Model portfolio update: fund winners and losers in second quarter

It was a turbulent quarter for markets across all asset classes. Here are the funds that held up well, and those that struggled. 

Investment markets continued to keep investors on their toes throughout the second quarter of the year as volatility and uncertainty remained high. For just the second time in 40 years, both stocks and bonds posted losses for two consecutive quarters as inflation and policy responses from central banks, governments and organisations such as OPEC continued to shape economic data and market movements.

From a style perspective, higher inflation and interest rates meant that value strategies outperformed, although this was due to them losing less.

Against this backdrop the growth and income model portfolios all posted negative returns over the quarter with the income models, where funds tend to have a value style bias, having the upper hand. In general, it was a tough quarter for active funds, with the low-cost model portfolios outperforming the active models.

Hardest hit was ii Ethical Growth, which was down 10.96%. This was followed by ii Active Growth and ii Low-Cost Growth, which were down 9.14% and 7.79%. While also producing negative returns, ii Low-Cost Income and ii Active Income fared better, with negative returns of 4.86% and 4.74% respectively.  

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Performance of models over 12-month time periods

Note: As at 30 June 2022. Portfolio launch date (for monitoring purposes) was 1 January 2019, *except Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.

Model portfolio changes

Since Morningstar took over responsibility for the models in April 2022 we have made a few changes, details of which are summarised below.

In ii Active Growth Model from an asset allocation perspective, we reduced exposure to corporate bonds and slightly increased the allocation to US equities. At the fund level we reduced the allocations to JPMorgan Emerging Markets (LSE:JMG) investment trust, Fundsmith Equity and Scottish Mortgage (LSE:SMT). We also removed the allocation to the Jupiter Strategic Bond fund. We introduced allocations to the Vanguard US Equity Index fund and the LF Ruffer Diversified Return fund and also increased the allocation to Capital Gearing (LSE:CGT).

In ii Low-Cost Growth, we increased the exposure to larger-cap stocks and to European equities. As a result of this, two new holdings were introduced: Vanguard FTSE Dev Europe ex UK ETF (LSE: VERG) and Vanguard US Equity Index.

In the ii Active Income Model,  we reduced the allocation to corporate bonds and slightly increased the allocation to US equities. At the fund level, we removed the allocation to Utilico Emerging Markets (LSE:UEM) and reduced the allocation to the Jupiter Strategic Bond fund. We introduced allocations to the M&G Global Dividend and Artemis Monthly Distribution funds.

In the ii Low-Cost Income Model, we increased the exposure to US equities, adding a new holding in Invesco FTSE RAFI UK 100 ETF (LSE:PSRU).

Earlier this year, interactive investor announced a handover of the day care of its rated lists to Morningstar’s Manager Selection Services Group.

The new percentage weightings for all the constituents in the five models can be found on the Model portfolio page. 

As stated in our methodology, the Super 60 and ACE 40 funds are considered first for the models. However, there is also the option to look outside the rated funds.

Growth funds that held up well, and those that suffered

The three growth model portfolios all produced negative returns over the second quarter of 2022. ii Ethical Growth Model was the hardest hit as a consequence of the growth-style bias that is naturally prevalent in most of the underlying funds.

Within ii Active Growth, Scottish Mortgage was the hardest hit fund, with the trust losing 30.09% in share price terms. Investors punished the high valuations of the “blue sky” growth companies that this fund has always sought. These names require belief in high levels of growth over the longer term to justify their valuations and, at present, few investors have the confidence to take such views.

Despite recent weakness, it should be remembered that this fund has shown exceptionally strong returns in more favourable market conditions and performance remains well ahead of benchmark over the past three years.

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In contrast, Jupiter UK Special Situations, added to the model at the start of April, was the only fund to produce a positive return over the quarter, up 0.17%. The fund benefited from its value investment style and from strong stock picking, particularly within the industrials and consumer discretionary sectors.

In ii Ethical Growth, the global equity funds held all produced double-digit negative returns, apart from the FP Foresight Global Rl Infrastructure fund, which was down 5.97%. The portfolio has significant exposure to the utilities sector, which performed reasonably well.

Elsewhere the model’s allocation to Baillie Gifford Positive Change was hard hit as, like Scottish Mortgage, it typically invests in some of the highest growth companies, areas which have sold off during the recent sell-off.

The BNY Mellon Sustainable Real Return fund, added to the model at the start of April, was the best-performing fund. The fund manager’s cautious approach and defensive positioning helped it deliver only a small negative return of 2.49% over the quarter.

The standout performer in ii Low-Cost Active was WisdomTree Enhanced Commodity ETF (LSE:WCOB). The fund 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 built upon its outperformance in the first quarter with a second-quarter gain of 4.6%. Energy, where the fund has just under 40% exposure, was the main contributor.

In contrast the allocation to the Vanguard Global Small-Cap Index Index fund was the largest detractor to performance, falling by 10.22%. Small-cap stocks came under pressure against the backdrop of a risk-off market environment.

Performance of the three growth model portfolios

Notes *as at 30 June 2022. Portfolio launch date (for monitoring purposes) was 1 January 2019, **except Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.

Income funds held up better than growth funds

While none of the funds in the ii Active Income Model were able to produce a positive return, there were a number of funds that held up well, due in large part to their value-style bias. Among these, were Murray International (LSE:MYI) (-0.12%), Morgan Stanley Global Brands Equity Income (-3.81%), City of London (LSE:CTY) (-2.56%), and Balanced Commercial Property (LSE:BCPT) (-2.49%), previously called BMO Commercial Property Trust.  

It is pleasing to see that these funds came from a diverse range of sectors, including global equities, UK equities and the allocation to alternatives (property). Balanced Commercial Property Trust delivered a strong relative return over the quarter as UK commercial property remained firm, particularly compared to US property where interest rates are rising more rapidly.

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ii Low-Cost Income had one fund that was able to eke out a small positive return, namely the SPDR® S&P Global Dividend Aristocrats ETF (LSE:GBDV) (1.62%). The fund tracks the S&P Global Dividend Aristocrats Quality Income Index. It is designed to measure the performance of high yielding companies within the S&P Global BMI that have increased or maintaining dividends for at least 10 consecutive years. In addition, the companies also have positive return on equity and cash flow from their operations.

The allocation to the SPDR® Morningstar Multi-Asset Global Infrstructure ETF (LSE:GIN) (-2.82%), which has a large weighting to the outperforming utilities sector, was also helpful for ii Low-Cost Income’s performance.

Elsewhere, in contrast to the property allocation in ii Active Income, the allocation to the iShares Global Property Securities Equity Index fund was the largest detractor from performance as the fund declined by 11.56%. This is because this product is a fund of real estate investment trusts (REITS), which have a much higher correlation to stocks in the short term and are impacted by market sentiment. Whereas with direct property transactions are less frequent, and the market moves more gradually. Additionally, the fund is 60% skewed to the US, where interest rates have been rising faster than in the UK, impacting prices.

Performance of the two income model portfolios

Notes *as at 30 June 2022. Portfolio launch date (for monitoring purposes) was 1 January 2019. Data source: Morningstar Direct. Past performance is not a reliable indicator of future results.