Will the three big fund trends of 2020 continue in 2021?

Three places allowed fund investors to make big returns in 2020: will it pay to repeat the trick next year? 

There have been only three places to park your money in 2020. If you held funds invested in the US tech giants, in China, or in gold, you will have had a fabulous year. Baillie Gifford US Growth (LSE:USA) and Scottish Mortgage (LSE:SMT), two investment trusts that have been popular ways to invest in the first of those categories, were up 114% and 96% respectively from the start of 2020 to 9 December, according to FE Analytics. Open-ended fund Matthews China Small Companies, returned 62%, while the best-performing gold fund, MFM Junior Gold, was up 66%. Not bad for a year in which Covid-19 has caused such remarkable market volatility.

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Hindsight is a wonderful thing, of course. The question facing us today is whether those themes will persist into 2021. And if not, where might fund investors focus on over the next 12 months?

The short answer to the first question is that the jury is out. On US tech stocks, many analysts took comfort from the election result, and while president-elect Joe Biden has promised to tax and regulate big tech more aggressively, his lack of a majority in the US Senate may make it more difficult to follow through on this threat. 

“A divided government was the best outcome for the technology sector,” says Fran Radano, manager of the North American Income (LSE:NAIT) investment trust.

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Even so, the valuations of stocks such as Alphabet (NASDAQ:GOOGL) are now close to 10-year highs – the same is true for companies including Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT), Salesforce (NYSE:CRM) and Qualcomm (NASDAQ:QCOM). It is also worth pointing out that the run-off Senate races in Georgia provide the incoming president with the chance to take more political control. Facebook already faces competition litigation in the US, and Europe’s regulators are also turning up the heat on big tech.

In China, Mike Shiao, Invesco’s chief investment officer for Asia excluding Japan, says: “We believe 2021 will be another fruitful year for Chinese equities, supported not only by higher visibility surrounding the growth outlook, but also by an increase in allocation to the asset class.” China is expected to continue bouncing back from the Covid-19 crisis more strongly than most other nations, he points out, and investors are increasingly allocating money directly to the Chinese market, rather than investing via an emerging markets portfolio.

However, there are reasons to be cautious here too. “The government and the People’s Bank of China have been discussing when to start reducing the amount of stimulus,” says Andrew Pease, global head of investment strategy at Russell Investments. The support measures, which included tax cuts, helped both China’s economy and stock market bounce back from the pandemic. “The most likely outcome is a continuation of the handover from monetary policy to fiscal stimulus,” says Pease. Mis-steps here could be problematic – and while a Biden US presidency is widely expected to ease trade tensions between China and the West, other countries have swung behind a more assertive stance on relations with China.

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Gold to benefit from more uncertainty to come

As for gold, the precious metal has, as always, been a beneficiary of uncertainty – the gold price is up by close to 25% over 2020 as a whole. Looking forward, it seems clear there will be more uncertainty to come, which is supportive of the gold price; moreover, low real yields on US Treasury bonds, traditionally associated with the bull case for gold, look set to persist. Goldman Sachs’ metals team is therefore positive about the outlook for 2021, with a target gold price of $2,300 per ounce, compared to a price of $1,860 in mid-December. 

The counter argument is that as the world moves beyond the Covid-19 crisis, courtesy of vaccine deployment, investors’ appetite for risk will return and safe-haven assets will suffer accordingly. “If there is a rapid recovery in economic activity due to the vaccine, there will probably be some further selling of gold-backed ETFs,” warns Samuel Burman, an analyst at Capital Economics. He sees a year-end price of around $1,900, offering only flat returns from where we stand today.

In other words, while there is a case to be made for each of the standout investment themes of 2020 to continue on well into the new year, there are also risks on the downside. At the very least, therefore, it makes sense for investors to think about new opportunities potentially emerging for the year ahead.

UK funds tipped to bounce back 

Those based in the UK may not have to look too far from home, suggests Dzmitry Lipski, interactive investor’s head of funds research. While 2020 has been a dismal year for UK equities – the UK stock market remains well in the red for the year, and lags almost every other developed market – there are reasons to be move positive about 2021, particularly since the eleventh-hour post-Brexit trade deal on Christmas Eve. 

The prospect of a no-deal scenario was one of two big headwinds - the other being Covid-19 - that cast a shadow over the UK stock market in 2020. 

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For investors looking to increase their UK exposure, Lipski suggests Man GLG Income Professional, one of interactive investor’s Super 60 members. The fund targets a level of income above the FTSE All-Share index together with some capital growth. The 5.6% yield currently on offer looks pretty generous.

“Manager Henry Dixon runs a relatively concentrated portfolio of around 65 holdings, adopting a value-based investment approach that could come back into fashion in the new year,” Lipski says. “The manager also has the ability to invest in the bonds of companies where the team’s analysis of the capital structure suggests more attractive capital upside and income potential than in its equities.”

Another possibility is City of London Investment Trust (LSE:CTY), another Super 60 member. “The investment trust ranks among the Association of Investment Companies’ ‘Dividend Heroes’, boasting a track record of increasing annual dividend growth for more than 50 years,” Lipski points out. “Job Curtis has been managing the portfolio for 28 years, a length of tenure that is exceptionally rare.”

Emerging markets favoured for 2021

Further afield, Darius McDermott, the managing director of Fund Calibre, suggests emerging markets could be an interesting theme to explore for the year ahead, offering continuing exposure to China, for those who expect it to continue to outperform, coupled with broader regional potential.

“We like Asia, which continues to offer all the usual growth drivers that are attractive to investors, such as growth in the middle-class population, as well as a better outcome from Covid-19,” says McDermott, pointing to the relatively low number of cases and fatalities in many countries in the region.

With good prospects of a rapid return to economic growth given the pandemic’s lesser impact, as well as ongoing weakness in the US dollar, which tends to provide emerging markets economies with a boost, Asia looks to offer interesting opportunities, McDermott argues. “Funds to consider include T. Rowe Price Asian Opportunities, Fidelity Asian Opportunities or FSSA Japan.”

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Thematic ideas 

One final thought, for those with a thematic approach to investment, rather than allocating by geography. In the wake of Covid-19, the long-term structural arguments for investing in healthcare look stronger than ever. In a survey of fund managers just published by the Association of Investment Companies, one in five picked healthcare as likely to be the best-performing sector of the market during 2021, well ahead of any other pick. Andrew Bell, the chief executive officer of Witan (LSE:WTAN), says: “The future looks very positive, with revolutions in information technology and medical science transforming lives for the better.”

In the short term, healthcare funds with exposure to Covid-19 vaccine producers are already benefiting. Baillie Gifford Positive Change, AXA Framlington Biotech and Schroder Global Healthcare are all investors in Moderna (NASDAQ:MRNA), for example. Most of the sector has positions in Pfizer (NYSE:PFE) and AstraZeneca (LSE:AZN).

The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this data may not be suitable for all investors and, if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website.