Model portfolio update: fund winners and losers in Q1 2023

Global equities gained in the first quarter, buoyed by receding recession worries in developed markets.

We are in the process of conducting our annual reviews of the Model Portfolios and will publish changes shortly.

Looking at the numbers, 2023 appears to have kicked off to a positive start especially after an incredibly painful 2022 as both equity and bond markets (GBP hedged) closed the first quarter with single-digit gains. What the numbers don’t show, however, were the swings in investor sentiment due a plethora of factors from the implications of better-than-expected economic data, to continued debates around inflation to market panic concerning the resilience of the global banking system; all this against a volatile geopolitical and economic backdrop as nations of the world continue to wrestle with the aftermath of Covid-19 and Putin’s war in Ukraine.

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Within equity markets and following a period of underperformance in 2022, growth stocks once again emerged as the winners, buoyed by strong performance in the technology and consumer discretionary sectors. Large-caps also outperformed their mid and small-cap counterparts as they often tend to do in periods of economic uncertainty.

Against this backdrop the performance of the Active Growth Model, which continues to feature a number of managers with a growth style bias, was disappointing, due largely to the performance of Scottish Mortgage Ord (LSE:SMT), abrdn Private Equity Opportunities (LSE:APEO) and the two multi-asset funds featured in the model, Capital Gearing (LSE:CGT) and LF Ruffer Diversified Return.

The top performer over the quarter was the Low-Cost Growth Model, which was up 2.57%, with the other growth models Sustainable Growth and Active Growth producing returns of 1.66% and 1.46% respectively. The Active Income Model produced a positive return and was up 1.32%, while the Low-Cost Income Model was the only model to incur a negative return and was down -0.26%.

Performance of models over 12-month time periods

Notes *as at 31 March 2023. Portfolio launch date (for monitoring purposes) was 1 January 2019, except Sustainable Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.

Performance of the three growth model portfolios

Theii Active GrowthModel produced a positive return over the first quarter of 2023 but was held back by the performance of Scottish Mortgage Trust, abrdn Private Equity Opportunities Ord and the two multi-asset funds featured in the model, namely Capital Gearing Ord and LF Ruffer Diversified Return.

While Scottish Mortgage showed a positive NAV return of 6.95%, reflecting its strong growth style bias, in share price terms there was a loss of 6.12% as investor demand for the trust slumped. The discount widened significantly as investors reacted to boardroom disagreements that were aired in the media, despite the investment approach employed by the team at investment manager Baillie Gifford remaining unchanged.

abrdn Private Equity Opportunities Ord invests into private equity and private equity funds and, although in NAV terms it was up 1.16%, the trust saw its discount widen over the quarter and in share price terms it was down 8.05%.

LF Ruffer Diversified Return and Capital Gearing, are both likely to underperform during periods when equity markets rally, due in part to the nature of their portfolios, which include allocations to fixed income. Both funds produced excellent returns in 2022, in the face of market weakness, but their exposure to longer-dated inflation-linked bonds suffered over the quarter, as they were not met with a commensurate rise in longer-term inflation expectations. LF Ruffer Diversified Return was down 1.92% over the quarter, while Capital Gearing Trust had a share price return of -3.47% and a slightly better NAV return of -1.92%, reflecting a slight widening of the trust’s discount.

Offsetting the weakness in these funds were strong performance from the Fundsmith Equityfund (6.92%) and from Jupiter UK Special Situations (7.09%). Fundsmith benefited from it’s large-cap growth style bias and from strong stock selection in the healthcare and communications services sectors. Despite its contrarian and value-orientated investment philosophy and bias down the market cap scale, the Jupiter UK Special Situations fund produced strong returns through being underweight to the weaker sectors in the UK market and from stock-specific successes across a number of industries.

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Holding back performance in the ii Sustainable Growth Model was the FP Foresight Global Rl Infrastructurefund, which was down 3.24% and the BNY Mellon Sus Real Return fund, which was down 2.14%.

FP Foresight Global RI Infrastructure invests in companies that own or operate physical infrastructure or renewable energy assets globally. Versus infrastructure peers and broader benchmarks, the fund has overweights to the utilities (primarily renewables rather than traditional utilities) and real estate sectors. Both of these came under pressure during Q1 2023 as uncertainty regarding demand for many commercial property sectors continued and energy prices softened as supply was able to keep up with relatively weak demand.

Offsetting this was strong performance from a number of funds with a distinct growth style bias, including, LF Montanaro Better World (4.95%), Baillie Gifford Positive Change(4.87%) and Royal London Sustainable Leaders(4.26%).

The stand-out performer in the ii Low-Cost Growth Model was Vanguard FTSE Dev Eurp ex UK ETF (LSE:VERG). The fund tracks the FTSE Developed Europe ex-UK Index which is a free-float market capitalisation weighted index capturing the performance of circa 460 large and mid-cap companies in developed European markets, excluding the UK. The fund’s bias to European equities, which outperformed global equities and its bias to large-cap stocks were both beneficial.

TheL&G Global 100 Index tracks the performance of the S&P Global 100 Index and has both a large-cap bias and an allocation of around 14% to Apple (NASDAQ:AAPL), its top holding, which also performed strongly over the quarter.

On the flip side the iShares Environmental & Low Carbon Tilt REIT produced a negative return of 4.36%. Renewed concerns over rate rises, continued uncertainty over demand in the retail and office spaces and weakness in the industrial/retail warehouse sector after relatively strong performance have all contributed to weakness in property funds.

Weakness in energy and agricultural commodities had an impact on the WisdomTree Enhanced Commodity ETF (LSE:WCOM), which provides investors with exposure to four broad commodity sectors, namely energy, agriculture, industrial metals, and precious metals (plus up to 5% in bitcoin), primarily through futures contracts. The ETF saw a loss of 6.18% over the quarter. 

Notes *as at 31 March 2023. *Portfolio launch date (for monitoring purposes) was 1 January 2019 ** Sustainable Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. Benchmark is Morningstar UK Adventurous Target Allocation. Past performance is not a reliable indicator of future results. 

Performance of the two income model portfolios

Against a backdrop that saw funds with a growth style bias outperform those with a value style bias, the income models faced a headwind, as most funds in these models tend to have a value style bias.

The performance of the two largest detractors in the ii Active Income Model were, however, less about their value style bias and more about the underlying asset class.

abrdn Private Equity Opportunities Ord invests in private equity and private equity funds and, although in NAV terms it was up 1.16%, the trust saw its discount widen over the quarter and in share price terms was down 8.05%.

Elsewhere Balanced Commercial Property (LSE:BCPT), had a decline of 5.56% in share price terms, however the NAV of this trust actually also saw a modest positive return 1.02%. The trust provides exposure to prime UK commercial property with a heavy bias towards central London and southeast England. With an underweight to the industrial/retail warehouse sector in the South East the trust avoided the worst of the devaluation in that sector while void rates and rent collections have all improved, however the uncertainty and general negative sentiment regarding commercial property weighed on the share price.  

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Positive contributors to performance within the model included Utilico Emerging Markets (LSE:UEM), which was up 4.88% in share price terms, with an even better NAV return of 5.28%. The trust benefited from strong stock selection in the utilities sector.

Jupiter Strategic Bondwas another strong performer with a return of 3.56% over the quarter. Exposure to developed market high-yield bonds was beneficial with the fund benefiting from spread tightening as well as interest rate exposure.

The ii Low-Cost Income Model was the only model to deliver a negative return over the quarter with the key laggards in the model the iShares Environmental & Low Carbon Tilt REIT, which produced a negative return of 4.36%, and the SPDR S&P Global Div Aristocrats ETF (LSE:GBDV), which was down 4.52%.

Renewed concerns over rate rises, continued uncertainty over demand in the retail and office spaces and weakness in the industrial/retail warehouse sector after relatively strong performance have all contributed to weakness in property funds.

The SPDR S&P Global Div Aristocrats fund has a significant bias to mid-cap stocks and at the sector level to real estate, both of which detracted from performance over the quarter.

Of the 10 funds held in the model only half were able to produce a positive return, and even these were held back by the style and market-cap biases that are naturally prevalent in many of these funds.

Notes *as at 31 March 2023. * Portfolio launch date (for monitoring purposes) was 1 January 2019. Data source: Morningstar Direct. Benchmark is Morningstar UK Adventurous Target Allocation. Past performance is not a reliable indicator of future results.