The best and worst performing funds of 2019

After another rollercoaster year, Nick Sudbury examines the best and worst performing funds of 2019 to see if they can provide any pointers for 2020.

It has been another rollercoaster year, but despite all the geopolitical concerns, each of the main asset classes has made healthy gains. This has enabled the vast majority of funds to generate positive returns, yet it’s always worth looking at the leaders and laggards to see if they can provide any pointers for what might lie ahead.

The FTSE World index of global shares has had an impressive 2019, with a year-to-date return of 21.5%¹ when measured in sterling. The US stock market, which makes up a large element of the index, was a key contributor, with the S&P 500 up 24.3%. Most of the different regions made double-digit gains, with MSCI Russia leading the way (an increase of 49.7%). The Indian Nifty 50 index is bringing up the rear with a return of just 9.5%.

Gold, silver and oil – three of the world’s most important commodities – also had a successful time of it, with price increases of 15.1%, 9.8% and 23.7% (Brent crude) respectively, although they have each been volatile. It has been a positive year all round with the main fixed-income categories making decent gains as well.

Looking at the list of best and worst performing funds can be a heartening or dispiriting experience, depending on how your own holdings fared, but it can also be enlightening. In some cases, the winners and losers can give an indication of which areas could do well or which could struggle in 2020.

It would certainly make a huge difference if you could tell the one from the other. For example, in 2019, the best performing investment trust YTD² was Golden Prospect Precious Metals (LON:GPM) with a gain of 51%, while the worst was Woodford Patient Capital Trust (LON:WPCT) with a loss of 61.6%.

All that glitters

Several of the top performing trusts and funds invest in gold-mining companies. The precious metal started the year priced at $1,279 per troy ounce and by 11 November had rallied to $1,453, an increase of 13.6%. However, many of the stocks in this area have risen much further. This is because they benefit from high operating leverage, with a small rise in the gold price having a much bigger impact on their net income.

One of the main beneficiaries has been Golden Prospect Precious Metals with a year-to-date gain of 51%. It has a highly concentrated portfolio, with the 10 largest holdings accounting for just over 60% of the assets. It is a small and volatile fund, with gross AUM of just £26m and typically trades at a discount to NAV of more than 20%. Despite the strong year, the shares are still down around 65% from the issue price in December 2006.

Amongst the best performing open-ended funds is the £1bn LF Ruffer Gold fund with a year-to-date return of 40%. It has a much more diversified portfolio than GPM, with 131 different holdings. The manager believes that the higher gold price is yet to be reflected in the majority of gold-mining stocks, which suggests that there is plenty of upside potential if gold holds on to its current level.

Gold has benefited from increased concerns about the impact of the US-China trade war and possible global economic slowdown. This has led to cuts in interest rates in the US, which reduces the opportunity cost of holding gold, but it will always divide investor opinion.

Russia and China

It has been a good year for investors in Russia and China, with MSCI Russia up 49.7% in sterling terms and the Shanghai Composite increasing by 16.6%. This has made it possible for some of the single country funds investing in these areas to make it near the top of the leader board.

Pictet Russia Index, a £40m fund that tracks MSCI Russia, rose by 43.4% year-to-date, while the actively managed £356m JPMorgan Russian Securities (LON:JRS) investment trust returned 49.3%. The country’s stock market has bounced back from the shock of having extra sanctions imposed last year, with the rise in the price of oil enabling it to deliver strong gains that have been further boosted by an increase in the value of the currency.

Mainland China has also been a good place to be invested, with Allianz China A-Shares up 46%, Allianz All China Equity 34.6%, First State All China 33.7% and the JPMorgan Chinese Investment Trust (LON:JMC)41.7%. Last year was the worst in a decade for the local stock market, but it has rebounded strongly in 2019, despite concerns about the trade war with the US.

China is moving from a manufacturing to a consumer-focused economy, but has much further to go, with an urbanisation rate that is still far behind countries like the US and the UK. This should provide a supportive backdrop for further growth once the trade war reaches some sort of favourable resolution.

Technology

Despite concerns about valuations, some of the technology funds have continued to do well this year. The best performing open-ended vehicles in this area were Wellington FinTech Unhedged GBP (+38.2%), Fidelity Global Technology (+35.6%), Smith & Williamson Artificial Intelligence (+35.4%) and L&G Global Technology Index (+35.2%).

Wellington FinTech is a $137m fund investing in companies that aim to use technology to disrupt or enhance traditional financial services. It was launched in October 2018 and has a concentrated 39-stock portfolio that includes many lesser-known names alongside the likes of Equifax, Visa and PayPal. 

As the name suggests, Smith & Williamson Artificial Intelligence invests in companies that develop AI technologies or the products or services that use them. It was launched in June 2017 and has £206m of AUM that it has used to build a 39-stock portfolio. The largest holdings consist of relatively unfamiliar businesses, as well as tech giants like Alphabet, Microsoft and Alibaba.

With assets of £3bn, Fidelity Global Technology is a much larger fund, that invests right across the tech sector and was launched in 1999 at the height of the dot-com bubble. It provides a very different exposure to L&G Global Technology Index, which is an index tracker that replicates the performance of the FTSE World-Technology Index. 

Brexit Bounce

It has been another volatile year for funds exposed to UK domestically oriented stocks, but recent progress towards ending the uncertainty has sparked a recovery amongst the small-and-mid-cap investment trusts. The chief beneficiaries include BlackRock Throgmorton (LON:THRG) with a year-to-date return of 40.5%, Mercantile (LON:MRC) (+34.4%) and Schroder UK Mid Cap (LON:SCP) (+29.3%). This is obviously a volatile area and could still go either way.

Solid year for popular growth managers

It has been another good year for Lindsell Train and Fundsmith, with all their flagship funds posting healthy gains. The star performers included Lindsell Train UK Equity, which was up 18.6% year-to-date, as well as its Global Equity fund, rising by 17.1%. Terry Smith’s funds had an even better time of it, with Fundsmith Equity returning 22.1% and his new investment trust, Smithson (LON:SSON) gaining 22%.

Crash and burn

Anyone unfortunate enough to have money invested in any of former manager Neil Woodford’s funds will not be surprised to learn that they feature amongst the worst performers for the year. Woodford Patient Capital is the worst performing investment trust of the lot with a year-to-date loss of 61.6%: there is still a huge amount of uncertainty over how much its unlisted holdings are  worth.

His open-ended funds haven’t fared much better with Woodford Equity Income down 24.2% and Woodford Income Focus posting a loss of 14.2%. The former is now in realisation mode and the latter has been suspended until a decision is made about its future.

The absolute return sector has seen further large investor outflows as it continues to disappoint and many of these vehicles languish amongst the worst performers. Examples include the now defunct VT Garraway Absolute Equitywith a loss of 63.2%, Merian Global Equity Absolute Return Hedged (-11.6%) and Quilter Investors Global Equity Absolute Return (-11.5%).

Some of the energy-related funds have also suffered, despite the increase in the price of oil. For example, Schroder ISF Global Energy has lost nine percent this year, while MFM Junior Oils is down 9.5%, but the worst of all is the Riverstone Energy (LON:RSE) investment trust: its share price has collapsed by 56.4%. 

Riverstone Energy recently announced that the gross value of its largely unlisted portfolio fell by 26% in the third quarter of the year, with only one of the underlying holdings actually appreciating. The declines are due to lower future production estimates and a reduction in the price/earnings multiples of their listed peers that are used to value them. It seems as though drastic action may be required to turn things around.

2020 vision

Perhaps the most surprising laggards are the various single-country funds that invest in India. Alquity Indian Subcontinent was down 5.6%, while Liontrust India lost 6.3% year-to-date, with the India Capital Growth (LON:IGC) investment trust falling 13.5%. The latter is currently available on a wider than normal discount of 16% (see fund of the month).

India has been through a tough time recently with the economy experiencing a cyclical downturn, but the landslide re-election of Prime Minister Modi earlier in the year has prompted various policy measures to stimulate growth.

Interest rates have been cut several times and there has also been a large reduction in corporate-tax rates, while Modi’s “Make in India” campaign is aimed at making the country a global manufacturing hub. There is a decent chance that the funds that invest in India will bounce back strongly in 2020.

The list of best and worst performing funds can give a valuable insight into what has been happening and in some cases can provide an indication of the areas to follow or avoid in 2020. Markets like Russia, China and gold tend to fluctuate wildly from one year to the next, whereas technology has been a lot more consistent. India could be the big winner as it claws back its recent losses.

FUND OF THE MONTH: India Capital Growth

The India Capital Growth investment trust mainly invests in mid-and-small-cap Indian companies. These have had a tough year and have suffered disproportionately as the country’s stock market has de-rated. As a result of this, the share price has fallen 13.5% year-to-date and the shares are now available on a wider than normal discount of 16%, but there is a decent chance that they could bounce back strongly.

One of the main issues facing the country has been a liquidity crisis that emerged following the collapse of a major unlisted infrastructure finance company in September 2018. This caused a sharp fall in the stock market and required central-bank intervention. The problem was created by ill-disciplined lending practices that have made the banks more reluctant to lend.

Since the re-election of Prime Minster Modi, there have been several important policy measures put in place to stimulate economic growth, including a number of interest-rate cuts and a reduction in the effective rate of corporation tax from around 35% to 25%. These are significant steps, but the reforms still have a long way to go.

IGC is managed by Ocean Dial, with the six-strong investment team divided between London and Mumbai. At the end of August, the fund’s portfolio was trading on 12 times estimated earnings for the year ended 31 March 2021. According to the manager, the last time it hit that level was in August 2013 and afterwards the fund went on to deliver a 197% return in sterling over the next three years.

India Capital Growth targets mid-and-small-cap companies, as these should benefit the most from India’s long-term growth potential. It uses a bottom-up stock-picking approach to identify businesses with pricing power, credible management teams and which are generating high cash returns on capital employed. The fund will inevitably experience periods of volatility, but for risk-tolerant investors, the current dip could be a good long-term buying opportunity.

¹ Index and commodities returns data to 7 November unless otherwise stated

² Fund and trust returns data to 11 November unless otherwise stated