Recovery, the easing value rally and China were the main stories for trust investors in July, as markets shifted between reopening optimism and caution over rising Covid-19 cases.
Although value stocks have demonstrated some bursts of outperformance since Covid vaccines were unveiled at the end of 2020, the value rally appears to have “run out of steam recently,” according to Fairview Consulting director Ben Yearsley.
He noted that July’s fund sector performance rankings have both growth and value peer groups at the top.
Source: FE Analytics
That said, recovery was the main theme among July’s top performing sectors. As investors’ confidence has grown, sectors such as IT European Smaller Companies, IT Private Equity, and IT Europe all performed well.
The European sectors are typically value focused and have benefitted from the rotation into this style during the market’s recovery from Covid-19. Europe initially lagged the UK in the recovery rally. This was largely due to the speed of the vaccine rollout and number of Covid-19 cases, factors which have dominated the pace of market and economic recovery.
The UK was initially better-off on both factors, but a recent rise in cases has seen some of the early positive sentiment around the UK splutter. This was reflected in July’s performance with IT UK Smaller Companies and IT UK All Companies drifting down to the middle of performance tables, returning 0.7% and 1.3% respectively.
It hasn’t been a straight run for value though as IT Technology and Media, a growth sector, was the second best performer for the month, with its average member making 4.8%.
The rotation into value has been a hot topic in markets so far this year as investors’ attention initially focused on value while inflation concerns grew and how this could affect the previously dominant growth stocks.
At the bottom end, IT China/Greater China made the biggest losses of the month after the average trust fell 16.5%. The sector experienced significant volatility after Chinese technology and education stocks faced an aggressive stance from regulators.
This caused massive falls in US-listed China stocks. The Nasdaq Golden Dragon China index - which follows the 98 biggest US-listed Chinese stocks – lost 23% in July alone.
Global crackdowns on tech companies by regulators are anticipated but the changes to Chinese education tech stocks were “more extreme than most expected,” said Ewan Lovett-Turner, head of investment companies research at Numis Securities.
He added that several private education business models had now been left “in tatters”.
But the regulations are not likely to be as extreme as this initial draft since innovation remains a key pillar in China’s five-year plan, Lovett-Turner added. “Therefore we do not expect it to seek to regulate the internet sector out of business,” he said.
The China sell-off had a negative knock-on effect for the IT Asia Pacific sector, which is closely linked to China’s economic and market performance. It posted an average loss of 5.1%.
IT Commodities and Natural Resource was another sector which struggled in July, losing 4.4%. Despite surging commodity prices caused by the global economic reopening, oil has seen a recent set- back caused by rising Delta variant concerns and cases.
Moving onto the individual trusts, JPEL Private Equity was the best performer with a 20.6% total return. It started the month on a 27% discount and ended on an 11.2% discount.
Source: FE Analytics
The $136.2m trust invests in Europe, North America and Asia focusing on various sectors, including technology hardware and equipment, pharmaceuticals, biotechnology and life sciences, commercial and professional services and consumer apparel.
Several private equity names made the top performers as investors’ confidence grew with the recovery environment. Other outperforming private equity trusts included Dunedin Enterprise IT, Symphony International Holdings and 3i Group.
The second best performer was Doric Nimrod Air Three, making 17.1%. Part of the IT Leasing sector, it’s an extremely volatile area containing travel and airline exposed companies, industries which have rallied the past few months with international travel resuming.
This was the big driver in performance for Doric Nimrod Air Three trust, most specifically the air travel revival. The trust’s management noted that the recovery of this sector and international air travel generally largely depends on the continuing vaccine rollout, which has lagged in some countries.
Augmentum Fintech, an IT Technology & Media trust, broke up the value names. The £289.6m trust invests in financial technology which seeks to improve the delivery and use of financial services, such as banking, insurance and wealth asset management. It focuses mainly on early stage businesses in the UK and Europe.
One of the more well-known trusts on the top performers list was Montanaro European Smaller Companies trust, which made 15.4%. Montanaro Asset Management specialises in researching and investing in smaller companies and has a particular focus on companies with a market valuation below €5bn.
Montanaro European Smaller Companies manager George Cooke seeks out quality growth companies that have experienced management and can deliver sustainably high returns on capital employed.
The trust applies environmental, social and governance (ESG) requirements, refusing to invest in companies generating a significant proportion of sales from products with societal impacts, such as tobacco, gambling, alcohol and guns.
It’s currently on a 0.9% premium, having started the month on a 3.8% discount.
Other big names trusts performing well in July include Lindsell Train, The Mercantile Investment Trust and Montanaro UK Smaller Companies, all of which hold an FE fundinfo Crown Rating of five.
Baillie Gifford’s Keystone Positive Change Investment Trust also made decent returns of 6.4%.
The fund house took over management of the portfolio from Invesco after previous manager Mark Barnett left Invesco in May 2020. The revamped strategy runs in line with the £2.4bn Baillie Gifford Positive Change fund, which is managed by Kate Fox and Lee Qian, assisted by senior impact analysts Michelle O’Keeffe and Ed Whitten.
The trust’s biggest holding is Moderna followed by Tesla, ASML Holding and Taiwan Semiconductor.
Source: FE Analytics
At the bottom of the table the savage hit to Chinese tech and education stocks is clear, with the worst performer – JPMorgan China Growth & Income - losing 21%.
However, the trust has outperformed long term making the highest returns in its sectors over one, three, five and 10 years.
Managers Howard Wang, Shumin Huang and Rebecca Jiang invests in Chinese companies linked to the growth of ‘New China’ - the transition of the country to a more consumer-driven economy. But its high exposure to the telecom, media and & technology sector clearly hurt its performance last month.
Other China exposed funds struggling in July were Baillie Gifford China Growth Trust and Fidelity China Special Situations and JPMorgan Asia Growth & Income and Templeton Emerging Markets Investment Trust.
The rest of July’s trailing funds are a mixed bag, but still largely reflecting the sector performance with commodities and natural resource portfolios struggling.
Baker Steel Resources was one, the third worst performer overall losing 15.3%. Other underperforming funds for the month were: The Biotech Growth Trust, Edinburgh Worldwide, JPMorgan Asia Growth & Income, The Diverse Income Trust and BlackRock Latin American.