UK and global funds are the key drivers of our model portfolios

A year on from Pfizer Monday, funds focusing on developed market equities have served our models well.

Over the past year, our five model portfolios returned between 23% and 28%, with Pfizer Monday (9 November 2020) helping to turbocharge returns, particularly for the UK and global fund constituents.

Leading the way is ii Active Income, up 27.8% over the past year. The three growth-focused portfolios follow, with respective returns of 26.9%, 26.6% and 25% for ii Active Growth, ii Low-Cost Growth and ii Ethical Growth. Trailing the pack, although not by much, is ii Low-Cost Income, up 23.2%.

Below, we drill down into performance over the past year, as well as examining how each portfolio fared in October. During the month, all five models produced positive returns, as markets recovered their poise. 

At the start of every quarter, the five portfolios are automatically rebalanced back to their target allocations. Our constituents have target allocations of either 5%, 10% or 15%. The weightings are displayed on our model portfolios page.

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The Active Income, Active Growth and Ethical Growth portfolios have 10 constituents, which are all actively managed investment funds and trusts.

The Low-Cost Income and Low-Cost Growth models contain nine index-tracking funds or exchange-traded funds (ETFs).

Performance of models over 12-month time periods

Notes *as at 31 October 2021. 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.

Income portfolios

In October, the income portfolios lagged the growth portfolios, which is to be expected given that it was a month during which markets were in recovery mode having posted losses in September. The S&P 500 index, for example, closed 4.8% down in September before going on to post its best monthly performance so far this year in October, racking up a gain of just over 7%. 

For the month, ii Active Income and ii Low-Cost Income returned 0.6% and 0.4%. 

The three top performers in ii Active Income were BMO Commercial Property Trust (LSE:BCPT), Bankers (LSE:BNKR) and Murray International (LSE:MYI), with gains of 6.7%, 3.8% and 2.2%. At the other end of the table, Utilico Emerging Markets (LSE:UEM) was a notable laggard; it declined by 4.6%.

Overall, emerging markets struggled in October. This was also reflected in ii Low-Cost Income, as the WisdomTree Emerging Markets Equity Income ETF was the worst performer, down 2.2%.

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The rest of the portfolio’s constituents posted small gains. Two members stood out with the same return of 3.1% for Vanguard FTSE UK Equity Income Index and iShares Global Property Securities Equity Index.

Over the past year, the emerging market constituents in the two passive models have performed as well as, and better in some cases, than the developed market-focused funds. As we explain below, this does not play out in the three growth portfolios. Instead, emerging market growth funds have notably underperformed. 

Since 1 November 2020, in ii Active Income, Utilico Emerging Markets has gained 28.8%. This is comfortably ahead of three of the four global funds in the portfolio, which mainly stick to developed market equities. Over this period, Bankers, Morgan Stanley Global Brands Equity Income and Fidelity Global Dividend returned 18.6%, 18.1% and 17.9%.

The other global fund, Murray International (LSE:MYI), returned 27.8%, slightly behind Utilico Emerging Markets. Murray International has more than 40% of its assets in Asian and emerging market equities, which is much higher than a typical global fund or trust. Most tend to hold little in the region, or stick to developed markets.

The two UK members have performed even better. City of London (LSE:CTY) is up 32.6% and Man GLG Income Professional has returned 41.5%. Both have benefited from the UK dividend recovery. In addition, both favour value shares, which for several months performed well following the vaccine announcements and successful roll-outs.

The overall best performer in ii Active Income, is BMO Commercial Property Trust. Over the past year, its share price total return is 74.9%. The other alternative selection, Standard Life Private Equity, has also served the portfolio very well, with a gain of 61.1%.

It has been a roller-coaster ride for shareholders in BMO Commercial Property Trust.In the first quarter of 2020, its share price fell 35% and its discount to its net asset value (NAV) widened to more than 50%. This was in response to national lockdowns, which negatively impacted the trust's property holdings, including offices and retailers. Commercial property is a bellwether for the wider economy, so it is an economically sensitive asset class. 

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Its share price remains below its pre-pandemic sell-off level – it was trading at 108p per share on 21 February 2020 and is currently trading at 102p (as at the time of writing) – but the share price has been climbing over the past year and its discount declining (helped by some share buybacks by the board) amid expectations that the outlook for property is brightening as the global economy recovers from the Covid-19 pandemic.

In ii Low-Cost Income, the WisdomTree Emerging Markets Equity Income ETF has returned 24.3% over the past year . This in line with our three developed market equity picks, which are up 29.5%, 26.8% and 22%: the Vanguard FTSE All World High Dividend Yield ETF, the SPDR® S&P Global Dividend Aristocrats ETF and the WisdomTree Global Equity Dividend Growth ETF.

The top overall performer over one year was Vanguard FTSE UK Equity Income Index, up 37.8%. It has benefited from the value rally, due to being heavily exposed to value sectors, such as banks, oil and miners.

In contrast, the SPDR® S&P UK Dividend Aristocrats ETF returned 22.8%. It seeks to invest in up to 40 stocks that have held or increased their dividends over the past seven years. Therefore, it has less exposure to the aforementioned value sectors, as many of those companies cut their dividends in response to the pandemic and have since returned to handing cash back to shareholders. 

Notes: *Portfolio launch date (for monitoring purposes) was 1 January 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.

Growth portfolios

The ii Ethical Growth portfolio topped the performance charts in October, up 1.7%. The passive ii Low-Cost Growth returned 1.3%, while ii Active Growth gained 1%.

Syncona (LSE: SYNC) was by far the biggest contributor to returns. Its share price total return for the month was 18%. Over one, year, though, it is deep in the red, having lost 19.8%. Last week, the trust, which invests in life science companies, reported its six-month results to the end of September. For this period, its net asset value (the performance of its underlying investments) declined by 11.4%. The decline was driven predominantly by falls in the share price of two of the trust’s listed holdings: Freeline Therapeutics Holdings (NASDAQ:FRLN) and Achilles Therapeutics (NASDAQ:ACHL). Syncona attributes the falls to “operational challenges” and “market sentiment”.

Over the past year, in common with the income portfolios, UK and global funds have been the main performance drivers. Four funds in ii Ethical Growth have returned over 30%: Impax Environmental Markets (LSE:IEM), Baillie Gifford Positive Change, Liontrust UK Ethical 2 and Montanaro Better World. The respective returns were 41.6%, 38%, 34.8%, and 32.6%. Not too far behind, with a return of 29.8%, was Royal London Sustainable Leaders.

In ii Low-Cost Growth, there’s not much to note in October. Seven members posted small gains, while the other two were slightly in the red.

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Over one year, the two UK and three developed equity passive picks returned over 30%. The top three performers are Vanguard Global Small-Cap Index, the Vanguard FTSE 250 UCITS ETF and Fidelity Index, with returns of 36.8%, 36.1% and 35.4%. Completing the top five with gains of 32.6% and 32.4% are the iShares Core MSCI World ETF and L&G Global 100 Index. 

The same trend played out for ii Active Growth. Since last November, the biggest performance drivers have been UK and global funds. The top three contributors have been Scottish Mortgage (LSE:SMT), Liontrust Special Situations and Fundsmith Equity, with gains of 51.4%, 31.9% and 23.3%.

The best performer was Standard Life Private Equity, up 61.1%. But as it only comprises 5% of the portfolio, it has less influence compared to other constituents.

In contrast to the income portfolios, the emerging market constituents in the three growth portfolios have notably lagged funds backing equities listed in developed markets – the US, Europe and the UK - over the past year. Stewart Investors Global Emerging Market Sustainability (ii Ethical Growth) returned 11.7%; Fidelity Index Emerging Markets gained 9.5% (ii Low-Cost Growth); and JP Morgan Emerging Markets (LSE:JMG) returned 12.7% (ii Active Growth).

Notes *as at 31 October 2021. 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.