Growth outpaces income, with majority of funds posting gains

In our latest monthly review, we explain how our portfolios are faring as the value rally cools. 

Back in March we pointed out that investors should not overexpose their portfolios to the resurgence in value investing. Instead, we noted that it is much more prudent to have exposure to both the growth and value style of investing. Doing so will help give investors diversification, which reduces the risk of a portfolio being lopsided.  

Rebalancing is another smart tactic to reduce risk. At present the portfolios are manually rebalanced each quarter to their target allocations, with some tolerance built in to avoid over-trading. However, from the start of October onwards the portfolios will be automatically rebalanced on a quarterly basis. The news article below has the full details and explains why we have moved to this new approach.

• Model portfolios to automatically rebalance every quarter
• Even if rotation has legs stick to this golden rule of investing 

Mixing and matching fund styles key for diversification

Over the past couple of months the value rally has cooled, and as a result of this year-to-date it is now neck and neck between the growth and value styles of investing.  Figures from FE Analytics show the MSCI World IMI Growth Index is up 15.8% versus 15.4% for the MSCI World Value IMI Index.

Our model portfolios have exposure to both investment styles, although ii Ethical Growth is naturally more growth focused. This is because funds that invest in an ethical or sustainable manner tend to avoid certain value sectors, such as miners or oil and gas companies.

Earlier this year the short-term performance figures of ii Ethical Growth lagged our other four portfolios, but as the value rally has slowed down in recent months the portfolio’s performance has been turbocharged. Over one and three months it is the best-performer out of the five models.  

Since its inception (1 October 2019) ii Ethical Growth also takes top spot, with a return of 44.3%. Over this time period the other models (which launched on 1 January 2019) have returned as follows: ii Active Growth (43.3%), ii Low-Cost Growth (23%), ii Active Income (10.5%) and ii Low-Cost Income (4.8%).

Below, we run through the fund winners and losers in August 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.

Performance of our models over 12-month time periods

Notes *as at 31 August 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.

• Your guide to interactive investor’s five Model Portfolios
• Value versus growth investing: the two styles explained 

How our growth portfolios fared in August – best and worst performers

In August, as mentioned above, ii Ethical Growth led the pack. It returned 4.6%. Elsewhere, ii Active Growth outpaced ii Low-Cost Growth, with a return of 3.6% versus 3%.

Ballie Gifford Positive Change and Impax Environmental Markets (LSE:IEM) were the standout performers for ii Ethical Growth, with returns of 7.8% and 7.7%.

Lee Qian, co-manager of Baillie Gifford Positive Change, spoke to interactive investor in April about the fund’s exposure to technology and gave an example of a holding that is representative of each of the fund’s four themes; social inclusion and education, environment and resource needs, healthcare and quality of life, and ‘base of the pyramid’ (addressing the needs of the world’s poorest people).

• Baillie Gifford Positive Change: top shares and two new holdings
• Why this star fund backs ‘controversial’ Alphabet and Tesla

The laggard and only constituent (there are 10 funds in ii Ethical Growth) to post a negative return in August was Syncona (LSE:SYNC), which gave up 5%. The life science focused trust was put under formal review by interactive investor last month due concerns regarding the trust’s performance and premium volatility.

It was positive returns across the board for all 10 members of ii Active Growth. Three constituents delivered returns of over 5%: Standard Life Private Equity (LSE:SLPE), up 7.2%, JP Morgan Emerging Markets (LSE:JMG), up 6.5%, and F&C Investment Trust (LSE:FCIT), up 5.4%.

In ii Low-Cost Growth just one of the nine holdings produced a negative return, and a small one at that. Vanguard Global Bond Index fell by 0.3%.

The biggest mover was Vanguard FTSE 250 ETF, which gained 5.5%. The value of the mid-cap 250 index, which is full of companies dependent more on domestic growth, has risen by around 17% this year. That compares to around 10% from the more internationally focused FTSE 100. The index outperformed the rest of the world’s major indices in August.

It was also a good month for global shares and higher risk areas of the market. Clocking returns of over 3% in ii Low-Cost Growth were L&G Global 100 Index, Vanguard Global Small-Cap Index and Fidelity Index Emerging Markets.

Performance of our three growth portfolios 

Notes *as at 31 August 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 August

Our two income models continue to be in recovery mode as shares across the globe reinstate their dividend payments. ii Active Income returned 2.6% in August, slightly ahead of the 2.2% gain for ii Low-Cost Income.

The good news, for those that have broadened their income horizons outside of the UK, is that the recovery in global dividends is surprising on the upside. Global dividends are now forecast to regain their pre-pandemic levels within the next 12 months.

The expectation, however, for UK dividends is that it will take until 2025 to return to pre-pandemic levels. UK dividend payments hit record levels for three years on the spin in 2017, 2018 and 2019. A key reason why it is expected to take longer than businesses listed overseas is down to the fact that a number of the big income shares in the FTSE 100 Index had been paying more in dividends than they could afford to prior to Covid-19 coming along, so have therefore taken the opportunity during the pandemic to re-set their dividends to more sustainable levels.

All 10 constituents in ii Active Income produced positive returns in August. Our two alternative picks led the way with returns of 7.2% and 6.8% for Standard Life Private Equity Trust (LSE:SLPE) and BMO Commercial Property (LSE:BCPT).

Utilico Emerging Markets (LSE:UEM) was the best-performing equity fund, with a return of 3.8%. Other notable contributors to performance were Fidelity Global Dividend, Morgan Stanley Global Brands Equity Income and Man GLG Income, with returns of 3%, 2.9% and 2.8%.

As expected, given the backdrop of buoyant stock markets, Jupiter Strategic Bond was the laggard, up 0.4%. The fund’s role is in the portfolio is to be a defensive ballast and give protection as a diversifier.

In ii Low-Cost Income, as was the case with ii Low-Cost Growth, the only blot on the copybook was a small loss, of 0.3%, for Vanguard Global Bond Index.

The other eight constituents posted gains in August. The top three performers were WisdomTree Emerging Markets Equity Income ETF, Vanguard FTSE All World High Dividend Yield ETF and iShares Global Property Securities Equity Index, with returns of 4.4%, 2.8% and 2.7%.

Performance of our two income portfolios 

Notes: *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.