Interactive Investor

Market rotation harms our three growth-focused model portfolios

Our two income portfolios held up well in January, but the growth models struggled.

16th February 2022 11:01

by Kyle Caldwell from interactive investor

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Our two income portfolios held up well in January, but the growth models struggled.

stock market dice chart buy sell 600

The market rotation in January negatively impacted the performance of our three growth model portfolios.

The two portfolios comprising active funds, ii Ethical Growth and ii Active Growth, posted sizeable losses of 11.2% and 7.9%.

ii Low-Cost Growth, which contains index funds and exchange-traded funds (ETFs), fared better, losing only 3.4%.

In contrast, the two income portfolios held up well, and ii Active Income and ii Low-Cost Income posted small losses of 0.5% and 0.4%.

As previously reported, two changes to ii Active Growth took effect from 1 February; Ninety One UK Alpha and Jupiter UK Special Situations entered the portfolio replacing Liontrust Special Situations and CFP SDL UK Buffettology

Below, we run through the best and worst performers in each of the five model portfolios in January, but first we explain why a market rotation has been playing out in recent weeks.

Performance of models over 12-month time periods

Discrete returns for the periods*:
01/02/2021 - 31/01/202201/02/2020 - 31/01/202101/02/2019 - 31/01/2020
Growth Portfolios
ii Active Growth5.322.416.4
ii Ethical Growth-1.225.7N/A*
ii Low-Cost Growth11.2910.5
Growth benchmark14.76.411.7
Income portfolios
ii Active Income17-5.112.8
ii Low-Cost Income15.7-5.98.2
Income benchmark17.9-3.97.4
Morningstar GBP Adventurous Allocation average7.37.112.3

Notes *as at 31 January 2022. 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.

Market rotation explained

Investors are questioning the potential end of the decade-long run for growth shares as interest rates rise in an attempt to combat high inflation.

As a result, many growth and tech shares have come under the cosh, with investors questioning their high valuations and taking profits following a strong run of performance over the past decade and since the start of the Covid-19 pandemic.

High inflation and the prospect of higher interest rates devalues the future earnings of tech shares, and this has unnerved investors. 

At the other side of the trade, the market has been rotating towards value shares, which are often more economically sensitive and benefit from higher interest rates.

Winners and losers in the growth portfolios

ii Ethical Growth was hit hardest by the market rotation, hindered by the fact that value shares, such as miners and banks, tend to fail to meet the requirements of funds that focus on environmental, social and governance (ESG) criteria.

Four of the 10 funds in the portfolio posted double-digit losses; Montanaro Better World (19.2%), Baillie Gifford Positive Change (17.5%), Impax Environmental Markets (LSE:IEM) (17.1%), and Syncona (LSE:SYNC) (10.4%).

There were losses for the other six funds. Rathbone Ethical Bond limited losses the most, down 2.4%.

In ii Active Growth, the standout underperformer in January was Scottish Mortgage (LSE:SMT), which gave up 19.3%.

Scottish Mortgage backs disruptive companies that have a technological edge over competitors. It also has a sizeable position, just under 20% of its assets, in unlisted companies. Many of these companies are at an early stage of development. Therefore, when there’s a heavy sell-off in tech companies, Scottish Mortgage is negatively impacted.

Investment trust analysts remain positive on Scottish Mortgage, with some arguing that now is a potential buying opportunity.

Two other big fallers in January were CFP SDL UK Buffettology and Fundsmith Equity, down 10.2% and 9.5%.

Buffettology noted in an update to investors that January was its worst month of relative underperformance since June 2016, when markets fell heavily in response to the vote for Brexit.

January proved to be Fundsmith Equity’s worst ever month. In his recent annual letter to investors, Smith pointed out that no investment strategy will outperform every single year and in every type of market condition. The star fund manager said: “So, as much as we may not like it, we can expect some periods of underperformance.”

Smith used January's investor factsheet to disclose the fund's maiden purchase of shares in Google parent Alphabet (NASDAQ:GOOGL). He  also recently snapped up shares in Amazon for the first time. In a series of video interviews with interactive investor a year ago, Smith said it was probably not too late to invest in the three technology giantsApple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Alphabet.

All 10 of the constituents in ii Active Growth posted a negative return in January. Capital Gearing (LSE:CGT), the wealth preservation investment trust, was the best at protecting on the downside, with a loss of 1.6%. It has a low weighting to shares, and plenty of defensive armoury, including inflation protection in the form of US inflation-linked bonds.

There were no huge individual losses among the passive products in ii Low-Cost Growth, which is largely why in January it managed to outperform the two growth models that invest in active funds. The three biggest fallers, down 6.7%, 6.4% and 5.9%, were Vanguard Global Small-Cap Index, the Vanguard FTSE 250 ETF and iShares Global Property Securities Equity Index.

Another positive driver of performance was that one of the portfolio's constituents produced a positive return. The WisdomTree Enhanced Commodity ETF returned 7.4% in January. Commodities tend to perform well when stock markets are volatile. The ETF makes up 5% of ii Low-Cost Growth.

Performance of our three growth portfolios 

% total return (with income reinvested) as of 31 January 2022, after*:
1 month3 mths6 mths1 yearSince inception*
Growth portfolios
ii Active Growth-7.9-6.7-3.45.355.1
ii Ethical Growth-11.2-10-7.1-1.226.8**
ii Low-Cost Growth-3.4-1.21.811.240
Growth benchmark-203.714.742.1
Growth benchmark since 1 October 2019 (date ii Ethical Growth was launched)22.2
Morningstar GBP Adventurous Allocation average-5.4-3.5-1.27.334.1

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.

Winners and losers in the income portfolios

Our income portfolios held up better, due to having more of a balance of growth and value strategies. In ii Active Income, there were positive returns for five of the 10 constituents in January. In terms of equities, four funds that delivered gains were City of London Investment Trust (LSE:CTY), Utilico Emerging Markets (LSE:UEM), Murray International (LSE:MYI) and Man GLG Income. The respective returns were 3.6%, 2.6%, 2.3% and 1.2%. The best overall performer, though, with a gain of 9.5% was BMO Commercial Property Trust (LSE:BCPT).

The growth-focused Bankers (LSE:BNKR) and Morgan Stanley Global Brands Equity Income were at the wrong end of the returns table, with losses of 6.4% and 6.2%.

In ii Low-Cost Income, four of the 10 holdings were in positive territory: Vanguard FTSE UK Equity Income Index, the WisdomTree Emerging Markets Equity Income ETF, the SPDR® S&P Global Dividend Aristocrats ETF and the Vanguard FTSE All-World High Dividend Yield ETF. The respective returns were 5%, 3.1%, 1.2% and 0.9%.

The return to form of value shares has benefited the UK market, as it is more economically sensitive than other exchanges. Value sectors – including oil, gas, miners and banks – comprise a large part of the FTSE 100’s market cap. 

Of the six constituents in the red, there were two sizeable losses of 5.9% and 5.2% for iShares Global Property Securities Equity Index and the WisdomTree Global Equity Dividend Growth ETF.

Performance of our two income portfolios 

% total return (with income reinvested) as of 31 January 2022, after*:
1 month3 mths6 mths1 yearSince inception*
Income portfolios
ii Active Income-
ii Low-Cost Income-
Income benchmark1.
Morningstar GBP Adventurous Allocation average-5.4-3.5-1.27.334.1

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.

Keep calm and carry on

The past three years have thrown up plenty of headwinds for global stock markets, including Brexit uncertainty and the Covid-19 pandemic. However, for investors who ‘kept calm and carried on’, it has been a potentially profitable period as the performance of our model portfolios shows.

Four of the five models, launched in January 2019, now have a three-year performance track record. Our two growth portfolios lead the way, with ii Active Growth and Low-Cost Growth returning 55.1% and 40%.

Our two income models have produced lower returns. This reflects the dividend drought during the early stages of the Covid-19 pandemic, when scores of companies paused or cancelled payments in a bid to shore up balance sheets. Active Income is up 30.9%, while Low-Cost Income has returned 22.2%.

Our Ethical Growthportfolio, which launched in October 2019 and comprises actively managed funds and trusts, has returned 26.8% since launch. Over this period, only Active Growth has performed better, up 33.1%.

Our Model Portfolios have been compiled by investment experts to help investors who do not have the time or the confidence to make their own investment choices. There are a variety of financial goals they are designed to help people meet.

However, you should note that the selection of our Model Portfolios is not a ‘personal recommendation’. This means we have not assessed your investment knowledge, your financial situation (including your ability to bear losses), your investment objectives, your risk tolerance, or your sustainability preferences.

You should ensure that any investment decisions you make are suitable for your personal circumstances, and if you are unsure about the suitability of a particular investment or think you need a personal recommendation, you should speak to a suitably qualified financial adviser.

The past performance of an investment is not a reliable indicator of future results, and ii does not guarantee or predict the future performance of the Model Portfolios or the constituent investments.

Risk Warning(s)

The value of your investments may go down as well as up. You may not get back all the money that you invest.

Investing in emerging markets involves different risks from developed markets, in many cases the risks are greater.

The value of international investments is affected by currency fluctuations which might reduce their value in sterling.


Annual performance can be found on the factsheet of each fund, trust or ETF. Simply click on the asset’s name and then the performance tab.

Any changes to the Model Portfolio constituents and the rationale behind those decisions will be communicated through the Quarterly Investment Outlook.

To see a list of previous updates to Model Portfolio constituent investments, please go to the relevant Model Portfolio’s ‘Timeline’.

ii adheres to a strict code of conduct. Members of ii staff may have holdings in one or more Model Portfolios (or the constituent investments), which could create a conflict of interest. Any member of staff involved in the development of research about any financial instrument in which they have an interest are required to disclose such interest to ii. We will at all times consider whether such interest impairs the objectivity of the recommendation to add/remove a constituent investment to/from a Model Portfolio.

In addition, staff involved in compiling the Model Portfolios are subject to a personal account dealing restriction. This prevents them from placing a transaction in the specified instrument(s) for five working days before and after an investment is included or amended and made public within a Model Portfolio. This is to avoid personal interests conflicting with the interests of investors in the Model Portfolios and their constituent investments.

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