While we are well into 2020 now, it’s not too late to look back at 2019 and analyse fund performance. Here, I look at four popular funds that underperformed last year that could potentially generate better returns this year, as well as four funds that outperformed in 2019 that could be due a correction this year.
Funds that underperformed their benchmarks in 2019
Invesco High Income
One popular fund that certainly underperformed last year was the Invesco High-Income fund, which is managed by Mark Barnett and has assets of around £5.7 billion. It returned just 6.1% compared to 22.4% for its benchmark, the Investment Association’s UK All Companies sector average.
There are a number of reasons this fund delivered such a poor performance last year. For a start, Barnett is very much a value-focused portfolio manager, and this style has been out of favour for a while now. Secondly, the fund has significant exposure to UK-focused companies, many of which delivered lacklustre returns last year due to Brexit uncertainty. Third, Barnett has suffered from stock selection issues. For example, holdings such as Burford Capital and Funding Circle have underperformed. Finally, with investors pulling money from the fund due to its association with Neil Woodford (Woodford previously managed it), I imagine Barnett has been forced to sell stocks at unfavourable prices.
Looking ahead, however, I believe Barnett’s performance could improve. Not only have value stocks come more into focus recently, but many UK-focused stocks have rebounded due to the fact that there’s more clarity on Brexit after the General Election. With the fund having significant exposure to blue-chip FTSE 100 companies that trade on low valuations such as BP, British American Tobacco, and Legal & General, I think it has the potential to deliver higher returns going forward.
Another income fund that underperformed in 2019 was the Jupiter Income fund, which is listed in Hargreaves Lansdown’s ‘Wealth 50’ list of preferred funds. This fund, which has assets of around £1.9 billion, returned 12.7% last year, versus 19.2% for its target benchmark, the FTSE All-Share index. That placed it 78th out of the 86 funds in the Investment Association’s UK Equity Income sector.
In my view, this fund’s underperformance is largely attributable to fund manager Ben Whitmore’s approach, which focuses on undervalued companies that are out of favour. This kind of investment strategy generally didn’t generate good results last year. For example, many of the fund’s top holdings, such as Aviva, Imperial Brands, and Vodafone delivered disappointing returns. Looking forward, however, I believe the fund’s performance could improve if value investing comes back into focus.
Marlborough Special Situations
Turning to the small-cap space, one popular fund that underperformed its benchmark last year was the Marlborough Special Situations fund, which is managed by Giles Hargreave and Eustace Santa Barbara and has assets of £1.5 billion. It returned 19.4% versus 25.4% for the Investment Association’s UK Smaller Companies sector average.
In my view, investors should not be put off by this underperformance. Giles Hargreave is one of the best in the business when it comes to UK small caps, and over the 10-year period to 31 December 2019, this fund outperformed the sector by a wide margin (313% vs 246%). Looking at the fund’s top holdings, I see a number of companies that I think have the potential to generate robust returns this year including Martin Sorrell’s new company S4 and Spirent Communications, a 5G network testing specialist.
Lindsell Train Global Equity
Finally, looking at the global equities sector, one fund that delivered underwhelming returns last year was the highly popular Lindsell Train Global Equity fund, which is managed by Nick Train, Michael Lindsell, and James Bullock and has assets of £8.4 billion. It returned 19.4% versus 22.7% for it benchmark, the MSCI World Index. When you consider Train’s long-term track record (since its launch in 2011 this fund has returned 317% versus 171% for its benchmark), it’s a surprise to see this fund among the underperformers.
Why did Lindsell Train Global Equity underperform? There are a few reasons. Firstly, a number of its top holdings pulled back in the second half of the year. For example, Unilever and Diageo both experienced pullbacks as the pound strengthened. Secondly, the managers’ ‘quality’ investing style that has been popular in recent years seemed to lose its shine late in the year as value investing came back into focus. Thirdly, this fund is highly concentrated, so a few underperforming stocks would have dragged performance down.
Looking ahead though, I would back Train to continue delivering strong returns for investors, given his track record. When you consider the growth prospects of many of the fund’s top holdings such as Diageo, PayPal, and Walt Disney, there are reasons to be confident about the future.
Funds that outperformed their benchmarks in 2019
Moving on to funds that outperformed their benchmarks in 2019, one well-known fund that delivered very strong returns last year was the Slater Growth fund. This UK growth fund, which is managed by Mark Slater and has assets of £634 million, generated a return of 37.6%, well above the return of 22.4% for its benchmark, the Investment Association’s UK All Companies sector average.
Now, last year, a number of holdings in this fund performed very well. For example, the share price of digital content specialist Future tripled, while Liontrust Asset Management shares jumped 90%. Entertainment One was also acquired at a substantial premium. I would be surprised if Slater can replicate this kind of outperformance in 2020. That said, he is a very good fund manager.
ASI UK Smaller Companies
Another popular fund that delivered fantastic returns last year was the ASI UK Smaller Companies fund. This fund, which is managed by Harry Nimmo and has assets of £1.9 billion, returned 47.5% versus 25.4% for the Investment Association’s UK Smaller Companies sector average, outperforming its benchmark by a wide margin.
Looking at the top 10 holdings here, I see a number of stocks that had very good runs in 2019 and could be due a near-term pullback. For example, stocks such as GB Group, 4imprint, JD Sports Fashion, and Future all rose spectacularly last year and now trade at relatively high valuations. Given the strong performance last year, I wouldn’t be surprised to see the fund’s performance moderate a little this year.
ASI UK Equity Income
In the UK Equity Income space, one fund that outperformed last year was the ASI UK Equity Income fund. This fund, which is managed by Charles Luke and is quite small at £165 million, returned 25.8% versus 22.2% for the FTSE All-Share index.
Examining this fund’s top holdings, I see a number of large-cap stocks that performed well last year and now look fully valued. For example, AstraZeneca, Countryside Properties, SSE, and Aveva all rose 30% or more. For this reason, I think there’s a chance this equity income fund could generate lower returns in 2020.
Morgan Stanley Global Brands
Finally, looking at the global equity sector, one fund that outperformed last year was the Morgan Stanley Global Brands fund. This fund, which has assets of £970 million, returned 25.4% versus 22.7% for its benchmark the MSCI World Net index.
I really like the look of this fund as it focuses on companies whose brands provide strong competitive advantages. However, analysing the top holdings, I see a number of stocks that rose significantly last year and could be due a pullback. For example, top holding Microsoft – which makes up over 8% of the fund – rose approximately 55% last year, while Visa jumped 42%. The fund is also heavily biased towards the US stock market, which has enjoyed a strong run recently. All things considered, I think it’s possible that this fund could experience a period of lower growth in the short term.
Disclaimer: Edward Sheldon has a position in the Lindsell Train Global Equity fund and owns shares in Aviva, Imperial Brands, Unilever, Diageo, JD Sports Fashion, GB Group and Microsoft.
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Based in London, Edward is an investment writer whose clients include a broad range of financial services firms located all over the world. Prior to launching his own investment writing business, Edward spent 15 years working in private wealth management and institutional asset management, both in the UK and in Australia. Edward holds a Commerce degree from the University of Melbourne, as well as the Investment Management Certificate (IMC) and the highly-regarded Chartered Financial Analyst (CFA) qualification.