Key takeaways from fund winners and losers in Q1 2024

Heading into 2024, most investment commentators were optimistic that stock and bond markets would rally amid expectations that the worst of inflation had been defeated and a “soft landing” had been engineered by central banks.  

As inflation continues to fall and the prospect of a severe recession looks unlikely, such optimism looks well placed. Fund manager optimism is now the most bullish since the start of 2022, according to the closely watched Bank of America survey.

Such optimism helped drive most fund sectors into positive territory in the first three months of 2024. In total, 43 made money (after fund charges), while 13 were in the red.

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Leading the pack was Investment Association (IA) Technology & Technology Innovation (average return of 11.1%), followed by IA North America (up 10.7%) and IA Japan (up 9.4%).

At the other end of the table, the three worst-performing fund sectors were IA UK Index Linked Gilts (-2.8%), IA Latin America (-2.7%) and IA EUR Government Bond (1.9%).

Below is a run-through of key takeaways and trends from fund performance in the first quarter of 2024.

AI trend has staying power, but is it now the ‘Fab Four’?

Investors remain bullish on prospects for the big US technology firms and see them as one of the main ways to profit from advancements in artificial intelligence (AI).  

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However, there is now talk of the spotlight homing in on the “Fab Four”: Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Amazon.com (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META). In the first quarter of 2024, those four stocks outpaced the other three members of the so-called Magnificent Seven. Nvidia lead the way with a gain of 87.6%, followed by Meta up 42.6%, Amazon up 20.7% and Microsoft up 14.6%. Meanwhile, two of the trio outside the “Fab Four”, Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL), are both in the red, down -29.5% and -7.8%, while Alphabet was up 12.1%. 

James Cook, manager of JPMorgan Global Growth & Income (LSE:JGGI) investment trust, owns the Fab Four. In a recent interview with interactive investor (links below), Cook explained why he remains bullish on the four stocks, including Nvidia, the biggest share price riser since the start of 2023, up 509% over that period (to end of March 2024).

Cook made the point that as Nvidia has 90% market share, demand for its computer chips, which are called graphic processors (or GPUs), will outstrip supply for the foreseeable future.

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• James Cook interview: the four stocks we are backing from the 'Magnificent Seven'

The strong performance of US tech continues to boost the performance of US and global funds, but in particular passive funds, which typically have higher weightings to the seven stocks. The dominance of those companies, which collectively account for around 30% of the S&P 500 index, makes it harder for active funds to gain an edge over the stock market.

Two stock markets hit record highs

In the first three months of the year, both the US and Japan saw their stock markets hit record highs. For the US, hitting a new peak happens fairly regularly. Data from Schroders, the fund manager, shows that of the 1,176 months since January 1926, the market was at an all-time high in 354 of them, so 30% of the time.

However, for Japan, its stock market reached a new all-time high in late February for the first time since December 1989.

The best US active fund over the quarter was GQG Partners US Equity with gains of 23.5%. While for Japan, Nomura Fds Japan Strategic Value, topped the charts with a return of 20.7%.

Some interest rate losers start to make a comeback...

A number of areas were negatively impacted by rising interest rates including funds and investment trusts that target high-growth companies, which in some cases includes exposure to unlisted businesses. Given their high-risk nature, investors moved money out to prioritise profits today over the prospect of future growth.

However, some strategies have been staging a recovery, although on a three-year view they remain deep in the red. The recovery is being driven by the expectation that rate rises have peaked and that cuts will occur soon, with the US Federal Reserve expected to lead the way.

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In the first quarter, “growth capital” trusts made positive returns, with Seraphim Space Investment Trust Ord (LSE:SSIT) up 43%, Schiehallion Fund Ord (LSE:MNTN) up 11.6%, and Chrysalis Investments Limited Ord (LSE:CHRY) up 6.8%.

FTSE 100-listed investment trust Scottish Mortgage (LSE:SMT), which focuses on innovative growth companies both listed and unlisted (up to 30% of the portfolio), also had a strong start to the year, up 10.6% to the end of March.

...but alternative assets remain out of favour

However, not all areas hit by rising rates have been staging a comeback. Property and infrastructure remain out of favour among investors. Both investment areas, which generate income, now face greater competition from bonds. With low-risk bonds, such as money market funds, yielding around 5%, there is less incentive to take on extra levels of risk to obtain a higher level of income.

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Both the IA Infrastructure and IA property sectors were among the small number of sectors that posted losses in the first quarter, down -1.7% and -1.6%. 

Meanwhile, for investment trusts, like-for-like sectors posted bigger losses. The average property trust is down -8.6%, while the infrastructure and renewable energy infrastructure sectors lost -5.2% and -13%.

The reason why investment trusts have posted bigger losses than funds is due to the investment trust structure. As investment trusts have two components – a share price and a net asset value (NAV) – the former tends to fall more severely than the latter when investors are cautious, creating in many cases bigger “discounts”. The NAV is how much the underlying assets held by the investment trust are worth.  

In addition, the use of gearing (or borrowing) by trusts magnifies losses as well as gains, causing them to drop more than similarly managed open-ended funds when markets fall, but rise more when they go up.