Best and worst funds 2023: Tech back with a bang as China funds sink

04 January 2024

Nick Wood, head of fund research at Quilter Cheviot:

“Following a painful 2022, fund and investment trust investors will be pleased to see a much improved 2023 swiftly following it. While the path to these returns was not exactly a straightforward one, the drivers of previous stellar performance returned to the top of the performance tables, giving a sense of familiarity to beaten up investors. Indeed, 2023 has seen a distinct sense of clarity at both ends of the table, highlighting the places it very much paid to be invested in, as well as the areas best avoided.

“Looking at funds within the Investment Association’s universe, it is clear technology stocks are very much back in vogue, despite the high interest rates that were supposedly going to hamper them. The ‘Magnificent Seven’ stocks have brought tech funds back to the fore, with the top 10 performers being almost exclusively focused on that sector. After a difficult few years, it is perhaps fitting that top spot goes to a fund managed by Cathy Wood, founder of ARK, a firm who is as synonymous with tech investing in the US as Scottish Mortgage is in the UK. Clearly the artificial intelligence boom of 2023 has helped to drive these funds up from the doldrums they found themselves in at the beginning of last year and will have rewarded investors who stayed patient and invested through the difficult period. It has been such a dominance from the tech sector that other markets that performed well have not really got much of a look in, with only one non-technology dominated fund, the Lazard Japanese Strategic Equity fund, cracking the top 20 best performers last year.

“At the other end of the spectrum, just as tech has been shooting the lights out, China has been left languishing at the bottom in a year when its Covid reopening was expected to produce attractive returns. abrdn China A Share Equity found itself at the bottom of the performance rankings, although given 42 of the bottom 43 are China funds, it is clear the country as a whole faced considerable headwinds. With China’s economic issues continuing to persist, it is unlikely we will see a revival akin to the tech funds, but there are hopes the worst is behind us and the country becomes somewhat more attractive in 2024 to investors."

Source: Morningstar, Quilter Cheviot, as at 31/12/2023

“Turning to the investment trust space, the story of 2023 in many ways was the widening of discounts for many. This particularly hit many of the alternative income trusts which had previously stood on premiums but were impacted most by interest rate raises. Within the top 10 biggest fallers, we see plenty of alternative income trusts whose price returns have been weak, including those within infrastructure, and various renewables. Like the open-ended fund space, China also features, although the universe is fairly small. Meanwhile, it continued to be a painful time for some private equity trusts with many also seeing the value of their portfolios being hampered by rising interest rates.

“The worst of the rate rises does now seem to be behind us and market participants are chomping at the bit for rate cuts to be initiated as global growth slows. When this time comes, it would be no surprise to see a quick reversal in fortunes for some of these alternative trusts who rely so heavily on the sentiment of the market and its belief that interest rates have peaked.

“While much has been made of the difficulties facing the investment trust sector last year. it wasn’t all bad news. As is often the case, some of the more esoteric areas had their time in the sun, with airline leasing trust Doric Nimrod Air Two, delivering a second consecutive year of outstanding returns. Furthermore, 3i Group led the field, proving that a quality portfolio can help overcome some of the challenges that have faced the private equity market in recent times.

“Outside of these more niche areas, the investment trust space saw a more broadly spread return profile. Representation from Japanese, Indian and wider emerging markets sat alongside more obvious winners such as the two technology focused trusts run by Polar Capital and Allianz. Furthermore, just outside the top 10 we even had UK equity representation from Aurora, the concentrated UK focused trust run by Gary Channon. The UK market has been truly beaten up in recent years, but again we may have reached a point of peak pessimism in this regard and brighter times may lie ahead.”

Source: Numis, Quilter Cheviot, as at 31/12/2023