The top-ranked funds that are down double digits in 2022

Morgan Stanley Global Insight, Baillie Gifford American and Morgan Stanley US Growth are some of the top-performing funds over five years that are down double-digits year-to-date.

Although there have been only eight trading days of 2022, some of the top-performing equity funds of the past half-decade have experienced a rocky start to the year in which investors were caught off-guard by heavy selling of US Treasuries after the Federal Reserve’s hawkish comments in late December which came as a surprise to financial markets.

The hawkish comments combined with the prospect of a withdrawal of quantitative easing (QE), has led to the sell-off in bonds – pushing up the yield of US Treasury bonds. This has hurt the valuations of many growth stocks which have earnings further out in the future and become discounted more heavily.

James Penny, UK chief investment officer at TAM Asset Management, said: “The selloff going on here is simply a repricing of long-term growth investing under the perception of a more hawkish Fed and the anticipation that where the Fed go the rest of the world’s central banks will follow.”

Growth stocks have boomed over the past decade with many growth-focused funds benefiting from the trend of declining interest rates as well as strong performance from fast-growing technology companies.

However, some of the funds that have been top-performers for investors over the past five years have also been hardest hit by the recent sell-off in growth stocks. Below shows all the funds that are down more than 10% year-to-date.

The hardest hit fund year-to-date has been the Morgan Stanley Global Insight fund, which is down 11.9%. Although the fund still remains in the top quartile based on its five-year performance, it is down to the fourth quartile over the past 6 months.

The strategy has large overweight positions in Singaporean tech firm Sea Ltd and American cloud software company Cloudflare, which have both been heavily affected by the correction in growth stocks, both down roughly 9% year-to-date.

The £5.6bn Baillie Gifford American fund, which recently replaced Fundsmith Equity as the most visited factsheet on Trustnet, was another top-performing fund that has endured a difficult start to 2021 – down 10.6%.

Although it is still top-ranked for its five year performance, its returns over one year have also fallen to the fourth quartile, where it is down 16.5% versus a 19.6% gain from the average IA North America sector fund.

The fund has been disproportionately affected by the sell-off in growth stocks, as well as by its large overweight position in Moderna, which is down over 12% year-to-date following a huge rally over the course of 2020 and most of 2021.

The Nikko AM ARK Disruptive Innovation fund was another notable strategy down double-digits in 2022 so far.

Run by Ark Invest’s Cathie Wood, many of the fund’s holdings have continued to suffer from the rout in high-growth stocks which has been unfolding over the past year or so.

Some of the fund’s largest holdings in companies such as Zoom, Roku and Teladoc are down between 60% and 70% from their highs in February of 2021.

However, despite the recent correction in growth stocks, investors shouldn’t be quick to dump these stocks, according to Penny.

“Growth investing has been such a powerful momentum play over the past decade and to see it taking a step back is both normal and expected as we move through different market cycles,” he explained.

“Longer-term growth companies and those in pursuit of disruptive innovation will continue to be trailblazers in a market ever more in demand for this type of innovation.

“So despite the short-term volatility being seen at the hands of this market, longer term the investment case for growth stocks remains intact.”

The chief investment officer said the stocks that should hold up in this market are the ones with real earnings in today’s economy.

“The more earnings which are extrapolated into the future rather than realised today the more inflation will erode them,” he explained.

“It’s also these future growth stories which have been the winners of previous markets and, as such, more focus remains on them for profit taking.”

Although the big technology giants with strong earnings today may be seen as a safe place to hide during volatility, Pieter Fourie, head of global equities at Sanlam Investments UK warned that even these companies can underperform.

He said: “Whilst large-cap tech was a source of strong returns during 2021, 2022 is beginning to show investors a glimmer of what can happen when these companies such as Microsoft, Accenture, ASML and Intuit begin to notably underperform.

“Whilst some investors may see a 10% pull-back as a buying opportunity, the starting point in terms of valuations for many of these names was already on such a high base.”