As we head towards a New Year of investing challenges, investment management consultant MATTHEW FEARGRIEVE explains some changes he has made to his portfolio of investment funds and considers some mutual funds and ETFs for inclusion in YOUR portfolio in 2021.
2021 starts here. As the annus horribilis that was 2020 draws to a muted close, it is time to draw together the market trends that have emerged over the past year, with a particular focus on the previous two quarters, with a view to discerning the key investing trends and asset classes of 2021. And once we have done that, it will be time to choose some investment funds for inclusion in our ISAs, SIPPs, pension pots and retirement plans.
Not that many of us will be stopping work quite when we had planned, before Covid-19 curtailed many a retirement dream. So making sure your investment portfolio is recalibrated and ready for the year ahead is more important than ever.
In this blog I tell you about the changes I have made to my own portfolio since my previous portfolio update blogs (read about equities here, bonds here, stocks 2021 outlook here and Bitcoin prospects here), and suggest some candidate fund managers and investment funds worthy of consideration for inclusion in your portfolio.
As before, my objective is to present you with a small selection of those mutual fund managers who have delivered returns that beat or at least tracked the markets over the previous one, three and five years, with investment products that have an OCF (the "ongoing charges figure": broadly speaking the annual fee you pay the manager) of less than 1.00% per year. Why? because I consider charges greater than 1.00% per year to be too big a drag on returns, except in the rare cases of truly exceptional returns that are regrettably hard to come by, especially in 2020.
Investment funds broadly come in two types: actively managed (higher fees) and passively managed, like index trackers or ETFs (lower fees). Both kinds are eligible, if you want, for inclusion in your portfolio, provided that their historical returns are good enough and their charges are low enough, or at least commensurate to the delivered returns. Remember, past performance (good or bad) is no guide to future performance.
Investment Trends of 2021
As 2020 draws to a close, there are several market trends that are emerging as 2021 forerunners that will characterise the markets and define investor sentiment, the principal two being vaccine- and Biden- related. The optimism and relief of Covid-19 vaccines had a stabilising effect on global stock markets over the last quarter of this year, as had the prospect of Joe Biden taking over from Donald Trump at the beginning of 2021.
These two things - vaccines and a Biden presidency - have made me adjust my portfolio's exposure to US large-cap equities (the shares of large companies listed on the S&P500), in particular stocks in the so-called Big Tech companies, and its exposure to gold. Why? Because the Biden administration might place regulatory inhibitors on the growth and dominance of the Big Tech corporations, which in any case are significantly overvalued; and because the increasing likelihood of things returning to normal will lead to less volatility in global stock markets, which in turn will lead to falls in the price of gold over 2021.
Other industry sectors of key interest in 2021 will be Green (sustainable resources, clean energy), cyber technology and robotics. Let's look at some of these in more detail.
Global large-cap equities
Possible regulatory checks on the power of the Big Tech companies, part of Biden's values-based approach to business, together with market normalisers beginning to kick in, should check somewhat the price hikes of tech stocks that we have seen throughout 2020. So we need to make sure that our portfolios are not overly weighted towards tech and S&P500 companies in general. We also need to be able to capture the countervailing growth in global stock markets outside of the US.
In my previous portfolio blog, I liked the Rathbone Global Opportunities Fund, which in June this year was delivering 5-year returns similar to the stellar Scottish Mortgage Investment Trust (which I hold, natch), but with an appreciably lower OCF of 0.52%. After a lacklustre six months of performance following my investment in June, I have decided to revamp my exposure to global large-cap equities by replacing Rathbone with a lower cost alternative, the iShares Core MSCI World UCITS ETF which has provided sector-beating returns over five years for an agreeably low OCF of 0.20%.
Regular readers of this blog will know that I am a fan of Baillie Gifford's investment products, because of their good returns and comparatively low charges. So it should come as little surprise to find me buying the Baillie Gifford Long Term Global Growth Fund, characteristically for this management house providing an actively-managed portfolio of global large-cap stocks with a focus on growth, and sector-beating three-year returns of 164%, all for a total annual charge (including transaction fees) of 0.68%. This fund is one of Morningstar's Top Ten Best Performers of 2020. A pity I came into it late!
I also bought the Baillie Gifford China Fund, but more on that below.
One investment I certainly shan't be ditching is the Baillie Gifford American Fund, which I bought in June and has returned an extraordinary 122% this year (219% over three years), as lockdown environments spurred digital adoption. The fund tops Morningstar's Top Ten Performers list.
You can read more about this fund (and other out-performers) in my 2020 round-up blog.
Green
Clean energy, ESG and sustainable investing were surprisingly unscathed by the flight to safe haven assets and funds with performance longevity that was triggered by the Covid crisis. In fact, ESG and clean energy funds have done surprisingly well this year, as investors made generous allocations to these sectors.
My portfolio was light on these assets, and as markets have become more buoyant over the last quarter, I have become more willing to invest. So I have bought two funds. iShares Global Water UCITS ETF provides me with exposure to global companies specialising in water services and related technologies. The fund has sector-beating returns over five years and, notwithstanding an OCF of 0.65%, which is a little higher than my fee tolerance normally permits, seems like a reasonable price to pay for a medium-term punt on water becoming an increasingly important sector as climate change plays out.
The other "sustainable" play that I have bought is also provided by iShares, their Agribusiness UCITS ETF (SPAG). Like the water sector, climate change seems likely to be the catalyst for huge structural change in agriculture, with more and more people needing to be fed at lower financial and ecological cost. This ETF has underperformed in recent years but I think that might be about to change, and for an annual total fee of 0.58% it seems worth a punt as a medium-term investment.
China
The market stabilisation of Q3 and Q4 made me feel braver about sparing some cash to allocate to a China fund. A growth-focused approach to investing in Chinese companies is essential, and you should look carefully at the prospectuses here, but an easy choice (for me, at least) was another product from Baillie Gifford, their Greater China Fund. In comparison to China equity funds offered by the other players (Jupiter, Barings, Invesco, JP Morgan to name a few of the biggest), the Baillie Gifford fund characteristically comes relatively cheap for an actively-managed fund (OCF of 0.87%) and with good historical returns over five years.
Personally, I would be unwilling to pay a higher charge for a gamble in the Chinese stock markets, particularly right now as the trajectory of Covid-19 in China is still an unknown. What is beyond doubt is that Donald Trump's departure from the White House bodes better for Sino-US relations than a Trump second term would have done. Still, China is one geographical and demographical area where investors need to tread carefully.
Government & Corporate Bonds
With company balance sheets and borrowing following a more defined path, now that the initial shock of Covid-19 is behind us, it feels much more comfortable investing in corporate bonds now than it did in July, and the investment grade and high yield picks I suggested in my blog at that time are still in my portfolio.
Predictably though, they have lost me money. It feels as though the only thing making me keep them there is the tenet that your portfolio must have some allocation to bonds. Right now, the total allocation of mine to government and corporate debt is about 18%, which I know is lower than the "average" bond weighting of 20% to 30%. What can I say? Retirement feels like a long way off!
That said, I felt this month was the right time to buy some more gilts (government bonds), in particular index-linked bonds, just in case governments decide to inflate their way out of debt. The eminence grise of inflation, and whether it will materialise, continues to haunt investors as they ponder the wisdom of gilt and gold investments for 2021. Maybe it was because I trimmed my gold exposure that I felt that I had to compensate a little for the possibility of inflation, by buying index-linked bonds.
Anyway, in a pretty boring defensive move, I have allocated some of my portfolio's cash reserve (the value of which is about 10% of total portfolio value) to the Legal & General All Stocks Index Linked Gilt Index Trust. For an OCF of 0.15% and a five year record of trading above its benchmark index (the FTSE Act UK Index-Lnk Gilts AS TR GBP), plus a Three-Star rating by Morningstar, this fund seemed a worthy candidate for bet on some inflationary conditions creeping into 2021.
Talk of inflation brings me to gold.
Gold
Gold has had a good crisis which, as a Safe Haven asset, it was destined to have. In direct correlation to the mood of the markets, the price of gold has declined from an August peak of US$2,000 per ounce.
I admit I was slow to adjust my portfolio's allocation to gold, and gold producers. Too slow. Gold is a flight asset, a Safe Haven in times of market volatility. You need to be in and out. Maybe I was distracted by the meteoric rise of Bitcoin over Q4. Anyway, after investing iShares Physical Metals Physical Gold ETC and iShares Gold Producers UCITS ETF at the start of 2020 (and that was a bit late to go into gold, really) and enjoying the returns that the six month rally brought me, I ought to have trimmed my exposure to the precious metal long before now.
As it was, by the time I got round to it, these two funds were eating into the returns they had given me earlier in the year. Still, they were, and still are, decent, steady-as-you-go forays into gold that are low cost and therefore appropriate for retail investors like me.
I decided to reduce my allocations to these funds by 50%, a move which has brought the gold weighting of my portfolio back to what may be considered a more "normal" level, which in my case is 5%. It's also a decision that some notable professional fund managers have been making over Q4, as market volatility has lessened. This may still prove to be a move I come to regret if 2021 is characterised by rising unemployment, Covid slipping out of control and any substantial curtailment of central bank stimulus. We shall see.
What the heck; if gold doesn't work out in 2021, there's always Bitcoin! You can read my blog about buying Bitcoin and gold in 2021 here.
Rebalance your Portfolio in 2021!
Aside from selling, buying and trimming your investments based on past performance and market projection, the New Year is a good time to recalibrate your portfolio's exposures to the individual assets, sectors and geographics that it will quite naturally have assumed over the preceding twelve months.
You will be surprised how far its equity-debt weightings and other pre-determined biases that you once had in mind have changed since you set your investment objectives and risk tolerances earlier in the year (or, if you are lazy like me, two or more years previously).
You can read my suggestions for how and when to rebalance your portfolio here.
MATTHEW FEARGRIEVE is an investment management consultant. You can read his blogs here and here, and see his Twitter feed here. His 2020 round-up blog is here.
Important information: the views expressed in this article are opinion only, and are not intended to be relied upon as financial advice or treated as a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.