Global tech back with a bang: The best and worst funds/trusts of first six months

05 July 2023

As we enter the second half of 2023, Nick Wood, head of fund research at Quilter Cheviot, takes a look at the best and worst performing funds and investment trusts of the first six months and the factors behind the performance:

“The past six months have been tumultuous from a markets perspective as rising interest rates, banking crises and geopolitical volatility have taken centre stage. So far, this year has seen a fairly dramatic sea change in the winners and losers from an investment fund perspective too as asset managers have attempted to navigate a fairly tricky environment.

“Nowhere have we seen such a reversal of fortunes than in the tech world, which came back with a bang following a difficult 2022. Ultimately, it has one thing to thank for this u-turn in performance and that is generative artificial intelligence. Roll back to the end of last year and it is likely very few had heard of ChatGPT, but it has rarely left the headlines since January. This has fuelled some extreme positive share price movements in a subset of technology stocks, not least Nvidia and Microsoft. More broadly, this has resulted in growth indices and funds generally outperforming their value peers, something that seemed unlikely at the start of the year with interest rates and inflation still rising.

“This trend has consequently resulted in some of last year’s weakest funds becoming some of the strongest so far this year. Funds such as T. Rowe Price Global Technology, Baillie Gifford American and Morgan Stanley Global Insight, which featured in the bottom ten performing funds for 2022, all make the top ten best performers this year – perhaps underlining the need to invest for the long-term.

“Another area that has surprised this year is China. At the beginning of the year, the Bank of America Fund Manager Survey showed a huge amount of bullishness on China post-Covid reopening, but this has very much not materialised in terms of equity returns, with dedicated China funds propping up the bottom of the list of poor performers. We are also increasingly seeing new launches of emerging market funds which are excluding China, as many struggle to get to grips with an increasing state regulatory presence in business and potential violations of human rights. China is definitely a country to keep an eye on for the second half of the year as it currently stands out as one of the cheaper markets. It is not out of the realms of possibility that it has a resurgence just like the tech sector this year.

“One area that has gained a lot of headlines of late but doesn’t feature at all among the leading funds is Japan. The headlines at half year tell you that the market is up over 25%, depending on which index you look at, but that’s in yen terms. For UK investors, MSCI Japan is up just 7%, reflecting an increasingly weak yen due to the ongoing policy of holding the 10-year government bond yields down at 0.5%. Given the moves up in other bond yields, this has significantly weakened the currency. Plenty of commentators expect the Bank of Japan to relax their policy, not least because inflation has taken hold in Japan, albeit still only around 3-4%. In that instance, one would expect some currency appreciation, so again it may feature on this list come the end of the year.

Source: Morningstar, Quilter Cheviot as at 30/06/2023

“The investment trust space has similarly seen a return to form for technology focused investments, with Polar Capital Technology and Allianz Technology Trust both hitting the top ten. Interestingly, however, fellow tech titan Scottish Mortgage has still not achieved the feats of 2020/21 despite its heavy weighting to the sector as it looks to battle back.

“One trend that has been noticeable in the investment trust space, though, is the meaningful improvement in the discounts of some trusts, particularly those investing in private equity. This was a sector that came under huge pressure as interest rates rose and growth investing faced somewhat of a headwind. Once we reach the end of the hiking cycle, which in the US appears to be very near, though Europe and the UK have some ways to go yet, then we can expect to see these high growth trusts begin to take advantage once again as conditions become a bit more conducive to that style of investing.

“Looking at the laggards, we can see more illiquid assets, such as infrastructure and renewables, struggling as these are also often most sensitive to rising interest rates. One of the key benefits of investment trusts is their ability to invest in illiquid assets, but this clearly comes with its own set of consequences and again help to make the case for investing in the long-term. As interest rates begin to come down again, assets such as this should once again come good, particularly given the long-term tailwinds in place for these sectors.

“Private equity also wasn’t immune from the difficult environment at the beginning of the year. Ultimately private equity is just like listed equity and can span multiple sectors, regions and size, and thus will be hit by their own set of factors, as well as more macro driven ones such as interest rates and the global economy.

Source: JPMorgan, Quilter Cheviot, as at 30/06/2023. Excludes investment trusts with market cap below £20m