Interactive Investor

Model portfolio update: fund winners and losers in the third quarter

F&C Investment Trust and Scottish Mortgage were two of the best performers over the summer months.

From a style perspective, growth outperformed value with the consumer discretionary sector being the key driver.

Against this backdrop the Active Growth portfolio was the only model to show a positive return over the quarter, reflecting its growth bias, share price strength from investment trust exposure and the lack of exposure to fixed income relative to other models.

The two income portfolios had to contend with equity fund exposure that has a tilt to the value style, and therefore underperformed their three growth model counterparts.

Top performer, Active Growth was up by 0.79% over the quarter, while the other growth models Low-Cost Growth and Ethical Growth produced -0.19% and -0.21% respectively. The income models produced larger losses, with Low-Cost Income and Active Income down 1.22% and 3.91%.

Performance of models over 12-month time periods

Discrete (%) returns for the periods*:   
Growth Models   
ii Active Growth-15.3525.4112.61
ii Low Cost Growth-5.9523.11-1.73
ii Ethical Growth-17.8822.8912.72
Growth Benchmark-5.1221.31-1.17
Income Models   
ii Active Income-2.8622.91-11.93
ii Low Cost Income-1.0415.78-9.7
Income Benchmark-5.1221.31-1.17
Mornignstar 80%+ Equity Category Average-9.4620.430.34

Notes *as at 30 September 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.

How the three growth portfolios fared

The ii Active Growth model portfolio produced a positive return over the third quarter of 2022, reflecting particular strength from the share price returns of two investment trust holdings

F&C Investment Trust (LSE:FCIT) was the best performer. The trust delivered a share price return of 11.52% over the quarter as sentiment improved and the 5.10% discount became a 2.42% premium. However, from a net asset value (NAV) perspective the trust didn’t stand out, with a return of just 1.09%.

ii Active Growth also benefited from another of its investment trusts, Scottish Mortgage (LSE:SMT), which is Baillie Gifford’s flagship investment trust. The trust had a share price return of 9.37% (3.31% NAV return), stemming some of the significant losses experienced over the preceding nine months.  The bulk of this return came in July as an upturn in risk appetite was driven by hopes of a pivot on Federal Reserve interest rate policy, and stocks with higher growth profiles therefore performed particularly well.

Highlighting how discount moves can impact investment trust share prices both positively and negatively was the return from abrdn Private Equity Opportunities (LSE:APEO), which stood at a negative 11.24%. The trust invests into private equity and private equity funds and, although it has been trading at a discount for the past year, the trust saw this widen over the quarter as investors became increasingly concerned about the outlook for its primarily European focused investments.

The Jupiter UK Special Situations fund was another laggard, after producing good relative returns in the previous quarter. The fund was hampered by its value investment style.

The standout performer in the ii Low-Cost Growth Model was L&G Global 100 Index. This fund tracks the performance of the S&P Global 100 Index which has a substantial weighting to the US and around 14% in its top holding, Apple, which performed strongly over the quarter. The Vanguard Global Corp Bond Index (sterling hedged) fund was the laggard, with the weakness of sterling responsible for most of the negative performance.

In ii Ethical Growth, the top-performing funds were Stewart Investors Global Emerging Markets Sustainability and the iShares MSCI USA SRI ETF (LSE:SUUS). The former follows the tried and tested Stewart Investors approach to investing in Asia and emerging markets. The fund focuses on sustainable growth stocks with higher quality elements, particularly regarding management teams. It performed particularly well in August and September, in what was a choppier market environment following July’s risk-on rally, and benefitted from its overweight to Indian equities, and underweight to Chinese equities. Returns for the iShares MSCI USA SRI ETF (LSE:SUUS) were currency related, reflecting the strength of the US dollar versus sterling over the period.  

The worst performer within ii Ethical Growth was Rathbone Ethical Bond, a sterling corporate bond fund. The Morningstar GBP Corporate Bond Category was among the worst performing categories in the quarter, such was the market’s negative reaction to the government’s fiscal announcement, with sterling falling sharply and gilt yields and spreads increasing substantially.

Performance of the three growth model portfolios

% total return (with income reinvested) as of 30 September 2022, after*:     
 1 Month3 Month6 Month1 Year Since inception
Growth Models     
ii Active Growth-3.820.79-8.42-15.3539.27
ii Low Cost Growth-5.64-0.19-7.96-5.9531.52
ii Ethical Growth-6.27-0.21-11.14-17.8813.76**
Growth Benchmark  -5.47-0.20-7.33-5.1232.68
Growth benchmark since 1 October 2019 (date ii Ethical Growth was launched)    13.76
Morningstar 80%+ Equity Category Average-4.98-0.67-8.67-9.4625.23

Notes *as at 30 September 2022. Portfolio launch date (for monitoring purposes) was 1 January 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results. ** Ethical Growth Launched 1 October 2019. Benchmark is Morningstar UK Adventurous Target Allocation.

How the two income funds fared

Only two funds in ii Active Income were able to produce positive returns over the quarter, Morgan Stanley Global Brands Equity Income and Fidelity Global Dividend. The Morgan Stanley fund has an emphasis on sustainable growth stocks and has a clear focus on consumer staples, healthcare and IT. The Fidelity fund has a dividend growth mandate with a defensive bias and is a more diversified product with biases to consumer staples, financials and industrials relative to the MSCI World Index. Both funds benefited from the weakness of sterling over the quarter.

At the bottom of the performance table, abrdn Private Equity Opportunities (LSE:APEO) produced a significant negative return in share price terms as highlighted above, but by far the largest negative return was seen from Balanced Commercial Property (LSE:BCPT). Despite posting a positive NAV return of 0.81%, the trust was down -27.18% in share price terms, moving from a discount to NAV of -19.16% to -45.88% by quarter end. The trust provides direct exposure to prime UK commercial property with a heavy bias towards central London and South East England. Investors have been quick to re-price the shares ahead of any potential re-valuation of the assets.

In ii Low-Cost Income Model Invesco FTSE RAFI US 1000 ETF (LSE:PSRF) delivered a positive return of 4.32%. The fund invests in US equities, but rather than weighting stocks by market-capitalisation, instead weights holdings by a combination of fundamental factors such as historic sales and dividends. The portfolio is highly diversified and has a value bias versus mainstream US indices, but still produced strong returns over the quarter versus mainstream indices as well as benefiting from currency moves.

The weakest returns were seen from the Vanguard FTSE UK Equity Income Index fund, down 6.17%. It tracks the FTSE UK Equity Income Index, which focuses on UK equities that have higher dividend yields. The portfolio comprises just over 100 stocks, shows a high yield and low valuation ratios versus mainstream indices, and has a bias towards financials at the sector level. High-yield stocks and financials have been out of favour over the quarter reflecting interest rate rises and economic growth concerns.

Performance of the two income model portfolios

% total return (with income reinvested) as of 30 September 2022, after*:     
Income Models1 Month3 Month6 Month1 Year Since inception
ii Active Income-6.37-3.91-8.46-2.8621.07
ii Low Cost Income-5.33-1.22-6.01-1.0417.04
Income Benchmark-5.47-0.20-7.33-5.1232.68
Mornignstar 80%+ Equity Category Average-4.98-0.67-8.67-9.4625.23

Notes *as at 30 September 2022. Portfolio launch date (for monitoring purposes) was 1 January 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results. Benchmark is Morningstar UK Adventurous Target Allocation.

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