In what has been a scary year for investors, the impact of the Covid-19 crisis has caused irreparable damage to some industries and as yet shows no signs of abating.
As Halloween draws attention to the scary side of things, Adrian Lowcock, head of personal investing at Willis Owen, outlines three funds that have been victims of the knock-on effects of the global pandemic.
“2020 has been a scary year for many reasons,” he said. “Covid-19 forced the world to change working, shopping and socialising habits and market reactions have left certain sectors in disarray.”
Below, Lowcock highlights his three “horror” funds have had a particularly tough time in this year’s uncertainty.
ASI UK Recovery
His first choice was the ASI UK Recovery Equity fund, which was closed on 22 October ahead of being wound down.
Lowcock explained that value style investing had already been out of favour but subsequently suffered greatly as a result of the government response to Covid-19.
Performance of MSCI UK Value vs MSCI UK Growth indices over 3yrs
Source: FE Analytics
Over three years, the MSCI United Kingdom Growth index has made a total return of 7.66 per cent, while the MSCI United Kingdom Value index made a loss of 30.11 per cent.
ASI UK Recovery Equity made a loss of 54.1 per cent over the same period, compared with the IA UK All Companies sector’s 5.4 per cent fall.
“With the uncertainty still lingering, the share prices of many ‘value’ stocks have yet to recover and many might take years to do so,” Lowcock said.
Two of the fund’s core holdings were global offices rental company,IWG and British American Tobacco.
“Both stocks are hugely out of favour and have lagged the wider market,” Lowcock added. “Time will tell whether these strategies will recover, but the deeper value a strategy tends to be, the worse the performance can be in the short term.”
UBS UK Equity Income
Lowcock also pointed to the £78.2m UBS UK Equity Income fund, managed by Steven Magill and Guy Walker.
“UK dividends were slashed in the crisis and whilst the worst looks to be behind the sector in terms of dividend cuts there are still plenty of companies and sectors which may take years to recover,” said Lowcock.
The Link Dividend Monitors shows headline UK dividends fell 49.1 per cent, year-on-year, in the third quarter of 2020 to £18bn. However, the decline was less severe than second quarter when dividends fell 57.2 per cent to £16.1bn.
On an underlying basis, excluding special dividends, payouts fell by 45.1 per cent year-on-year to £17.7bn. This was slightly less than the 50.2 per cent decline seen during the second quarter.
Susan Ring, chief executive for corporate markets at Link Group, said: “UK plc is not out of the woods, but the trees are perhaps thinning a bit. Our worst-case scenario has steadily improved all year and though UK investors face a historic decline in their income this year, the worst is now behind us.”
One of the worst-hit areas has been the oil & gas majors with BP and Shell both cutting dividends as the oil price collapsed.
“These both feature in the top 10 holdings in this fund, and the share prices, after an initial recovery have slumped again this year,” Lowcock added.
UBS UK Equity Income also has exposure to banks such as Barclays and HSBC which have also languished.
“However, this fund does have a strong cyclical bias, and should those sectors recover this fund may bounce back,” he said.
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
Year-to-date, the fund has made a loss of 38.71 per cent, in comparison with losses of 22.91 for the FTSE All Share and 24.68 per cent for the average IA UK Equity Income sector peer.
Schroder ISF Global Energy
Lowcock’s third “horror” fund is the £290.7m Schroder ISF Global Energy fund, which has been run by Mark Lacey since 2013.
The fund has 91.57 per cent of assets invested in oil & gas, which has struggled throughout the year.
The declining price of oil over the year was triggered in March with the Russia/Saudi Arabia oil price war and was exacerbated by nationwide lockdowns which halted global movement.
“Energy has been one of the horror sectors of 2020,” said Lowcock. “Not only did the oil price turn negative earlier in the year, but as countries enter a second lockdown the outlook for transport remains fairly weak.”
Total Return of Bloomberg Brent Crude Sub index over 1yr
Source: Bloomberg
The Bloomberg Brent Crude sub index is currently down 43.41 per cent over one year.
“At the same time a shift of focus to ESG has led many to speculate if the oil price will ever fully recover,” said Lowcock. “The sector and support services all continue to trade on significant discounts, but it is not yet clear if they are justified or not.”
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
Year-to-date, Schroder ISF Global Energy has made a loss of 54.57 per cent, which is indicative of the energy sector as a whole as the MSCI World/Energy index also made a loss of 48.98 per cent. The IA Global sector has made a total return of 4.8 per cent over the same time frame.