What happened next for the pandemic fund and investment trust winners

Investors are often encouraged to think long term and run their winners to benefit from the wonders of compounding, a term that describes how investment returns generate future gains.

While this is a prudent way to grow wealth, there are occasions when it pays to take profits, such as when a fund or share has enjoyed a purple patch of form that’s unlikely to last indefinitely.

Covid-19 is a case in point. In the first quarter of 2020, markets took fright when a pandemic was declared, with US and UK markets falling by 20% or more. However, from the start of April onwards, a market recovery started to take place, with the big winners being companies benefiting from the shift to working at home during lockdown periods.

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The most notable beneficiaries were technology firms and businesses with strong online operations, including the five FAANG tech giants: Facebook, now called Meta Platforms (NASDAQ:META),Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL), the parent company of Google. Other winners included video conference firm Zoom and Moderna, one of the vaccine creators.

A report last week in the Financial Times, citing data from S&P Global, pointed out that technology shares with a market value of more than $10 billion dominated the list of the 50 biggest winners in 2020.

However, since the start of 2021 things went pear-shaped, with many of those winners turning into losers in share price terms. According to the FT “these early pandemic winners have collectively shed more than a third of their total market value, the equivalent of $1.5 trillion, since the end of 2020”. Those figures were FT calculations based on Bloomberg data.

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A similar trend played out for the biggest early pandemic fund and investment trust winners. Number-crunching by interactive investor, using FE Analytics data, found 10 of the biggest pandemic winners with returns above 90% and comfortably ahead of the MSCI World Index gain of 45.5% (from 1 April 2020 to 1 April 2021) all made losses over the following three years (from 1 April 2021 to 1 May 2024).

As the table below shows, the smallest loss was -11.3% and the biggest loss was -58.9%. Those losses would have been felt the most by investors who got their market timing wrong – buying when performance peaked and then crashed. In contrast, over this period the MSCI World Index produced a gain of 34.6%.

An investor who bought at the start of 1 April 2020 and held on until 1 May 2024 would have seen healthy gains in most cases, with the performance boost at the start of the pandemic outweighing the more challenging performance period that followed.

However, two of the best-performing pandemic funds, JPMorgan China Growth & Income (LSE:JCGI) and Edinburgh Worldwide (LSE:EWI), have seen their pandemic gains wiped out.

None of the 10 funds and trust beat the MSCI Index over this period, up 95.8%.

Pandemic winners that have come off the boil 

Source: FE Analytics 

Hindsight is a wonderful thing, of course. But we now know the growth and technology trends went into reverse from the end of 2021 to the start of 2023, due to soaring levels of inflation and interest rate rises.

Since then, the technology sector has bounced back due to investor excitement over the potential of artificial intelligence (AI). but this has mainly benefited a small number of stocks – the US technology giants making up the “Magnificent Seven”, which include Nvidia, Microsoft and Amazon.

As a result, funds and investment trusts with exposure to technology benefited. For example, over the past year Scottish Mortgage (LSE:SMT) is up 33.4%.

There’s also been a spectacular change in fortunes for funds and trusts investing in China. When the pandemic emerged, China was largely successful at keeping new cases under control. As a result, its economy recovered quicker, which sent the Chinese stock market soaring, and funds and trusts investing in the country benefited.

However, over the past couple of years, investment in China has been hit by policy tightening and stringent regulation in several sectors, notably technology and property. This has led some investors to steer clear of the region on the grounds that political risk outweighs the potential rewards. In addition, there are fears over debt levels in the property market. 

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Lessons for investors

While not many people – including central bankers – predicted that inflation would rise as high or prove as sticky as it has; the change in fortunes for the growth-focused fund and trust pandemic winners shows how investment styles go in and out of fashion.

This serves as a reminder that investors should look to diversify, rather than bet the house on growth or value.

Another lesson to remember is that paper gains only become real when they are cashed in. At times, investors can regret not taking some profits, such as when a fund or trust is a star performer over a short period. 

Of course, there’s always a risk of taking profits too soon, particularly when the investment is significantly outperforming everything else. However, taking some profits also helps to reduce risk, which can be achieved through rebalancing.

In a nutshell, rebalancing involves looking at your winners and converting some paper gains into real profits. Some of the proceeds could be reinvested in areas of your portfolio that have been underperforming, but which may soon recover their poise.

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Rebalancing helps investors restore the level of investment risk the portfolio had when it was first put together.

A final point is to be careful of buying following a strong period of short-term performance – such as one year.

As history shows, those who buy high are likely to be disappointed. In the case of individual equities, a high valuation needs to be backed up by strong growth prospects. The more expensive a share becomes, the harder it is to sustain that level of performance, which is why overheated valuations tend to cool over time.  

When it comes to funds, there’s usually a strong reason why a fund has experienced a period of short-term strong performance, such as the sector, market, or types of shares it invests in becoming fashionable.

A short-term fund winner could continue to deliver, but the risk is that investors miss the boat. With any investment, it is worth trying to put to the back of your mind its recent performance and ask yourself: would I buy today?