interactive investor’s three growth portfolios returned between 3.5% and 4.4% in August, ahead of the benchmark.
This August proved to be one of the best on record for risk-friendly investors, with global stock markets taking their lead from the outsized gains made in the US. The technology-laden Nasdaq 100 index returned 11.2% in August, which in turn helped propel the wider S&P 500 index to a 7.1% gain.
Japan stocks also performed well, with both the MSCI Japan Small Cap and larger company Topix index putting on more than 8%.
For sterling investors, these gains were more muted as the dollar continued to weaken and sterling generally held its value against other major currencies – sterling-converted returns were around 2% lower for most overseas market indices but more than 3% lower in the Asia-Pacific region.
In the UK, investors in smaller companies and equity income strategies were well rewarded. The FTSE UK Dividend+ index gained 6.8% and the Numis Smaller Companies including Aim (ex investment companies) index was up 6.3%. Both far exceeded the wider market return of 2.4% from the FTSE All-Share index.
In the fixed-interest space, the hedged-to-sterling exposure we have through most of our models – particularly the passive, low-cost versions, helped to limit losses. The Bloomberg Barclays Global Aggregate Hedged GBP index lost 0.7%, but the unhedged version was down 2.1%.
Among the models, all of which target a relatively adventurous asset allocation, the three growth versions again led the way – they returned between 3.5% and 4.4% in August. That represents comfortable outperformance of the growth benchmark, which returned 2.7%, as well as the Morningstar GBP adventurous allocation’ sector, where the average fund returned 3.1%.
Although the two income-focused portfolios made less-exciting returns of 2%-2.6%, this was better than the income benchmark return of 1%.
- Find out more about our Model Portfolios and the benchmarks used to compare performance in our methodology
- Check out our guide to our five Model Portfolios
ii Ethical Growth leads the way
Standout stat: iShares Global Clean Energy exchange traded fund gained 17.4% in August – nearly double the gain it made in July.
Turning to the individual portfolios, the ethical growth model led the way in August, returning 4.4%. The portfolio is comprised predominantly of actively managed funds and investment trusts, but it was a passive index-tracker that excelled in August.
iShares Global Clean Energy (LSE:INRG) exchange traded fund gained 17.4% – nearly double the gain it made in July – and cementing its status as the best-performing holding among all models alongside Scottish Mortgage (LSE:SMT) investment trust (which is held in the active growth portfolio) in the year to date.
The ETF has gained 45.3% so far this year from its portfolio of 30 global “clean energy” companies and the top five holdings, predominantly involved in solar energy, account for around 28% of the fund’s total $1.73 billion value.
The fund has a target weight of 10% in the ethical growth portfolio, but its recent strong performance compared with the other nine holdings has propelled it to 13.7%.
Impax Environmental Markets (LSE:IEM) investment trust continues to provide decent growth from its more diversified portfolio: it returned 5.3% in August, and its current popularity means the shares are trading on a small premium to the underlying net asset value, but the £856 million trust has regularly been issuing new shares to meet demand.
Investors in the trust can access a variety of environmental themes: the top holding at 2.9% of the portfolio is US-based Rayonier (NYSE:RYN), which specialises in sustainable forestry, while second-largest holding Clean Harbours (NYSE:CLH) deals with hazardous waste management. UK-based Spirax-Sarco Engineering (LSE:SPX), a leading firm in industrial energy efficiency, also features in the top 10.
Although the trust does not provide much in the way of yield (currently around 1%), it is notable that over the past five years the dividend has grown at an annualised rate of 16.5%, and its £10.8 million of revenue reserves represent 1.4 years of the previous year’s total.
As with the other four model portfolios, ethical growth has 10% exposure to “alternative” asset classes. For the ethical growth model this is represented by 5% each in property and private equity.
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Impact Healthcare (LSE:IHR) provides the property component and this investment trust has 94 nursing and residential care homes in its portfolio. Having regularly traded at a premium from its launch in March 2017, the shares have traded at a discount for much of this year, currently -6% compared with the last recorded net asset value on 30 June.
The shares have not shone this year, unlike in 2019, and are down 3.5%. Nevertheless, this compares very favourably against other trusts that invest in physical property and it is also worth noting that the shares were trading on a small premium at the start of the year, so the move to a discount has also been a drag on performance.
The private equity element is provided by Syncona (LSE:SYNC), the £1.4 billion investment trust that invests in unquoted life sciences enterprises. Successful investments in cutting-edge companies such as Freeline (NASDAQ:FRLN), Autolus (NASDAQ:AUTL) and Blue Earth Diagnostics has led to rapid share price appreciation in the past. But this has also been accompanied by some fairly wild swings in its premium to net asset value.
Currently, the premium of 10% to the 30 June net asset value (Syncona’s portfolio is valued quarterly) compares favourably with spikes as high as 42% in July 2018.
In the second quarter of this year, a highlight for the trust was its 27% stake in Autolus, which is now quoted on Nasdaq. The cell therapy company’s valuation in Syncona’s life sciences portfolio rocketed from £77 million on 31 March to £206.3 million on 30 June, following reports of positive data across Autolus’s pipeline of programmes.
Like Impact Healthcare, Syncona’s relatively small weighting in the overall portfolio means its performance has less impact than other holdings such as Fundsmith Sustainable Equity and Impax Environmental Markets (both with target 15% weightings).
However, the strong recent performance has contributed to strong outperformance of the growth benchmark. Since inception on 1 October 2019, this portfolio has returned 10.8%, which compares very favourably against a 2.5% loss from the benchmark, which is comprised predominantly of leading world equity indices.
Standout stat: F&C investment trust was the portfolio’s second-best performer in August, but remains on a steady discount of around 9%.
With a 4.2% return over the month to the end of August, the ii Active Growth Portfolio was only marginally behind the ethical version, but also usefully outperforming the 2.7% return from the growth benchmark.
Since we started monitoring its performance on 1 January 2019, the active growth portfolio has returned 30.8% – more than double the 13.1% return from the benchmark.
Undoubtedly the largest contribution has come from Scottish Mortgage. The UK’s biggest investment trust continued its stellar run in August – it gained 10.6%, taking its 12-month gain to a colossal 85.9%.
Early September saw the trust’s shares fall back following the rapid 10% correction from the Nasdaq Composite index, while Scottish Mortgage’s manager Baillie Gifford also announced that the firm had cut its stake in electric auto manufacturer Tesla, citing breach of portfolio concentration guidelines. As at 31 July, the date of Scottish Mortgage’s last published factsheet, Tesla had come to represent more than 13% of the trust’s total assets, which on 7 September were quoted at £14.76 billion.
For followers of the active growth portfolio, Scottish Mortgage’s powerful performance since the start of the year brings its own potential problem. Its weighting in the portfolio had risen to 20.2% at end-August (19% at end-July), against a target of 15% when the portfolio was rebalanced at end-March.
Although we prefer not to recommend additional manual adjustments for customers who have followed any of the interactive investor models with a lump sum commitment, this higher than desirable weighting may need to be addressed following the formal quarterly review at the end of this month.
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This potential rebalancing issue does not affect regular investors who are following the models because they are likely to be allocating fixed percentages of a regular capital outlay into each of the model’s constituents.
F&C investment trust (LSE:FCIT) was the portfolio’s second-best performer, returning a highly respectable 5.1%, following a 2.1% loss in July, and a little better than the 4% return from the MSCI AC World index benchmark. The trust’s discount to net asset value has remained steady at just under 9% and at a current share price of 694p the shares yield 1.7%, with dividends paid quarterly.
With more than £100 million of revenue reserves, representing 1.8 years of the previous year’s total dividend to end December 2019, the trust looks nailed-on to record its 50th anniversary of annual dividend increases in 2020.
With total assets of around £4.5 billion, F&C is one of the UK’s largest investment trusts and having been launched in 1868, it is also the oldest. Whereas the much larger Scottish Mortgage is more concentrated, F&C is more diversified, with investments in more than 500 companies globally. More than half its assets are in the US and just 7% is in the UK. Overweight positions in tech behemoths including Amazon (NASDAQ:AMZN) have contributed usefully to recent better performance. Indeed, technology represents the largest sector exposure for the trust, at around 19%.
Overall, year to date, seven of the ii Active Growth Portfolio’s 10 members are in the first performance quartile of their respective sectors, with two in the second quartile and just F&C in the third quartile, with a loss of 7.3%.
Since launch, the portfolio’s risk/return profile is very favourable against the growth benchmark, with superior returns achieved with less volatility since 1 January 2019.
Standout stat: The L&G Global 100 index fund was the portfolio’s top performer in August, returning 6.9%.
For a collection of passive, index-tracking investments, it is perhaps surprising to see that the ii Low-Cost Growth Portfolio outperformed its target in August, returning 3.5% against 2.7% for the growth benchmark.
However, this can largely be attributed to two funds; one that tracks the fortunes of the largest 100 global companies and the other mid-sized UK companies.
The L&G Global 100 index fund was the portfolio’s top performer in August, returning 6.9%, compared with 4.6% for the iShares Core MSCI World exchange traded fund (ETF), which represents the performance of all global developed markets. Both funds have very low ongoing charges, at 0.14% and 0.2% respectively.
But not as low as August’s second-best performer. With a return of 5.4%, Vanguard FTSE 250 index also has the second-lowest ongoing charges among the portfolio’s nine holdings, at 0.1%. Its focus on the UK’s 250 mid-sized companies below those in the FTSE 100 index also helped the portfolio to outperform our growth benchmark, while also comparing very favourably with the 1.5% return from the Fidelity Index UK fund, which also has the lowest ongoing charges among the nine portfolio constituents of 0.06% a year.
However, while the fund is slightly ahead of the index it tracks – the FTSE All-Share – in the year to date, with a loss of 18.1%, it is between 0.9% and 0.8% behind the index return over one and three months respectively, according to Morningstar data. These short-term tracking anomalies tend to dissipate over longer time periods but tracking error is monitored closely in the low-cost portfolios.
Since 1 January 2019, when we began to formally monitor the portfolio’s performance, ii Low-Cost Growth has returned 13.9% compared with 13.1% for the growth benchmark.
Andrew Pitts is an independent consultant for interactive investor and was formerly editor of Money Observer magazine from 1998 until 2015.
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