Our Ethical Growth Portfolio’s table-topping September caps a stunning first year.
September was a tumultuous month politically, with Donald Trump contracting Covid-19 and widely considered to have lost the late September debate with rival presidential candidate Joe Biden. Across Europe, coronavirus was resurgent and in Britain, Brexit uncertainty remained and local Covid-19 lockdown restrictions started to spread.
There seemed plenty to keep investors on the back foot, but instead it was a flat month. UK stocks ended the month down 1.7%, while the MSCI World index had barely budged in sterling terms, recording no change at all.
That was the same situation for the growth benchmark we measure returns against for interactive investor’s three growth-focused model portfolios, made up of 80% in UK and global equity indices, 10% in bonds and 10% in alternative asset classes.
Although the Low-Cost Growth Portfolio of index-tracking funds made a small loss of 0.5% on the month, the equivalent Active Growth Model Portfolio made a gain of 0.5%. Looking at the quarterly return, the 6.9% gain for Active Growth comfortably outstrips the 2% return from Low-Cost Growth. And since inception in January 2019, Active Growth has returned 31.4%, compared with 13.3% for Low-Cost Growth.
The star of the show, however, is Ethical Growth, which celebrates its first anniversary. It outperforms all the other models, returning 2.4% on the month, 9.4% over the quarter and 13.5% over the year to 30 September.
Standout stat: since launch in January 2019, the portfolio is up 13.3%, but this is less than half the gain recorded by the Active Growth Portfolio.
UK equities have a target weight of 25% in this portfolio and they continue to prove something of a drag – Fidelity Index, which tracks the FTSE All-Share index, lost 2% in September and the Vanguard FTSE 250 ETF (LSE:VMID) was down a tad more at 2.5%.
In the year to date, both of these trackers have lost investors 19.7%. In the process UK equities have now dropped to a 19% weighting in the portfolio, indicating that they may need to be rebalanced in the forthcoming quarterly review.
There was not much to write home about from the overseas holdings either. The best of the three global tracker funds was Vanguard Global Small Cap index, which gained 1.3%, compared with a loss of 2.5% from L&G Global 100 index and the more representative iShares Core MSCI World ETF (LSE:SWDA), which did not budge over the month.
In fact, the Vanguard fund, which tracks the performance of around 4,300 companies that are members of the MSCI World Small Cap index, was the portfolio’s second-best performer in September. In the year to date, however, it still has some catching up to do when compared with L&G Global 100 index. Its focus on the world’s largest companies by market capitalisation has generated a 7.8% return compared with a 4.1% loss from the small company tracker.
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Marginally taking the top spot in September was WisdomTree Enhanced Commodity (LSE:WCOB), with a 1.5% gain. This ETF, along with iShares Global Property Securities (down 0.2%), provide the portfolio with its targeted 10% exposure to alternative asset classes.
The hedged to sterling share class of Vanguard Global Bond Index also made a positive, albeit tiny, return of 0.5% on the month, but it continues to be one of the top three best-performing holdings in the portfolio this year, returning 4.6%.
That has helped the Low-Cost Growth Portfolio to limit losses incurred elsewhere, leaving it down 0.5% on the month and down 2% over one year. Since launch in January 2019, the portfolio is up 13.3%, but this is less than half the gain recorded by the Active Growth Portfolio. The growth benchmark has returned 13.1%.
Standout stat: iShares Global Clean Energy gained 11.3% in September, and on a one-year view is up 62.8%.
Having topped the monthly performance charts in July and August, the Ethical Growth Portfolio has made it a hat-trick of wins among our five models, with a September gain of 2.4%. It is also the top-performing portfolio over the quarter, up 9.4%.
This month also marks the portfolio’s first anniversary and over the year it is also the top performer: with a 13.5% gain it marginally pips the Active Growth Portfolio’s 12.8% return. In addition, the outperformance, compared with the benchmark, is 16%.
The portfolio’s sole passive holding, iShares Global Clean Energy (LSE:INRG), has again led the way in September. Its 11.3% gain over the month far exceeded gains elsewhere in the portfolio and takes its one-year gain to 62.8%. That strong performance has seen its weighting in the portfolio steadily rise from a target of 10% to 14.9%, so this is one issue that will be tackled during the annual review of the portfolio taking place this month.
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Impax Environmental Markets (LSE:IEM), an investment trust with a more diversified thematic portfolio than the iShares ETF, had a quiet month, returning 0.6%.
In the UK, Royal London Sustainable Leaders also had a quiet month. But despite returns being flat, this still represented one of the best performances among nearly 800 share classes of UK Large-Cap Equity funds sold throughout the EU, according to Morningstar data. Its loss of -1.8% in the year to date ranks even better, while also outperforming the FTSE All-Share index by 18.1%. The fund’s success under lead manager Mike Fox has seen assets under management balloon from £577 million three years ago to more than £2.2 billion today.
Trojan Ethical Income provides the portfolio with further exposure to UK equities, but this total return-focused fund also reserves the right to invest up to 30% of assets in overseas equities. The current non-UK equity exposure amounts to 24% in big names such as Nestlé (SIX:NESN), and Colgate-Palmolive (NYSE:CL).
In its most recent report released in September, the fund managers highlighted the exposure to fast-moving consumer goods (FMCG) companies had been a boon not only throughout the Covid-19 pandemic, but also over the longer term, due to their sales of “affordable, everyday, repeat-purchase items, under hundreds of renowned brands across many countries, [which] creates resilient revenues that we find tend to result in relatively predictable generation of shareholder value”.
Nearly a quarter of the fund is invested in companies classified as “consumer staples” and 12% is in “consumer discretionary” stocks. The managers state that while not all FMCG companies have performed so well during the global pandemic, “we continue to see the fund’s FMCG exposure as collectively being able to deliver resilient, growing cash flow and dividends long into the future, much as it has done in the past”.
Fundsmith Sustainable Equity and BMO Responsible Global Equity, which provide the portfolio’s exposure to global equities, eked out tiny gains over the month. So far in 2020, they have both returned in excess of 12%, but that is not very exciting when compared with our benchmark, the MSCI AC World Growth index, which has returned 21.1%.
Standout stat: one month short of its 10th anniversary, Fundsmith Equity has generated an outstanding return of 427%.
Like its much smaller sustainable stablemate, Fundsmith Equity has also suffered something of a disappointing year – certainly in the context of investors who have become accustomed to regular, table-topping performance numbers. In the past month, the fund has returned 0.4% and its year-to-date return of 13.6% puts it in the second quartile of Morningstar’s 2,183-strong cohort of fund share classes that pursue growth from global large-capitalisation companies.
When comparing the fund’s performance against those closer to home, however, the picture is quite different: the average fund in the Investment Association’s Global sector has returned just 5.2% year to date. Meanwhile, over longer time frames, there are few, if any, funds that can hold a candle to Fundsmith Equity.
One month short of its 10th anniversary, the fund has generated an outstanding return of 427%, compared with 192.1% from its benchmark, the MSCI World index.
The fund’s assets have swollen to £21.7 billion, which has led some fund-pickers to question whether it can be nimble enough to capitalise on opportunities that present themselves in these volatile markets, or that it has simply become too big.
However, because Fundsmith Equity is not a “trading” fund (manager Terry Smith’s ideal holding period for a stock is forever) – and the average market capitalisation of the 29 companies in the portfolio is £142.2 billion, the fund’s large size is not a major concern due to the fund’s buy and hold preference.
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It continues to be the portfolio’s second-largest holding, representing 14.4% of the total, as it did last month. The largest continues to be Scottish Mortgage investment trust (LSE:SMT), which sported a market capitalisation of £13.5 billion on 30 September, and had increased its weighting in the portfolio to 20.7% (up from 20.2% at end-August). That followed another fine month for the trust, which invests in progressive growth companies, in which its share price increased by a further 3.1%.
At the time of writing (13 October), the trust’s performance and size has taken another lurch upwards, taking its market capitalisation to £14.4 billion (up around £900 million in eight trading days) and an even higher weighting in the portfolio. In the quarterly review that is shortly taking place, followers of this model portfolio should be alert to the fact that Scottish Mortgage is likely to be reweighted to closer to its initial target weight of 15%.
The “alternatives” holdings representing a target 10% weighting in the portfolio – investment trusts Capital Gearing (LSE:CGT) and Standard Life Private Equity (LSE:SLPE) – both marginally outperformed.
Overall, the portfolio returned 0.5% on the month, increasing its gain to 31.4% since inception in January 2019, 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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