The first review of our model portfolios details performance to date and reveals fund and trust winners and losers.
This is our first review of the five model portfolios that interactive investor has designed for private investors. You will now be able to keep up to date with how they are performing on a monthly basis.
First, a few brief pointers to give this update some context. There are three growth-oriented portfolios: the ii active growth and ii ethical growth portfolios are each comprised of 10 investment funds and investment trusts, all bar one of which is actively managed. The ii low-cost growth version currently has nine index-tracking funds and exchange traded funds (ETFs).
Of the two income-focused portfolios, the ii active income version also has 10 actively managed funds and trusts, and the low-cost option has nine index-tracking constituents.
What they all have in common is an asset allocation to global (including UK) equities that is not expected to fall below 80%, with bonds and “alternative” asset classes such as commodities, private equity and infrastructure accounting for the remaining 20% exposure.
All are predominantly comprised of the funds, investment trusts and ETFs that we rank among the best options for private investors – these are our Super 60 and ACE 30 ethical/ESG (environmental, social, governance) selections.
- ii Super 60 investments: Quality options for your portfolio, rigorously selected by our impartial experts
- Want to invest ethically? ii’s ACE 30 list of ethical investments can help
Please note, the weightings shown on the ii Model Portfolio pages are target weightings, so will therefore remain static unless changes to the portfolios are made.
The growth portfolios – measuring performance
The benchmark that we judge the performance of all three growth portfolios against is broadly representative of the targeted asset allocation.
Of the 80% exposure to equities, the benchmark includes 25% UK (FTSE All-Share index), 40% developed markets (MSCI World), and 15% developing markets (MSCI Emerging Markets). The fixed interest exposure is represented by a 10% weighting to the Bloomberg Barclays Global Aggregate index and the “alternatives” allocation is represented by 5% each in global property and core commodity indices.
Standout stat: 11.3% outperformance of the growth benchmark since launch in October 2019.
The conventional growth portfolios have been running for 19 months but our ethical growth version has excelled since its inception on 1 October 2019. While a portfolio return of 6.2% to 31 July might not seem terribly exciting, it is far better than the 5.1% loss recorded by the growth-focused benchmark over 10 months.
This outperformance has also been achieved with less volatility that the benchmark and continues to be evident over shorter time periods. Over three months to end July, the portfolio has risen by 11.1% compared with 6.9% for the benchmark.
Driving the outperformance throughout the period has been the funds that are primarily focused on clean energy sources and other environmentally aware investment strategies.
Impax Environmental Markets (LSE:IEM), now the portfolio’s largest holding (16.1% of the total), has been among the best recently, returning 15.6% over the past three months. The trust has a large slug of its portfolio invested in North America (41%) and at 24%, energy efficiency is its biggest thematic play, followed by water infrastructure and technologies at 20% of the portfolio.
Perhaps surprisingly, renewable and alternative energy investments only represent 9% of the portfolio, but this is fine for the purposes of this portfolio. It already has a decent slug of exposure to this theme via an exchange traded fund: iShares Global Clean Energy (LSE:INRG), which offers market capitalisation-weighted investment in 30 of the world’s largest clean energy suppliers. The ETF’s sterling share class has dwarfed returns from other constituents: over three months, for example, it is up 29.3%, and is also the top performer since the portfolio’s inception date, since when it has gained 25.2%.
The portfolio’s two global growth-focused funds, BMO Responsible Global Equity and Fundsmith Sustainable Equity, have both provided solid returns since the portfolio’s inception. The BMO fund has a marginally higher (30.6%) portfolio weighting to information technology, while the Fundsmith fund has a decent slug more in healthcare – 28.8% versus 19.5%.
Where the two portfolios differ significantly in sector and regional allocations is in consumer staples and the UK. Fundsmith Sustainable Equity has 23.5% of its portfolio in companies providing everyday consumer essentials, but BMO Responsible Global Equity has just 2%. It has 3.7% exposure to the much-unloved UK market, while Fundsmith has 11.7%.
These differences have helped the BMO fund to pull ahead of Fundsmith Sustainable Equity over shorter time periods. However, since the latter fund’s launch in August 2018, it is honours even, with both returning around 25%.
Royal London Sustainable Leaders continues to be one of the top-performing UK equity funds – and not only for investors seeking profits with principles. Although not immune to the stock-market collapse in the first quarter, it staged a strong bounceback, cementing its excellent longer-term performance in the process. Over the past three years to the end of July, the fund has gained 27.8% compared with an 8.3% loss from the average fund in its sector – UK All Companies – and the FTSE All-Share index return is not much better at -3.1%.
We also include an equity income-focused fund as a stabilising influence in the portfolio and thankfully Trojan Ethical Income has held up far better than the vast majority of UK equity income-focused funds in this year’s rout. Although returns are negative in the year to date, its ethical focus and ability to spread its net further afield from the UK have undoubtedly aided its pull-ahead from the pack.
Whereas members of the UK equity income sector must invest at least 80% of assets in UK equities, Trojan Ethical Income aims to have at least 60% in the UK and currently has around 70% exposure, with 8% in cash and the rest in US and European stocks such as Colgate-Palmolive (NYSE:CL) and Nestle (XETRA:NESM).
Click here for more information about the 10 funds in the ethical growth portfolio.
Standout stat: Scottish Mortgage (LSE:SMT) has gained 727% over the decade.
Some exceptional performances among the 10 funds in the ii active growth portfolio have helped it to a gain of 25.5% since its inception on 1 January 2019. That compares very favourably against the growth benchmark return of 10.2%, and with lower volatility.
This level of outperformance has persisted throughout this year’s difficult markets – in the year to date the portfolio has returned 3.4%, having bounced back from an earlier loss on the year of -23% when markets reached their nadir in the third week of March, according to analysis from data provider FE Analytics. Since then, it has been virtually uninterrupted growth with the majority of funds delivering better performance than peers in their respective sectors.
The standout performance has been the “new economy”-focused Scottish Mortgage (LSE:SMT) trust, propelling it from a 15% weighting in the 10-strong portfolio to within a whisker of 19% in the space of four months. That is due to its incredibly strong returns: in the year to date it is up 50.1%, driven by the exponential share price growth of electric automobile manufacturer Tesla (NASDAQ:TSLA) – its largest holding – and a host of tech behemoths such as Amazon (NASDAQ:AMZN), Tencent (SEHK:700) and Alibaba (NYSE:BABA) that have generally prospered throughout the Covid-19 lockdown period.
The trust’s superior long-term performance numbers add up to a return of 727% over the decade, according to Morningstar data, compared with 214% from the data provider’s index of developed markets. It has also propelled Scottish Mortgage to a £12.8 billion market capitalisation.
SMT’s gain has not only helped to keep our portfolio ahead of the benchmark, it has made up for less inspiring numbers from other global equity funds and trusts in the portfolio. Although Fundsmith Equity, the portfolio’s second largest holding, has performed with credit this year (returning 8.4% compared with zilch for the MSCI World index), F&C Investment Trust (LSE:FCIT) has not yet emerged from an uncharacteristically poor period in the depths of the market crisis.
Like Scottish Mortgage, F&C IT has some exposure to unquoted private equity, but overall its portfolio is less focused than SMT, as illustrated by the fact that its 10 largest holdings (led by US technology holdings) represented just 15.6% of the total at the end of June.
In contrast, Tesla alone accounted for 12.7% of SMT’s portfolio and the 10 largest holdings represented 54.6% of total assets. Including the trust’s borrowings – gearing represents 7% of total assets – assets stand at £13.7 billion. This modest level of gearing, which has been between 5% and 13% in the past three years, have added to SMT’s longer-term returns, as have the admirably low fees. Its ongoing charges of 0.36% are very difficult for any other actively managed global equity fund to match, although F&C’s 0.57% ongoing charge is also commendably low.
Fidelity Global Dividend is included among the global equity cohort as a stabilising influence. Its safety-first approach has ensured that it did not suffer as much as other equity income focused funds when dividends dried up. Although its 0.3% loss in the year to date is nothing to write home about, it is among the best of funds that follow a similar remit, aided by the fact that it typically has less invested in UK equities (currently around 17%) than most other global equity income funds.
Two funds provide the portfolio’s exposure to UK equities, with both predominantly targeting medium-sized and smaller companies. Liontrust Special Situations and Castlefield CFP SDL UK Buffetology have both generated returns in the first quartile of the Investment Association’s UK All Companies sector this year, but in common with other UK-focused funds, performance is not yet positive year to date. That said their losses of 10% and 10.8%, respectively, compare very favourable with the 20.4% loss from the FTSE All-Share and FTSE 100 indices. They are both among the strongest performing funds in longer time periods up to 10 years.
With much of the news focus on struggling UK shares and booming US technology, it has been easy to miss the fact that global emerging markets have been quietly clawing back lost ground – and at a faster clip than global developed markets. That’s also true of our selection, JPMorgan Emerging Markets (LSE:JMG), which has been particularly strong over the past three months, returning 17% compared with the benchmark MSCI Emerging Markets index return of 13.3%. This £1.2 billion trust, managed by Austin Forey for 26 years, is the standout performer in its peer group. Its five-year return of 94.3% is more than four times the peer group average and 34 percentage points higher than the benchmark index. It has a high conviction portfolio, with the top three holdings – Taiwan Semiconductor (NYSE:TSM), Tencent and Alibaba – accounting for nearly 25% of the total.
Click here for more information about the 10 funds in the active growth portfolio.
Standout stat: The 5% return from the sterling hedged class of bond index tracker Vanguard Global Bond Index is the best year to date.
Our low-cost growth portfolio has returned 10% since inception on 1 January 2019, in line with the 10.1% return from the growth benchmark that we hope it will beat over the years to come.
The bond fund component of the nine funds in our low-cost growth portfolio has been the best performer in the year to date. The hedged to sterling share class of Vanguard Global Bond Index fund, which tracks an index of global investment grade bonds, has returned 5% in the year to 31 July.
Among the equity holdings, a focus on larger global companies has been most profitable, with the L&G Global 100 Index fund up 3.5%, followed by the more widely invested iShares Core MSCI World exchange traded fund, down 0.3%.
Perhaps surprisingly in the aftermath of the first-quarter market meltdown, emerging markets have had a pretty decent crisis in the year to date. Fidelity Index Emerging Markets fund has lost just 1.1% and in common with more risk-focused holdings, it has been particularly strong over the past three months, having gained 11.2%.
That is also true of Vanguard Glb Small-Cap Index, a fund that tracks the performance of more than 4,000 smaller companies around the world. It has gained 9.6% in the past three months, but that is not yet enough to get it back into the black for 2020, as it is still down 8.6% year to date.
The UK equity index-tracking holdings also need to make up lost ground and continue to lag the rebound seen in global index-tracking funds. Although Vanguard FTSE 250 (LSE:VMIG), which tracks the performance of mid-sized UK companies, has staged a small 3% rebound over three months, it remains down 21.9% in the year to date. Fidelity Index UK, which has a higher weighting to larger UK companies, has not fared much better. It remains down 19.3% and its performance is flat over three months.
Click here for more information about the 10 funds in the low-cost growth portfolio.
The income portfolios – measuring performance
The benchmark that we judge the performance of the two income portfolios against is broadly representative of the asset allocation that we target.
Of the 80% exposure to equities, the benchmark includes 25% UK (FTSE UK Equity Income), 40% developed markets (FTSE AW High Dividend Yield), and 15% developing markets (MSCI EM High Dividend Yield). The fixed-interest exposure is represented by a 10% weighting to the Bloomberg Barclays Global Aggregate index and the “alternatives” allocation is represented by 5% each in global infrastructure and property indices.
Standout stat: City of London (LSE:CTY) has increased its dividend for 54 consecutive years.
Any investment strategy that focus on generating an income from equities has been under the cosh in 2020 and for our portfolio it has been no different. Although the Active Income portfolio is marginally ahead of our income benchmark since launch on 1 January 2019, a loss of 0.1 % is hardly an inspiring return so far, which has been achieved with marginally higher volatility than the benchmark.
Although down 16% on the year to date, the portfolio had lost nearly 35% at the market nadir on 21 March, according to data from FE Analytics. And although performance in the last few weeks has slipped back a little, investors have seen a reasonably strong bounce back, particularly in April and May.
Among those funds making a recovery in that period was Artemis Global Income. Nevertheless, after in-depth analysis of recent asset allocation and stock-picking decisions by the manager, the fund was removed from the Super 60 select list in July. It was replaced by Morgan Stanley Global Brands Equity Income and this fund also replaced the Artemis fund in the active income model portfolio on 1 August.
The Morgan Stanley fund focuses primarily on “quality growth stocks” that also have a habit of paying reasonable dividends. The team takes a high-conviction approach and runs a highly concentrated portfolio of around 20 to 40 holdings. The income the fund generates comes in two forms. The underlying companies in the portfolio have an average dividend yield of around 2%. Second, the fund’s income is boosted to a target of 4% by a derivatives-based strategy for which the fund receives regular premiums.
This relatively new fund has been given an initial 10% weighting in the model portfolio. To make up the remaining 5% allocation following the removal of Artemis Global Income, we have increased the exposure to Murray International (LSE:MYI) by a further five percentage points to 15%.
The past five years have been difficult for investors in the trust and this year has not been any different, with the shares down 22.2%. Manager Bruce Stout only invests in companies that he does not regard as being overvalued and where dividend streams are secured by strong cashflow and balance-sheet strength.
This has led to a very progressive dividend policy, and the board has stated that it wants to at least maintain last year’s dividend. Priced at around 960p, the shares are trading at a relatively rare discount to net asset value of 5% and provide a prospective yield of at least 5.5%, backed by strong revenue reserves.
The global equity income trust has consistently shied away from the UK in recent years, preferring instead the hunting grounds of the Asia-Pacific region and emerging markets, which together account for more than 40% of the equity portfolio. Stout has used the past six months’ market ructions to reduce the trust’s holdings in higher-yielding sovereign bonds and top up on favoured equity holdings. Analysts at Stifel and Investec Securities have recently been among those to reaffirm their positive views of the trust’s prospects.
Utilico Emerging Markets (LSE:UEM), our emerging markets income choice for the portfolio, has not provided the defensive characteristics we had hoped for during the first quarter wipeout. A very large weighting to Brazil, hard-hit by the pandemic, as well as to transport infrastructure across emerging markets, has contributed to a poor capital performance. In the year to date, the share price is down 24.7%, with not much improvement in recent months.
Although the trust’s board has committed to pay at least the same dividend as last year, there is some concern that it may need to dip into capital reserves to do that.
The uncertain outlook for emerging-market economic activity and the impact on the portfolio’s holdings and income policy has led interactive investor to place the trust’s status as a Super 60 fund under formal review, so expect an update on the trust’s position in the active income portfolio in next month’s review.
Strong stabilising influences on the portfolio have been provided by Fidelity Global Dividend (see the review of the active growth portfolio) and Bankers investment trust (LSE:BNKR). The latter is not classified as a global equity income trust, but it has raised its dividend for the past 53 years and also aims to at least beat UK inflation from year to year. Both have largely held on to their capital values in the year to date, with income reinvested.
As investors might expect, the bond holding has provided the most solid returns so far this year. Our conservative choice in this arena, Jupiter Strategic Bond, delivered a 4.5% gain in the year to date, putting it among the top 20% of sterling strategic bond funds. As risk appetite has returned, its more recent return has been less robust, but it is doing its job well of providing lo- volatility diversification for the portfolio.
In common with other UK equity income funds, our choices still have much ground to make up on the year. Job Curtis, manager of the City of London trust, which has just celebrated its 54th year of rising dividends, is confident that it can maintain its record. But even with income reinvested the trust is sitting on a loss of 26.1% in the year to date. Data provider Morningstar calculates that the trust has net gearing of 12.8%, which will help the trust deliver superior returns should markets perk up, but will exacerbate losses if markets take another downward lurch.
Our other UK play, Man GLG Income, has fallen by a similar level so far this year, but investors should take some comfort from the fact it continues to pay a monthly dividend, although these have been reduced by roughly 35% since April when compared with last year’s payments. The fund’s manager, Henry Dixon, invests in lesser-trodden areas of the UK stock market, taking a value approach that has delivered strong medium to long-term gains. That should be viewed as a relatively impressive feat given the value investing style has been out of favour for some time now.
The portfolio’s “alternative” allocations are to property and private equity. The property pick, BMO Commercial Property Trust (LSE:BCPT), earlier this month announced that it was resuming monthly dividend payments after a four-month hiatus. However, these have been set at half the previous level for now, and at a current price of 67p, the shares are yielding 4.1%.
Click here for more information about the 10 funds in the active income portfolio.
Standout stat: SPDR S&P Global Div Aristocrats (LSE:GLDV) has lost 25% this year.
As with most equity-income focused strategies, the low-cost income portfolio has not fared at all well this year. It means that since launch in January 2019, the portfolio has fallen by 3.2%, a loss that is marginally worse than the 0.9% fall from the income portfolio benchmark. Over the past six months, the portfolio has lost 13.7% compared with a 12% loss from the benchmark.
In the year to date (to 31 July), there is one relatively decent bright spot among the three exchange traded funds that provide the developed-market exposure. The portfolio’s 15% weighting to the WisdomTree Global Quality Dividend Growth (LSE:GGRP) exchange traded fund has held up well, gaining 1.9%. That is in marked contrast to the hefty falls from SPDR S&P Global Dividend Aristocrats (-25%) and Vanguard FTSE AllWorld High Dividend Yield ETF (LSE:VHYL), down a more palatable 13.5%.
The WisdomTree ETF was introduced to the portfolio on 1 April with the aim of providing greater diversification, which means the portfolio has not had the full benefit of its outperformance over the year. It tracks the performance of the WisdomTree Global Developed Quality Dividend Growth index, a fundamentally weighted index comprised of dividend-paying companies with the best combined rank of growth and quality factors from global developed markets. However, the ETF has continued its comparative outperformance since its introduction.
The other bright spot was the SPDR® Morningstar Multi-Asset Glbal Infrastructure ETF (LSE:GIN), which has gained 1.1% year to date. Unfortunately, however, its impact on the portfolio’s returns was minimal as it has only a 5% weighting.
In contrast to the two global markets ETFs that have suffered big losses, the placings are reversed for the UK exposure. This time the curated SPDR S&P UK Dividend Aristocrats ETF (LSE:UKDV)beats the pure index tracker, Vanguard FTSE UK Equity Income Index fund. However, they are still both deep in negative territory over the year, with the SPDR ETF down 20.5% compared with a 25% loss from the Vanguard fund.
Thankfully, the bond component, representing 10% of the portfolio, has provided some much-needed ballast. The hedged to sterling share class of Vanguard Global Bond Index has gained 5% in the year to date.
Click here for more information about the nine funds in the low-cost income portfolio.
Andrew Pitts is an independent consultant for interactive investor and was formerly editor of Money Observer magazine from 1998 until 2015.
Any changes to the ii Model Portfolio constituents and the rationale behind those decisions will be communicated through the Quarterly Investment Outlook.
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