Active funds outpace passive picks in income portfolios

Fund performance has picked up over the past three months, with our ii Active Income model up 12.6%. 

Positive market momentum persisted in December, as vaccine optimism continued to boost investor confidence. In the UK, markets were also buoyed by the last-minute Brexit deal.

As a result, all five of interactive investor’s Model Portfolios were in positive territory in December. 

In common with all other time frames, it was the ii Active Incomethat had the upper hand. The 10 active funds in the portfolio collectively returned 4.2% over the month, versus 2% for ii Low-Cost Income, which is comprised of 10 passive funds.

As the table below shows, over three months, six months, one year and since inception, ii Active Incomehas outperformed ii Low-Cost Income. For 2020 as a whole, our two income models notably lagged our three growth portfolios, with ii Active Income and ii Low-Cost Income both recording losses for the year, down 4.2% and 7.3% respectively.

Over the past three months, there have been signs of a turnaround in performance for income funds. ii Active Income is up 12.7%, a return that is ahead of the three growth models. In the same period,ii Active Growth has gained 12.6%, ii Ethical Growth is up 12.3%, and ii Low-Cost Growth is up 10.7%.

• How our five Model Portfolios performed in 2020 

How the two income Model Portfolios are performing: 

Notes: *as at 31 December 2020. Portfolio launch date (for monitoring purposes) was 1 January 2019, except Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct

• Find out more about our Model Portfolios and the benchmarks used to compare performance in our methodology
• Check out our guide to our five Model Portfolios

ii Active Income

Standout stat:Standard Life Private Equity saw its share price fall by 40% at one point in 2020, but ended the year up 20%.

Two investment trusts notably led the pack in December, with Standard Life Private Equity (LSE: SLPE) up 13.4% and BMO Commercial Property (LSE: BCPT) posting a gain of 11.3%.

Both had a roller coaster of a year. SLPE saw its share price fall 40% at one point. However, it benefited from the market recovery that took place from the end of March onwards and ended the year in positive territory, up 19.8%. In addition, its three-month performance has been particularly strong, with its share price total return 25.5%.

Its discount has subsequently narrowed, and now stands at around 25%. Winterflood, the investment trust analyst, says this “represents a significant value opportunity given the fund’s strong long-term performance record, the quality of its investment portfolio, which reflects the team’s well-established selection process, and the strength of its balance sheet”.

• Three investment trust bargains at the start of 2021 

BMO Commercial Property has also been staging a recovery over the past three months, up 25.3%. However, it remains deep in the red for 2020 as a whole, down 28.3%.

Its share price performance in 2020 was not helped by the fact that its discount (in common with other property trusts) slumped notably during the first quarter sell-off, as some investors rushed for the exit amid concerns over the economic impact of Covid-19. The share price falls were in excess of the decline in the value of the underlying holdings held by the trust, its net asset value (NAV). At its peak, its discount hit 60%, but it is currently trading at just over 30%.

• Everything you need to know about investment trusts 

In December, BCPT’s share price was boosted after it announced the monthly dividend would be increased by 40% from its August level, when dividends were reintroduced. The new dividend amount of 0.35 pence per share equates to 70% of the dividend amount that was paid prior to its dividend being suspended in April.

Elsewhere, three fund managers that target undervalued companies as part of the way they invest continued to see their performances improve in December. City of London (LSE: CTY) led the way in gaining 5.1%, followed by Murray International (LSE: MYI) and Man GLG Income, up 5% and 4.4%.

In a recent update to investors, City of London’s fund manager Job Curtis pointed out that companies are returning to the dividend list, including soft drinks maker Britvic (LSE:BVIC) and British Land (LSE: BLND), the real estate investment trust, which are both held by City of London. “The combination of the attractive dividend yield of UK equities and more confidence in the dividend-paying capacity of companies may lead to positive returns being sustained,” says Curtis.

Also of note in December was the continued performance turnaround of Utilico Emerging Markets (LSE: UEM). In December, the trust returned 4.3%, while over three months its returns stand at 13%. For the year, though, it posted a loss of 14.4%. This was mainly down to the trust’s steep fall in the first quarter sell-off of 2020 (it declined 30%), due to its exposure to Brazil, which was hampered by the fall in the Brazilian real.

• Fund Spotlight: Utilico Emerging Markets investment trust 

ii Low-Cost Income

Standout stat: In 2020 WisdomTree Global Equity Dividend Growth ETF  gained 12.7%, with its quality focus paying off.

Our 10 passive picks, comprising both index funds and exchange-traded funds (ETFs), returned 2% in December. Over three months and six months, the portfolio made gains of 7.6% and 6.2%, but in 2020 declined by 7.3%.

The UK exposure was the strongest performing part of the portfolio in December. The Vanguard FTSE UK Equity Income gained 5.3%, while SPDR® S&P UK Dividend Aristocrats ETF (LSE: UKDV) was up 3.4%.

The next best performers were WisdomTree Emerging Markets Equity Income, up 2.6%, followed by Vanguard FTSE All-World High Dividend Yield ETF (LSE: VHYL) and SPDR® S&P Global Dividend Aristocrats ETF (LSE: GBDV), up 2.4% and 2%.

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Two passive picks posted small losses, SPDR Morningstar Multi-Asset Infrastructure ETF (LSE: GIN) was down 0.5% and iShares Global Property Securities declined by 0.1%.

For 2020, the standout performer in the model was WisdomTree Global Equity Dividend Growth ETF, which gained 12.7%. The ETF tracks a bespoke index developed by the fund provider. It includes companies in global developed markets that are fundamentally weighted by a variety of quality and growth factors and then adjusted by the dividends paid and dividend growth achieved. In 2020, its quality focus paid off.

Any changes to the ii Model Portfolio constituents and the rationale behind those decisions will be communicated through the Quarterly Investment Outlook.

ii adheres to a strict code of conduct. Members of ii staff may hold shares or units in investments which make up the ii Model Portfolios, which could create a conflict of interest. Any member of staff intending to complete some research about any financial instrument in which they have an interest are required to disclose such interest to ii. We will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, staff involved in the production of the ii Model Portfolios are subject to a personal account dealing restriction. This prevents them from placing a transaction in these portfolios or the underlying specified constituents of each portfolio for five working days before and after an investment is included or amended and made public within the list. This is to avoid personal interests conflicting with the interests of the recipients of the ii Model Portfolio options.