UK equity, smaller companies and energy strategies have been among the strongest-performing funds.
A worldwide vaccine programme has ignited hopes that the end of the coronavirus pandemic could soon be in sight, and with it economic recovery. It has also triggered a revival in some of the most beleaguered stocks in the market – value stocks, especially in the UK market, which is full of cyclical companies that have long been out of favour.
Since Pfizer (NYSE:PFE)’s 9 November announcement of a Covid-19 vaccine breakthrough, UK equity, small-cap and energy strategies have been among the strongest-performing funds.
Top of the pile between 9 November 2020 and 13 January 2021 is Schroder ISF Global Energy which returned 51% over the period. A handful of other energy funds also make the list, including TB Guinness Global Energy, up 39%, and BlackRock GF World Energy, up 26%. While these numbers suggest an impressive rebound, they don’t cancel out the huge falls for some of these funds during 2020’s February to March sell-off, notes Samantha Dovey, group head of fund research at Ravenscroft.
“Schroder Global Energy at its worst point was down 64% in the middle of March, so even up 50.9% it’s still well underwater on a rolling 12-month basis, it was hit really hard,” says Dovey. She also notes that over the 18 months between September 2018 and 19 March 2020 the fund fell 76% in sterling terms.
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Small caps come back fighting
Elsewhere, there are UK small companies funds in the top-performers list from Gresham House, Stonehage Fleming, Premier Miton and Marlborough. A few UK equity income funds and UK alpha funds also feature, from groups including Saracen, JO Hambro Capital Management, and Aviva Investors. All these funds are up around 25% to 28% since November.
A recent report from consulting and research firm Square Mile found that professional investors found renewed interest in UK equities in the last quarter of 2020, with UK All Companies the most researched sector.
Chris Metcalfe, investment and managing director at IBOSS, says the resurgence of UK equities after years in the doldrums comes as a result of the confluence of two factors: the vaccine roll-out, and a Brexit trade deal.
“It was a combination of the two things coming together. Without the vaccine, I don’t think the Brexit situation would have actually moved very much, because how would you re-rate the stocks? It would be very difficult.” He notes that, over the last decade, the UK has not been the place to be, and global investors have certainly agreed as the market has been widely shunned. But that is starting to change.
“Over 10 years, you would rather not have been in the UK because it’s just been so bad. The post-Covid crash was just terrible. And I think, because we’ve been underperforming for so long, we can come back quite a long way,” he says.
Top 20 funds since first Covid-19 vaccine breakthrough
|Fund||Total return (%)|
|Schroder ISF Global Energy||50.9|
|Nikko AM ARK Disruptive Innovation||42.2|
|TB Guinness Global Energy||39.1|
|Guinness Sustainable Energy||27.9|
|Aviva Investors UK Listed Equity High Alpha||27.5|
|VT Cape Wrath Focus||27.5|
|Marlborough Nano Cap Growth||26.3|
|Premier Miton UK Smaller Companies||26.3|
|BlackRock GF World Energy||26|
|Guinness Global Energy||26|
|JPM Korea Equity Fund||26|
|TB Saracen UK Alpha||25.9|
|Ninety One Global Energy||25.9|
|Legg Mason Royce US Small Cap Opportunity||25.5|
|Ninety One Global Special Situations||25.2|
|JOHCM UK Equity Income||25.2|
|TM Stonehage Fleming AIM||25.1|
|JOHCM UK Growth||24.9|
|LF Gresham House UK Smaller Companies||24.9|
Data from 9 Nov 2020 to 13 January 2021. Source: FE Analytics.
Road map out of the crisis
The FTSE 100 is heavy in banks, oil and mining companies – 20% of the index is in oil and basic materials - and Metcalfe expects to see gains for these areas this year, especially if dividends return. Travel and leisure stocks could also pick up from their depressed positions as vaccines offer a road map out of the crisis. All this, as well as a rotation from growth to value stocks, should benefit UK funds, while energy now looks interesting.
“We are more bullish on commodities and energy than we have been for a long time, although there is a clash here with the ESG agenda. I think we could get even bigger spikes in the oil price from here because people are underestimating the strength of the recovery,” adds Metcalfe.
Ravenscroft as a house invests globally and tends to have an overweight towards the consumer staples, healthcare and technology sectors. However, it does have exposure to the value investing style through funds including Lazard Global Equity Franchise, and has some further cyclical exposure through Latin America. “We have started to look at the UK and especially UK value. While we wouldn’t ordinarily do that, in a very expensive world, we have to look at areas that we can still value, that we can understand, and that we know what we’re investing into,” explains Dovey.
So, should investors be abandoning all their growth funds and backing value now, or could this recent outperformance be another flash in the pan?
Dovey says there is still uncertainty about whether a value revival can last, given that we don’t know what will be lasting long-term structural changes post-pandemic. “It’s not really about growth versus value, it’s about where you see opportunity. Just because you hold an expensive stock, doesn’t mean that it is wrongly expensive, and when you talk about a cheap stock, is it a value trap or is it cheap because sentiment is against that particular sector or company, or is it going through change? You have to make sure you are buying everything for the right reasons.”
‘Many false dawns’
Metcalfe sees “an awful lot of reasons to be optimistic” about a comeback for value, and thinks these stocks look compelling on valuation grounds. “Part of our case on the UK and part of the value case generally is that there’s an element of safety. If you look at valuations, compared to some of those growth names that really benefited from the work-from-home environment, we went into those with valuations already high, and then they morphed into amazingly defensive stocks seamlessly, so I think there is valuation risk in quite a few of those names that you haven’t got in the value stuff.”
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“Is this a sustainable change or just a temporary fix?” he asks. “We’ve had so many false dawns for value, but I do think this is different from lots of points of view. Valuations have got so extreme with growth versus value, something was going to change at some point, we just didn’t know what the catalyst was going to be, and it looks like it was the vaccine.”
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