have undergone a volatile rotation from “growth” stocks being in favour to “value” stocks outperforming.

When central banks dropped interest rates to near zero at the start of the pandemic to stimulate the economy, stocks that were growing fast but were short on profits performed best.

However, now that rates are rising to cool inflation, funds that buy cheaper stocks, such as those in the natural resources sector, are delivering the best returns.

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The only funds to perform well in both markets over the past three years, according to BMO, were BlackRock Continental European, Slater Artorius, Quilter Investors Corporate Bond, Quilter Investors Diversified Bond, and Fidelity Japan. They have delivered returns of 44%, 59%, 10%, 17% and 43% over the past three years.

Rob Burdett, head of multi-manager investing at BMO Global Asset Management, said: “The number of funds consistently achieving top returns fell dramatically in the first quarter of 2022 due to the significant impact of the war in Ukraine, and the geopolitical effect on resource supply.

“The war in Ukraine is the latest in market shocks, with the resulting sanctions having a significant impact on commodities, inflation and interest rates, as well as the impact at a sector level, with knock-on effects for defence and energy stocks. These crises have caused significant gyrations in financial markets and underlying asset classes.”

But picking a fund for all markets is not necessary the right thing to do. Felix Milton, chartered financial planner at Philip J Milton & Company, advocates a balanced investment approach, owning funds that perform well in different market environments, rather than picking funds that can do well in all of them.

He said: “Go with a diversified approach. Value is in favour at the moment, but was not in the past. It is very unlikely you can own a fund that will do well in both growth and value markets. Some hedge funds might be able to, but they are tough for retail investors to own and are very expensive.”

James Penny, chief investment officer at TAM Asset Management, agrees. He says that “go-anywhere” fund managers, known as “unconstrained” investors, failed to foresee the rotation from growth to value shares and the sharp rise in interest rates.

He notes: “Go-anywhere investors are failing now because surviving as a fund manager for the past decade actually meant picking fast-growing stocks. It was impossible to beat the MSCI World index as a value manager and so unconstrained managers were de facto growth investors."

The long boom for American technology stocks has led most wealth managers to own passive funds that own stocks according to their size. Retail investors have also been drawn to high growth funds, such as those managed by Baillie Gifford, according to Penny.

This leaves them very exposed to changing investment trends, he argues. He said the best approach going forward was to stick with active managers.

He said: “Active management is key now. We need human investors to be agile and find well-priced stocks. We deploy a ‘barbell’ approach, where portfolios are made up of both growth and value funds – and we tilt the balance depending on market conditions. Since November 2020, we have been moving money into cheaper shares.”

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On the growth side, Penny owns BlackRock Global Unconstrained Equity fund. For cheaper stocks, he likes, Havelock Global Select and Schroder Recovery. He also owns the S&P 500 Equal Weight Index, which has an equal amount invested in the largest 500 American companies. Two options on interactive investor are the Invesco S&P 500 Equal Weight ETF (LSE:SPEQ) and the Xtrackers S&P 500 Equal Weight ETF (LSE:XDWE).

Penny notes that value funds have not actually done as well as he might have expected. While performing better than growth funds, many have still lost money this year.

He said it is therefore important to own “diversifiers” to create a balanced portfolio, such as Ninety One Diversified Income, which can uses hedging to make money when markets fall.  

Milton takes a more concentrated investment approach, putting greater emphasis on undervalued companies rather than expensive but fast-growing ones.

“We are betting on a large recovery for value shares and are reluctant to own technology stocks, even after a sharp drop for the sector this year.

“But everything has a price that makes it good value. Microsoft (NASDAQ:MSFT) has Office 365 and huge economies of scale. It could be a deep value stock at one point but is still too expensive for us now. We could own the technology sector in the future via an investment trust, such as Manchester & London (LSE:MNL).”