Three years on from Covid crash: key lessons, best and worst funds

Kyle Caldwell analyses how funds and investment trusts have fared three years on from stock market turbulence in response to the Covid-19 pandemic. 

We’ve recently passed the three-year anniversary of the stock market turbulence triggered as a result of Covid-19 becoming a global pandemic.

Over a four-week period, which started on 21 February 2020, steep falls were recorded, which sent funds and investment trusts deep into the red. To remind readers of how notable the declines were, in the first quarter of 2020 the FTSE All-Share index lost 25.1%, while the MSCI Global Index gave up 15.7%.

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A source of comfort during turbulent times is that the history books show that stock markets do recover from crises, and the Covid-19 pandemic was no different. From the start of April onwards, a recovery began.  

Three years on from the Covid-19 sell-off, figures from FE Fundinfo show that just over half of fund sectors are in positive territory – 30 out of 58 – for the period 21 February 2020 to 20 March 2023. All figures quoted in this article are total return net of fund fees. 

A game of two halves

The past three years has been a game of two halves. First, during the market recovery phase, technology shares and firms with strong online operations were the big winners. Funds and investment trusts with a growth focus and exposure to the lockdown winners saw their performances soar, delivering much higher returns over a short time period than investors would ordinarily expect.

Then, from late 2021 onwards, inflation reared its ugly head. It was expected that inflation would be a temporary phenomenon in response to the global supply chain problems that materialised following the re-opening of economies after lockdowns. However, inflation has intensified and lasted for much longer than central bankers had been expecting, with Russia’s invasion of Ukraine last February a factor, as this has put pressure on food and energy prices.

In an attempt to cool inflation, central bankers have been raising interest rates. This has completely changed the investment landscape and growth-focused funds and investment trusts have seen their performances go into reverse, with tech-exposed portfolios the worst hit. Higher interest rates drove down the high valuations of growth companies, which are based more on their future potential rather than the profits they make today (if they are making a profit).

Some pandemic winners have handed back most of their gains

Some of the best-performing pandemic funds have seen most or all their gains wiped out, as we've previously reported. Scottish Mortgage (LSE:SMT), the FTSE 100 listed investment trust, is the highest profile example of this. From 1 April to 2020 to 1 April 2021, it soared, with a share price total return of 112.1%.  

However, over the three-year period from 21 February 2020 to 20 March 2023, it is up only 4.6%.

Interestingly, the three cautiously managed wealth preservation investment trusts have all outperformed Scottish Mortgage over this three-year period. Ruffer Investment Company (LSE:RICA) leads the way, with an eye-catching return of 46.7%, followed by returns of 12.7% and 8.5% for Personal Assets (LSE:PNL) and Capital Gearing (LSE:CGT).

In a video interview with interactive investor at the end of last year, Ruffer fund manager Duncan MacInnes explained how a number of its protective positions paid off in 2022, including shorting (betting against) some of the US tech giants. 

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While investing for the long tern and running winners to benefit from the wonder of compounding is widely acknowledged as a prudent way to growth wealth, there are occasions when it can pay to take profits, such as when a fund has enjoyed a purple patch of form that’s unlikely to last indefinitely.

In addition, an important point to remember in terms of how funds fared over this three-year period is how investment styles go in and out of fashion. To reduce the risk of being overly exposed to one investment style, it makes sense to choose funds that invest sufficiently differently from one another.

The worst fund sectors

There have been other big losers from the high inflation and rising interest rate backdrop, among them bond funds. Given that bonds pay a fixed income, this becomes less valuable when inflation rises. At the same time, bonds become less attractive when interest rates rise as there is greater competition from cash returns and better deals available from newly issued bonds with higher yields. This results in bond prices falling and yields rising.

As a result, all 18 of the bond fund sectors posted losses over the three-year period. Two of the safest bond fund sectors lost the most, with UK Index-Linked Gilts and UK Gilts down 25.9% and 21.8%. In the case of UK index-linked bonds, the sharp falls in bond prices have ultimately outweighed their inflation benefits. Such funds offer inflation protection by paying a level of interest linked to price rises in the market where the bonds are issued.

The 10th worst-performer is UK smaller company funds. Such funds suffered sharp falls during the first quarter of 2020, then started staging a recovery from April onwards. However, in 2022 that recovery was halted by stagnant economic growth, high inflation, and interest rate rises. Those headwinds led investors to reduce risk, which caused share prices and valuations to slump. However, as we have explained separately, various professional investors now argue that too much bad news is now priced in, meaning that now could be a good opportunity to consider the funds and investment trusts that specialise in UK smaller companies. 

The 10 biggest sector laggards since the Covid-19 market sell-off 

Source: FE Fundinfo. Data from 21 February 2020 to 20 March 2023. Past performance is not a guide to future performance.

Fund sector winners

The best-performing sector over the three-year period is commodity/natural resources, with the average fund up 45.3%. Commodities are “real assets” that have historically performed well during times of high inflation. In addition, commodities soared during the pandemic and following Russia’s invasion of Ukraine. 

Another tailwind is the predicted new super-cycle for commodities, driven by the global green revolution as major economies strive to decarbonise. This will lead to increased use of ‘green’ metals such as lithium and copper to power car batteries and wind turbines.

Among the top five sector performers, despite both being out of favour over the past year or so, are technology and US funds, in which the average performer has returned 26% and 24.4% over the period examined (21 February 2020 to 20 March 2023). 

The two global sectors, which offer investors diversification by country, are also in the top 10, both returning around 17%.

The two UK fund sectors, which can invest in shares of any size, did not make the top 10. The UK equity income fund average performer returned 3.6%, while the UK all companies sector posted a small loss of 0.1%.

The 10 sector winners since the Covid-19 market sell-off 

Source: FE Fundinfo. Data from 21 February 2020 to 20 March 2023. Past performance is not a guide to future performance.

Individual winners and losers 

In terms of individual gongs, four of the 10 best-performing active funds over the period are energy specialists: Guinness Sustainable Energy, BGF World Mining, BlackRock Natural Resources Growth & Income, and BGF Sustainable Energy. 

Two smaller company funds also feature, which shows the potential for outperformance with strategies that search for ‘tomorrow’s winners’. 

Top 10 performing active funds 

Source: FE Fundinfo. Data from 21 February 2020 to 20 March 2023. Past performance is not a guide to future performance.

The same trend played out among investment trusts. Top of the pops is Geiger Counter (LSE:GCL), which invests in uranium stocks, while CQS Natural Resources Growth & Income (LSE:CYN) is the second-best performer, up 131.2%. In third and fourth place, respectively, are BlackRock Energy and Resources Income (LSE:BERI) and BlackRock World Mining Trust (LSE:BRWM), up 114.8% and 112.1%. 

Top 10 performing investment trusts 

Source: FE Fundinfo. Data from 21 February 2020 to 20 March 2023. Past performance is not a guide to future performance.

The worst-performing funds are those with Russian-exposure. As our separate feature explains, most Russian-dedicated exchange-traded funds (ETFs) took the decision to close after MSCI discontinued its Russian index series in March, including HSBC, DWS, Xtrackers, Invesco and BlackRock. 

Active funds either shut or put suspensions in place. For the HSBC GIF Russia fund and Liontrust Russia, the price continues to be calculated daily, but investors can’t cash in until sanctions are lifted. 

The figures show that the three worst-performing funds, from 21 February 2020 to 20 March 2023, are JPM Emerging Europe Equity, Schroder ISF Emerging Europe, and Liontrust Russia, with respective losses of 99.1%, 62.9%, and 57.9%.

For investment trusts, JPMorgan Emerging Europe Middle East & Africa Securities (LSE: JEMA) has been a heavy faller, down 82.3%. 

Another key trend is that ‘growth capital’ trusts, which invest in unlisted early stage companies, typically in the technology and healthcare sectors, posted heavy losses. Four that deep in the red are: Schroder UK Public Private Trust (LSE:SUPP), Chrysalis Investments Limited (LSE:CHRY), Syncona (LSE:SYNC), and Schiehallion Fund (LSE:MNTN), down 60.8%, 56.3%, 48%, and 46.1%.