Why our income portfolios are lagging our three growth models

We explain the performance gap between our growth and income models, and review performance in January.

We are fast approaching the one-year anniversary of the Covid-19 stock-market sell-off, a four-week period that continues to have ramifications for the performances of our two income-focused model portfolios – ii Active Income and ii Low-cost Income.

Growth funds have recovered more ground

Overall, since the dust of the sell-off settled at the end of March last year, funds and trusts that focus on investing in companies with the best growth prospects have been clawing back losses. Some are now back in positive territory.

For funds that invest in dividend-paying companies recouping losses has been more of an uphill struggle, due to the widespread income cuts, suspensions and cancellations that have taken place. On this front, the UK has seen dividends dry up considerably. In 2020, more than 500 companies listed on the London Stock Exchange reduced, postponed or cancelled payouts; 52 of those were FTSE 100 stocks.

This is one of the main factors why our ii Active Income and ii Low-cost Income are both in negative territory over the past year (to the end of January), down 5.1% and 6.1% respectively. This has also weighed on overall returns since the portfolios were launched at the start of January 2019.

In ii Active Income, our two UK equity income holdings have posted losses of more than 10% over the past year: Man GLG Income has declined 13% and City of London (LSE: CTY) is down 12%. In contrast, our two growth-focused UK picks in ii Active Growth have posted small positive returns: CFP SDL UK Buffettology is up 1.1%, while Liontrust Special Situations has gained 0.9%.

The same rings true with our passive models. Our two UK income passive picks held in ii Low-cost Income have underperformed our two growth choices in ii Low-cost Growth. In ii Low-cost Income, the SPDR® S&P UK Dividend Aristocrats ETF (LSE:UKDV) and Vanguard FTSE UK Equity Income Index have lost 16% and 13.8%. But, in ii Low-cost Growth, Fidelity UK Index and Vanguard FTSE 250 have posted smaller losses, of 7.2% and 2.6%.

How our income portfolios have performed 

Notes *as at 31 January 2021. Portfolio launch date (for monitoring purposes) was 1 January 2019, except Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct.

Other reasons why our income models have lagged

Outside of UK equities, two other holdings have been negative contributors for ii Active Income. BMO Commercial Property (LSE:BCPT), which saw its dividend widen significantly in the sell-off following the suspension of its monthly dividend, is down 26.8% over the past year. Utilico Emerging Markets (LSE:UEM), which lost 12% over the same time period, fell notably in the first quarter of 2020, due to its equity exposure to Brazil, which was negatively impacted by the fall in the Brazilian real.  

Both, however, have been staging a comeback of late. Over the past three months, BMO Commercial Property is up 28.4%, while Utilico Emerging Markets has returned 16%. In December, BMO Commercial Property announced a new monthly dividend amount of 0.35 pence per share. This equates to 70% of the dividend amount that was paid prior to its dividend being suspended in April.

In ii Low-cost Income, performance was not helped over the past year by SPDR® S&P Global Dividend Aristocrats ETF (LSE:UKDV) and WisdomTree Emerging Markets Equity Income with both posting losses of 11.5% and 5%. But, our other global income ETF did buck the trend, the WisdomTree Global Equity Dividend returned 11.2%. Its focus on quality companies paid off in total return terms during the dividend storm. Elsewhere, a small loss of 1% was posted by the Vanguard FTSE All-World High Dividend Yield ETF (LSE:VHYL).

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Reasons why our growth models have raced ahead

In contrast, in ii Low-cost Growth our three global growth holdings have returned more than 10% over the past year. Vanguard Global Small Cap Index led the pack, up 16.7%, followed by L&G Global 100 Index and iShares Core MSCI World ETF (LSE:SWDA) returning 13.1% and 10.9%. The portfolio’s performance was also buoyed by Fidelity Index Emerging Markets returning 22.9%.

In ii Active Growth, as mentioned earlier, growth-focused funds had a much better year than the income funds held in ii Active Income. Two other examples of this trend are Fundsmith Equity, up 12.7%, and F&C Investment Trust (LSE:FCIT), which returned 4.8%. But, it was the standout returns by Scottish Mortgage (LSE:SMT), up 117%, which gave a big boost to overall performance. Also playing its part was JP Morgan Emerging Markets (LSE:JMG), up 36.7%.  

It was more of a team effort in respect of ii Ethical Growth. Four of the six holdings retained throughout the year have been strong performers. Impax Environmental Markets (LSE:IEM) led the way, up 41.7%, followed by BMO Responsible Global Equity, Syncona (LSE:SYNC) and Stewart Investors Global Emerging Markets Sustainability, with respective returns of 20.3%, 19.2% and 18%.

Over the past year ii Low-cost Growth is up 9%, ii Active Growth has returned 23% and ii Ethical Growth is up 27.1%.

Moreover, since inception ii Active Growth has significantly outperformed ii Active Income, gaining 47.8% versus a return of 12%. ii Ethical Growth is up 29.3% (from a different inception date of 1 October 2019). ii Low-cost Growth has returned 9% since launch, while ii Low-cost Income is up 5.4%. 

How our growth portfolios have performed 

Notes *as at 31 January 2021. Portfolio launch date (for monitoring purposes) was 1 January 2019, except Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct.

How our models fared in January 2021

ii Ethical Growth led the way, up 1.9%. Its performance was turbocharged by Impax Environmental Markets and Baillie Gifford Positive Change, which respectively returned 9% and 7.7%. 

Our other two growth models produced flat returns over the month. ii Low-cost Growth returned 0.5% while ii Active Growth lost 0.1%. 

Also posting small losses were our two income models. ii Low-cost Income declined by 0.8% and ii Active Income gave up 2.2%. 

But, to end on a positive note, ii Active Income has been the best performer of the five portfolios over the past three months, up 14%. Time will tell as to whether this is the start of a period of stronger performance for income-focused funds. Much will depend on how the Covid-19 pandemic pans out over the coming months; if the vaccine roll-out is a success companies could, in theory, begin to restore dividend payouts.