Top of the class: 10 top performing funds in 2018

We highlight 10 standout performers in 2018, delivering strong returns in a difficult year for stock markets.

It has not been a great year. Global stock markets are up marginally this year in pound terms, but that’s thanks in part to sterling’s fall throughout 2018. And that’s not a measure of stock market health spread across the globe.

The US accounts for 63% of the global stock market index, and has yet again delivered a strong performance for the year. But our own FTSE 100 is down for the year, as are European, Japanese, Asian and emerging markets.

It has not been a great year for funds either. Of those based in the UK, less than one in five have delivered a positive return this year. But there have been some that have stood out, delivering strong returns in 2018’s more testing conditions.

We have listed 10 of the standouts in the slides that follow. They are not the 10 absolute best performing funds: that would have resulted in a list of funds all clustered in the same sectors that have done well this year, which we think would have made for less interesting reading.

The funds we have highlighted are mostly those which have topped their different sectors, giving a better idea of the top performing managers across the different asset classes. Far from clustering around the same stocks, they are diverse bunch, but they have all managed to make the most of this year’s choppy markets.

To see the next slide, click on the green arrow to the right. Then use the arrows in the top right to scroll back and forth. The bar on the right allows you to scroll up and down.

If you have any trouble accessing the slides, click here to view them all on the same page.

It has not been a great year. Global stock markets are up marginally this year in pound terms, but that’s thanks in part to sterling’s fall throughout 2018. And that’s not a measure of stock market health spread across the globe.

The US accounts for 63% of the global stock market index, and has yet again delivered a strong performance for the year. But our own FTSE 100 is down for the year, as are European, Japanese, Asian and emerging markets.

It has not been a great year for funds either. Of those based in the UK, less than one in five have delivered a positive return this year. But there have been some that have stood out, delivering strong returns in 2018’s more testing conditions.

We have listed 10 of the standouts in the slides that follow. They are not the 10 absolute best performing funds: that would have resulted in a list of funds all clustered in the same sectors that have done well this year, which we think would have made for less interesting reading.

The funds we have highlighted are mostly those which have topped their different sectors, giving a better idea of the top performing managers across the different asset classes. Far from clustering around the same stocks, they are diverse bunch, but they have all managed to make the most of this year’s choppy markets.

To see the next slide, click on the green arrow to the right. Then use the arrows in the top right to scroll back and forth. The bar on the right allows you to scroll up and down.

If you have any trouble accessing the slides, click here to view them all on the same page.

Odey Swan

After long predicting a global economic and stock market crash, and losing his investors plenty of money in the process, bearish hedge fund manager Crispin Odey finally found himself on the right side of markets this year.

The manager’s Odey Swan fund was the best performing fund available to UK investors this year, rallying 43%. For long suffering investors in the fund, 2018 has brought some welcome respite, but after heavy falls in 2016 and 2017, they remain 38% down over the last three years.

Odey is a notorious bear and in late 2016 predicted the FTSE 100 could fall 80%, warning the global economy faced a downturn that would be ‘remembered in a hundred years’. While that Armageddon has not materialised, the stock market falls this year have been enough for Odey, who is able to ‘short’ or bet against, shares, to make money.

Key bets this year have included a short position on shares in embattled retailer Debenhams (DEB), down 84% this year, and a bet against shares in shopping centre developer Intu Properties (INTUP), whose shares have more than halved after the collapse of its takeover by a consortium of investors.

Polar Capital Healthcare Opportunities

Healthcare has been one of the few bright spots in an otherwise glum year for stock markets: while global stock markets have risen just 1.7% in pound terms since the turn of the year, the main healthcare index is up 15.1%.

Partly, that rally has been driven by relief, as the worst fears for the sector sparked by US president Donald Trump’s railing against drug pricing have failed to materialise. The traditional defensive qualities of healthcare stocks have meanwhile been in demand during 2018’s market volatility. And growing sales in China from some of the pharmaceutical giants have also excited investors.

Of the healthcare funds available to UK investors, Polar Capital Healthcare Opportunities, the open-ended version of the Polar Capital Global Healthcare (PCGH) investment trust, has been the best performer.

There are differences between the two. Daniel Mahony and Gareth Powell’s fund is less heavily weighted towards large-cap stocks than its investment trust counterpart, and the managers are more severely underweight the pharmaceutical sector in their fund.

That latter positioning helped the trust in the first half of the year, with an overweight position in healthcare devices also providing a boost. The takeover of Wilson Therapeutics and investor excitement over Merck & Co’s (MRK.N) flagship oncology product also helped the managers on their way.

Polar Capital wasn’t the only healthcare fund to report strong returns this year, with Schroder Global Healthcare up 12.8% and AXA Framlington Health delivering 9.4%.

Baillie Gifford American

Donald Trump’s tax cuts ensured US-focused funds rode the sugar rush in American markets this year. And even the ‘Red October’ sell-off since October, hitting the growth stocks favoured by Edinburgh fund group Baillie Gifford, wasn’t enough to knock its American fund from the top of the performance charts.

The £1.9 billion fund sits at the top of one of 2018’s top performing fund sectors, North America, up 21% in 2018. But it was a year of two halves for the fund, which had raced to a 40% return by the end of September, but has fallen 12% since.

Run by a team headed by Citywire AA-rated Tom Slater, co-manager of the Scottish Mortgage (SMT) investment trust, the fund is top of the sector since Slater took up the reins in January 2016, having nearly doubled investors’ money over that time.

The portfolio shares FTSE 100-listed Scottish Mortgage’s favouring for US growth stocks, with a top 10 featuring Amazon (AMZN.O), Tesla (TSLA.O) and Grubhub (GRUB.N).

In the fund’s annual report, the managers said that stock market volatility and fears over US interest rate rises were not affecting their long-term focus.

‘During periods of such volatility, we focus on two of our key beliefs: focus on the long term and ignore the noise,’ they said.

‘We remain resolutely focused on finding the exceptional growth companies in America and holding onto them for long periods of time.’

Neptune Global Technology

Technology was the best performing sector of the market this year, despite its fall in October, and the US the best performing stock market. So it’s no surprise to find a technology fund with a heavy US weighting in this top 10.

Robin Geffen holds 93% of his £40 million fund in US stocks, with top positions in Apple (AAPL.O), Microsoft (MSFT.O), Amazon (AMZN.O) and Visa (V.N).

One US tech stock not to feature in the fund is Facebook (FB.O), however. Geffen sold the social media giant in June after a meeting with founder Mark Zuckerberg who Geffen said failed to answer seven key questions about the strategy for the business, avoiding a 20% plunge in July after Facebook posted weaker-than-expected user numbers.

In his most recent quarterly update, Geffen said he was taking heart from the technology sector’s strong cashflow performance.

‘Over the past five years, the technology sector has comprised 25% of the S&P 500’s market capitalisation, but has generated 57% of the total incremental free cash flow,’ he said.

‘We remain positive on the sector on the basis that this cash flow generation can continue as the economy shifts to a more digital footing.’ 

Artemis US Smaller Companies

Citywire A-rated Cormac Weldon was able to bolster the returns of his Artemis US Smaller Companies fund from an unlikely source: cannabis stocks.

Weldon is the only UK-based manager to invest significantly in Canada’s growing cannabis industry, backing the IPO of Tilray (TLRY.O) on the Nasdaq in July as well as Canopy Growth (WEED.TO) and Aphria (APH.TO).

He was able to bank some explosive gains: Tilray’s flotation was priced at $17 per share, but within two months they had rocketed by more than 1,150% to $214. They have slumped to $84 since, but not before Weldon had sold the bulk of his holding at a substantial profit.

Weldon expects more countries to follow in Canada’s footsteps and legalise marijuana, and he is investing in companies with ‘early mover advantage’.

In his latest update to investors, trade tensions between the US and China were weighing on his mind.

‘We have little or no exposure to industrial and consumer companies that import from China as we suspect their margins will be at risk,’ he said.

But he has sold Welbit (WBT.N), which makes equipment that increases automation in fast-food restaurants, on the potential impact of tariffs.

‘Some of the components are imported from China and we think the company will have difficulty passing on the costs of the tariffs,’ he said. ‘We sold the holding.’

Lindsell Train Global Equity

One of the UK’s most popular funds has enjoyed another strong year. Global funds have consistently topped the sales charts this year, and this £5 billion fund run by Citywire AA-rated trio Nick Train, Michael Lindsell and James Bullock has been top of many investors’ shopping lists.

Their fund, along with Fundsmith Equity, sits well ahead of all others in the Investment Association’s Global sector over five years.

While Fundsmith just pips it over that timeframe, up 151% versus 148%, there is clear water with the third-placed fund, T Rowe Global Focused Growth, up 106%.

And Lindsell Train has beaten Fundsmith this year at least, delivering nearly double Terry Smith’s 7.5% return.

The fund was not immune to October’s falls, with Lindsell saying he spent the month ‘trying to add to some of the biggest fallers and other positions we are keen to build up’, including eBay (EBAY.O), Hargreaves Lansdown (HRGV), and Shiseido (4911.T)

‘This arbitrary selling of good performers is symptomatic of this type of sharp market decline and not a signal of a more worrying malaise specific to these companies,’ he said.

BlackRock Emerging Markets Absolute Alpha

To make money in emerging markets this year, it helped if you were able to short shares. Sam Vecht and Gordon Fraser are able to do just that with this tiny £5.9 million fund, helping them to profit from the bear market in emerging markets.

A bet against Turkey paid off in the summer as the country’s currency crumbled against the backdrop of ballooning inflation, a large deficit and a diplomatic rift with the US.

‘The short in Turkey, where the market saw heavy falls in the Turkish lira and equities, was the major contributor to performance,’ the managers said in their latest interim report.

That reversed the fund’s previous positioning, after the managers reduced their ‘long’ exposure to Turkey the year before and sold positions in Turkcell and Turkish Airlines.

Vecht and Fraser’s strong 2018 follows a torrid 2017, in which the fund was one of the worst performers of the thousands available to UK investors, losing 9.7%.

A bet against Chinese technology stocks hurt the fund badly. ‘Our view that the technology sector rally in China had been extreme and that the strength of momentum looked very stretched, regrettably did not pay off,’ said the managers as they reviewed performance.

That bearish stance has gained more currency this year, however, with Chinese technology stocks among the worst hit by October’s sharp sell-off.

Sanditon European Select

Chris Rice’s £118 million fund has been uninspiring since its launch in August 2014, losing investors money in each of its first full years as the manager’s bearish positioning was caught on the wrong side of stock markets.

This year looked like it was going the same way, until the Red October sell-off ignited performance. Having lost 1% in the first nine months of the year, the fund has rallied 10.5% since. His preference for stocks in defensive sectors like telecommunications, and his shorting of growth stocks, was finally rewarded.

The scale of the stock market falls even persuaded the manager to shift his fund to a net long positioning in a bid to profit from a market rebound. Not that he expects to keep that in place for long.

‘Our core view is that 2019 will see the bear market develop further,’ he said in his latest update to investors.

‘It remains our view that the biggest risk as we enter 2019 is to be found in stocks within the growth style. We will also use the current rally to move further short this area of the market.’

Morgan Stanley Global Brands Equity Income

This relatively new fund has done what many other income funds have failed to this year by delivering a positive return.

Only one UK equity income fund has managed that at the time of writing, and barely: Schroder Income is up 0.8% for the year, according to Wednesday’s price.

Global equity income funds have fared better, but less than half of the sector has delivered a positive return. This tiny £5 million fund is top of the tree, up 7.2%.

Managed by Bruno Paulson and William Lock, the fund launched in 2016 and is an offshoot of their £1.1 billion Morgan Stanley Global Brands fund.

The portfolio is designed to reduce the risk of losing money and invests in companies with high recurring revenue that are better placed to weather an economic downturn. These companies must also have pricing power which enables them to pass inflationary costs onto consumers.

The largest holding in the fund is consumer goods giant Reckitt Benckiser (RB), followed by Microsoft (MSFT.O), and Unilever (ULVR).

BMO Global Real Estate Securities

UK real estate investment trusts may have suffered a grim year as Brexit fears have weighed, but globally Reits have had a better time of it, with the main benchmark for the sector up 8.1% for the year.

This £41 million fund, run by Marcus Phayre-Mudge and Alban Lhonneur, has delivered 7.2%, slightly below that, but is nevertheless the best performing fund investing in Reits available to UK investors.

It’s worth noting that the pure index return simply isn’t available from funds. The one fund that tracks the index, iShares Global Property Securities Equity Index, has lagged even more, returning 6.7% for the year.

The fund is heavily weighted to the US, and the managers believe a strong US economy can continue to support the country’s Reits, even as interest rates rise.

‘If interest rates are rising in response to an improving economic backdrop then, subject to suitable constraints on the development of new supply, rents will rise as businesses and employment grows and wages rise, supportive to the real estate sector,’ they said in their latest interim report.

‘We expect investors to focus on earnings growth, with further yield compression coming only in response to the prospect or the reality of rental growth.’

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