How our five portfolios are faring as value rally starts to cool

Over the past year, two of our model portfolios are up over 30%, comfortably outpacing the benchmark. 

Since last November’s vaccine announcements, value shares (which tend to be cyclical businesses) have outperformed growth shares, but in recent weeks there have been signs the trend may not be here to stay.

In June, the S&P 500 Growth Index gained 5.7%, while the S&P 500 Quality Index was up 4.7%. In contrast, the S&P 500 Enhanced Value Index lost 2.9% and the S&P 500 Dividend Aristocrats Index declined by 1.2%.

A key driver is that investors are embracing technology shares once again; with the latest Bank of America Merrill Lynch Global Fund Manager Survey reporting that “long tech” is now the most crowded trade. Commodities – a popular way to play the global economic recovery – was previously the most crowded trade.

This has directly impacted our model portfolios, as it has caused ii Ethical Growth to rise from bottom to top for its one performance in June. Given that ethical funds tend to be underweight (hold less than the index), or completely avoid certain cyclical sectors on ethical grounds, such as big oil and mining companies, when value shares outperform it is a headwind. When the opposite plays out, it turns into a tailwind.  

Below, we run through the fund winners and losers in June for all five of our models, including detailing how each portfolio performed. All performance figures are total return, the share price total return in respect of investment trusts.

No changes have been made (including no rebalancing) to the five models this month. 

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Growth performance and top performers in June

All three growth portfolios outperformed the two income models in June. ii Ethical Growth led the pack, up 3.8%, followed by returns of 3.4% and 2.5% for ii Active Growth and ii Low-Cost Growth.

There was nearly a clean sweep of positive returns across the board for ii Ethical Growth, with the two exceptions being Syncona (LSE:SYNC) and Liontrust UK Ethical, which lost 1.9% and 0.2%.

Baillie Gifford Positive Change and Montanaro Better World were the standout performers, with returns of 9.9% and 7.4%.

Mike Fox, fund manager of Royal Sustainable Leaders, believes the value rally will prove to be short-lived. The fund is a strong performer over both the long and medium term, but has, in common with other ethical or sustainable funds, underperformed its sector average (IA UK all companies) since the vaccine announcements.

He told interactive investor: “It tends to happen (value shares outperforming growth shares) in the early stages of an economic recovery. We [also] underperformed coming out of the financial crisis for about nine or 12 months, and then you get over that period of maximum economic acceleration. Then it went back to businesses determining investment outcomes, so micro rather than macro.

“We feel pretty confident this is going to happen this time. But in the period since the vaccines have been available, value has performed better and cyclicality has done better.”  

Moving on to ii Active Growth, growth-focused Scottish Mortgage (LSE:SMT) and Fundsmith Equity were the two top contributors to performance in June, with returns of 11.6% and 6.6%.

Scottish Mortgage recently benefited from backing money transfer firm Wise for several years ahead of its IPO in early July. Wise was valued at more than £8 billion, which is more than double the £3.6 billion valuation of the business in a fundraising last July.

Only one of the other eight constituents in ii Active Growth posted a loss in June, with F&C Investment Trust (LSE:FCIT) down 0.6%.

In our passive ii Low-Cost Growth our three global picks provided the bulk of the returns in June. L&G Global 100 Index took the top spot, up 4.3%, followed by gains of 4% and 3.1% for iShares Core MSCI World ETF (LSE:SWDA) and Vanguard Global Small-Cap Index.

The only losses came from the two UK constituents. Vanguard FTSE 250 ETF (LSE:VMIG) declined by 1.6%, while Fidelity Index UK gave up 0.1%. The UK market has a bias towards cyclical companies. 

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Notes *as at 30 June 2021. Portfolio launch date (for monitoring purposes) was 1 January 2019, except **Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. 

Another positive month for our income portfolios

The dividend recovery continued to gather pace in June, with returns of 1.6% and 1.3% for ii Active Income and ii Low-Cost Income. Over the past six months, both income portfolios have outperformed the three growth models.

In ii Active Income, the two biggest contributors to returns in June were Utilico Emerging Markets (LSE:UEM) and Morgan Stanley Global Brands Equity Income, up 7.1% and 4.8%.

Standard Life Private Equity (LSE:SLPE) and BMO Commercial Property (LSE:BCPT) also had a good month, up 4.1% and 2.5%.

At the other end of the table, Man GLG Income, which takes a value-based investment approach, was down 2% in June.

In ii Low-Cost Income, there were positive returns for nine of the 10 constituents. The exception was Vanguard FTSE UK Equity Income Index, which fell by 1%.

The biggest contributor to performance, up 3.5%, was the WisdomTree Global Equity Dividend Growth ETF (LSE:GGRG). This ETF tracks a bespoke index that was 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 dividends paid and dividend growth achieved.

Notes *as at 30 June 2021. Portfolio launch date (for monitoring purposes) was 1 January 2019, except Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct.