Funds and investment trusts that have returned to form

We highlight funds and trust in our Super 60 and ACE 40 lists that have seen an upturn in performance. 

Just like stock markets, the performance of funds and investment trusts does not go up in a straight line.

The key for investors is to back an active fund manager worth their salt and avoid funds that consistently fail to deliver. When funds are failing to deliver, it could be down to the manager playing it too safe by failing to deviate significantly enough away from the index (known as ‘hugging the index’). Or, it could simply be down to the fund manager making too many bad investment decisions time and time again.

When a fund is going through a rough patch, it is important to take a step back to attempt to understand why. Doing so will help investors to assess whether the dip in form is temporary or permanent.

It could be that the stock market region the fund invests in, or its investment style, is out of favour - or indeed both. If this is the case subdued short-term performance may be forgiven.

As ever, it is worth assessing how the fund is performing in line with a similar fund. If it is notably out of kilter, action may need to be taken.

In interactive investor’s Super 60 and ACE 40 lists, there are both active funds and passive strategies (index funds and exchange-traded funds). We have options across all the main asset classes and regions, and there are a mixture of investment styles on offer; for example some of our equity funds invest in growth shares, while others invest in value shares.

• Value versus growth investing: the two styles explained
• Big shares versus small shares: funds in the ii Super 60
• Golden rules for ISA investors: review your investments twice a year

Over the past six to nine months, some of the funds and investment trusts in our lists that had been going through a challenging short-term performance period have been staging a recovery. Below we run through fund and trust examples.

Value style returning to form

The upturn in fortunes for value shares since last November’s vaccine announcements has been a helpful tailwind for R&M UK Recovery. From the start of 2020 to 31 October 2020, it had underperformed the Investment Association’s UK All Companies sector. The fund was down 24.9% versus 21.1% for the average fund.

But, since last November, its performance has pulled away from other funds. From 1 November 2020 to 1 August 2021, it has gained 49.3% versus 35% for the sector. The fund invests in recovery stocks, which it defines as good businesses trading on depressed valuations that are currently experiencing below-normal profit levels.

Another investment in our Super 60 list that has experienced an upturn in performance due to its value investment style is the JPMorgan European Income investment trust (LSE:JETI). From 1 November 2020 to 1 August 2021, it returned, in share price terms, 45.2% versus 36.1% for the average European trust.

Prior to that, the trust had been notably lagging the European sector over various time frames. Its one-year performance figure is now ahead of the sector average, but it still lags the sector average return over three and five years. Bear in mind, though, that the sector is small, with only eight trusts.

Out-of-favour asset class

It has been a roller coaster ride for shareholders in BMO Commercial Property (LSE:BCPT) over the past 18 months, In the first quarter of 2020, its share price fell 35% and its discount to its net asset value (NAV) widened to over 50%. This was in response to national lockdowns, which negatively impacted the trust's property holdings, which include offices and retailers. Commercial property is a bellwether for the wider economy, so is an economically sensitive asset class. 

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 99p (as at the time of writing on 5 August) – but the share price has been climbing over the past six months or so amid expectations that the outlook for property is brightening as lockdown restrictions ease.

• Commercial property post-pandemic: what's next for the sector?
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The monthly dividend is 0.35 pence a share, compared to 0.5 pence per share pre-pandemic. Its discount has narrowed to 17% versus 36% for its 12-month average.  

In its latest trading update (on 27 July), the trust reported a net asset value total return of 5.3% for the second quarter of 2021. Over the same period, its share price total return was 29.6%.

The trust reported that combined rent collection received to date for the second quarter of 2020 to the second quarter of 2021 was 90.3%.

Defensive Asia trust sees performance improve

Last October, the board of Pacific Assets (LSE:PAC), which invests in shares listed in the Asia-Pacific region, gave its fund manager David Gait a vote of confidence. It said in its half-year results that despite five years of underperformance (to 31 July 2020) it remained happy with the fund manager’s approach to investment decisions.

The trust, which invests in quality growth companies, tends to preserve capital better than rival trusts in falling markets. However, it failed to do so during the Covid-19 sell-off. Gaitgave four reasons for this: a large fall in the Indian market, where the trust had significant exposure of 35%; the market falls punishing all companies, no matter their quality; too much exposure to banks; and too little exposure to strong-performing China.  

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Since the start of this year, Pacific Assets’ defensive stance has fared better than its rivals. It is up 5.6% versus a loss of 0.1% for the Asia-Pacific trust sector. In July, the trust was not caught up in the sell-off of Chinese technology shares due to not investing in the sector. Rival trusts typically hold around 10% in Alibaba (NYSE:BABA) and Tencent (SEHK:700), which both saw their share prices take a big hit owing predominately to concerns about the Chinese government’s regulatory crackdowns on technology and education companies.

Hit hard in sell-off, but bouncing back

Our final two examples are Utilico Emerging Markets (LSE:UEM) and Unicorn Ethical Income, which both fell notably during the Covid-19 stock market sell-off. In the first quarter of 2020, both fell by 34%. Both falls were steeper than their respective fund or trust sector. The average global emerging markets trust declined by 25.6%, while the average UK equity income fund gave up 29.9%.

Utilico Emerging Markets, which invests in utilities and infrastructure firms, was hit hard due its exposure to firms listed in Brazil. The country’s stock market was negatively impacted by the fall in the Brazilian real. In response, the trust has since reduced its weighting to Brazil.

Unicorn Ethical Income fell further than other funds owing to its concentrated approach, and its focus on smaller company shares. During the sell-off, smaller-sized shares sold off more than larger companies.

Both have since been clawing back losses. During the market recovery phase – from 1 April 2020 to 1 July 2021 – Unicorn UK Ethical Income was up 45.6% and Utilico Emerging Markets was up 44.5%. From the start of 2020 to 1 August 2021, Unicorn UK Ethical Income is down 3.8% and Utilico Emerging Markets is 4.6% in the red.

Utilico Emerging Markets has lagged other emerging market trusts since last April, with the sector returning 54.6%. However, due to its defensive stance, this is to be expected when markets rise notably over a short time period. 

In its latest financial year, which was to the end of March, Utilico Emerging Markets delivered a net asset value (NAV) return of 30.2% for the 12-month period, while its share price total return stood at 27.3%. The trust outperformed the MSCI Emerging Markets Utilities Index, which was up 17.2%.

Since last April, Unicorn Ethical Income has slightly outperformed its sector, up 45.6% against 44.1%. In April, co-manager Simon Moon appeared on interactive investor’s Funds Fan podcast.

Addressing how the fund performed during last year’s sell-off, Moon said he was encouraged by the strength of the balance sheets for holdings in the fund.

“A key tenet of our investment process is how well financed companies are by the strength of their balance sheets. This was very important going into the pandemic.

“In the broader market, we saw plenty of companies that required fundraising to shore up balance sheets. That was very unlikely for companies within our portfolio.

“The strength of balance sheets largely dictates the speed of recovery, resumption of dividend payments and investment for growth into these businesses. That puts the overall portfolio in a better position than the wider market, given that its levels of financial gearing are far lower than the market. And we have been encouraged by the recovery in fund performance, and even more encouraged by the strength of underlying trading in investee companies.”

• Funds Fan: ethical income investing interview with Unicorn
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