How signs of market rotation impacted our growth Model Portfolios

Kyle Caldwell reviews how the fund, trust and passive picks in our growth portfolios fared in November.

The next couple of months or so will make clear whether the early signs of a market rotation has legs. 

In November, there was a notable shift away from the beneficiaries of lockdown, the stay-at-home winners of the pandemic, towards cyclical firms and sectors that had seen their share prices depressed by a lack of light at the end of Covid-19 tunnel.

Early November’s announcement of Pfizer’s(NYSE:PFE) effective vaccine was followed by more good news about breakthroughs from Moderna(NASDAQ:MRNA) and the University of Oxford. The trio of vaccine announcements proved to be a shot in the arm for value stocks, which have notably underperformed growth stocks over the last decade.

• Is this the start of a style rotation? 
• Most fund sectors have clawed back Covid-19 losses
• ETF winners and losers in Covid-19 vaccine rally

Whether this trend persists is anyone’s guess. On the one hand, the successful roll-out of a vaccine will be beneficial for the global economy, which in turn is a favourable backdrop for value stocks that are more economically sensitive, such as retailers, oil companies, airliners and house builders. But, as analyst Numis points out, it would be a bold call to bet against the “increasing dominance of technology and changing consumer habits following the Covid-19 crisis, particularly when supported by low interest rates”.

Mark Harris, lead fund manager of a range of multi-asset funds at Garraway Capital Management, says: “Pfizer’s vaccine announcement sufficiently challenged the consensus view that Covid-19 would continue to suppress economic activity for the foreseeable and that quality growth was therefore the place to be parked. So extreme was the consensus challenge that we saw historic moves in markets, with value (especially cyclical) stocks massively outperforming growth stocks.”

As far as our three growth Model Portfolios are concerned, November’s rotation resulted in two of our portfolios slightly underperforming the benchmark. However, our passive portfolio ii Low Cost Growth managed to marginally gain an upper hand.

But, much more pleasing, is the fact that over all other time periods (three months, six months, one year and since launch) all three portfolios have produced benchmark-beating performance.

How the three ii growth Model Portfolios are performing

Notes *as at 30 November 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
• Examine our guide to our five Model Portfolios

ii Low-Cost Growth

Standout stat: four of our nine passive picks produced 10% plus returns in November. 

Our passive growth portfolio led the pack during the rally, which is not a massive surprise. When markets rise quickly over a short time period, as they did in November, active fund managers struggle to keep pace with the wider stock market.

Four of the nine passive holdings in ii Low-Cost Growth produced returns above 10% in November. Two UK funds led the way, even outperforming the FTSE 100 index, which in returning 12.4% had its best one-month return since 1989.

Fidelity Index, which tracks the FTSE All Share index, gained 14.4%, while the Vanguard FTSE 250 ETF (LSE: VMID) was up 12.5%. Investors will be hoping that this is the start of a stronger period of performance for the UK market, which has for the last couple of years been battling various headwinds, including uncertainty over Brexit and Covid-19. In the event of both of those uncertainties being removed, 2021 could see those domestic and international investors that heavily sold UK equity exposure over the past couple of years make a return to the UK market to take advantage of its cheap price tag compared to other markets. 

Smaller companies were another winner from increased bullishness in November. In turn, this benefited the Vanguard Global Small-Cap Index, which rose 11.7%.

The fourth double-digit return in the portfolio came from iShares Global Property Securities Equity Index, up 11.4%. Increased confidence regarding the outlook for the global economy next year and beyond sent the share prices of property companies higher in November.

Performance in November was also helped by our two global passive picks, the iShares Core MSCI World ETF LSE: SWDA returned 9.3%, while the L&G Global 100 Index was up 8.8%.

The two laggards were WisdomTree Enhanced Commodity ETF (LSE:WCOB) and Vanguard Global Bond Index, with returns of -0.2% and 0.7%, respectively. The defensive nature of each means that when markets are in a risk-on mode, as they were in November, they will underperform. But during periods of volatility, both prove their worth as diversifiers in the portfolio.

• How ‘defensive’ trusts have performed during a turbulent 2020
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ii Active Growth

Standout stat: Scottish Mortgage continued its impressive run of form, up 10.4%, despite its focus on growth companies. 

Our active picks lagged ii Low-Cost Growth by 1.6% in November, returning 7.2% versus 8.8%. This was not helped by the more subdued returns over the month from CFP SDL UK Buffettology and Fundsmith Equity, up 5.8% and 4.9%, respectively. Both have a quality-growth focus, with the former investing in the UK and the latter operating under a global remit. With value stocks rallying in November, growth stocks fell behind.

Keith Ashworth-Lord, manager of the CFP SDL UK Buffettology fund, notes that the news of successful vaccines in November “caused a sea-change in sentiment in the stock market”, which he described as a “dash for trash as investors scrambled to pick up shares in companies and sectors that had been out of favour since the onset of the pandemic”.

Ashworth-Lord concedes that the rotation “is almost guaranteed to result in underperformance of our portfolio for the time its lasts”. However, he is of the view that the value rally will be short-lived. “If we go back to the wake of the global financial crisis, the same happened then but it was not long before the quality companies again picked up the baton and drove the market recovery thereafter. I expect the same to happen this time,” he says.  

Scottish Mortgage (LSE: SMT) continued its impressive run of form, despite its focus on growth companies. It gained 10.4%. 

In early November the trust announced that it had reduced its exposure to tech giants, including Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA) and Facebook (NASDAQ:FB), due to its returns being overly concentrated in “a handful of big winners”. Trust managers James Anderson and Tom Slater explained that the increase in Tesla’s stock price, for example, has had a “dramatic impact” on the trust’s returns.

In November, Scottish Mortgage will have further benefited from its holding in the electric car maker, as Tesla’s share price soared following confirmation of its admission to the S&P 500 index. It will enter the index on 21 December.

Elsewhere, Standard Life Private Equity (LSE:SLPE) was the star of the show, returning 11.7% over the month, another beneficiary of the risk-on environment. The weakest performer was Jupiter Strategic Bond, up 1.7%.

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ii Ethical Growth

Standout stat: Baillie Gifford Positive Change benefited from its holding in Moderna, which saw its share price advance from $67 a share at the start of the month to $152 by the end of November.

Our ethical choices returned 7.7% in November, ahead of ii Active Growth, but behind ii Low-Cost Growth. The standout performers were Liontrust UK Ethical and Baillie Gifford Positive Change, up 13.6% and 12.7% ,respectively.

In both cases this was down to stock-picking paying off, with Baillie Gifford Positive Change particularly benefiting from its holding in Moderna, which saw its share price advance from $67 a share at the start of the month to $152 by the end of November following its announcement about an effective vaccine for Covid-19.

Both Liontrust UK Ethical and Baillie Gifford Positive Change were new entries to the ii Ethical Growth portfolio at the end of October following our annual review of the portfolio. Both funds entered with individual portfolio weightings of 10%.

• Ethical Growth portfolio annual review: four funds in, four funds out
• Fund Spotlight: Baillie Gifford Positive Change

The Liontrust UK Ethical fund aims for long-term capital growth via a diverse portfolio of UK companies that have strong growth prospects and meet the fund’s ethical requirements, as well as its rules regarding environmental and social responsibility.

Baillie Gifford Positive Change invests in high-quality growth companies that can deliver positive change in one of four areas: social inclusion and education, environment and resource needs, healthcare and quality of life, and “base of the pyramid”. The latter means addressing the needs of the world’s poorest populations.

Two other new names were introduced at the end of October, FP Foresight Global Real Infrastructure and Montanaro Better World, which in November returned 6.3% and 3.9%.

The third-best performer during the month was BMO Responsible Global Equity, up 8.3%. This also proved good timing as we increased the weighting from 10% to 15% as part of our annual review.

The worst performer during the month, posting a loss of 1.2%, was Syncona (LSE: SYNC). This was despite the life sciences-focused investment trust reporting solid results in November for the six months to 30 September, recording a net asset value total return of 9.6% over the reporting period. Its life science portfolio is valued at £667 million, an increase of almost 25% from the previous year.

Syncona’s current premium stands at just over 20%, but this is much lower than during some trading days in November when the premium was above 30%.

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.