As the year comes to a close, we speak to Laith Khalaf, head of investment analysis at investing platform AJ Bell, the UK’s 3rd largest, about the most popular investments on his platform, across shares, funds, and investment trusts.
Here’s four things to note about the list:
1) Passive ETFs still preferred over active funds
During times when markets go through prolonged falls – known as bear markets – the expectation might be for an investors to prefer active funds, with fund managers peering through the carnage and selecting companies that will fare better amid the economic dreariness, over passive strategies such as ETFs which buy the whole market. Seemingly, that has not happened in 2022. Bar Terry Smith’s Fundsmith and Jeremy Podger’s Fidelity Global Special Sits, the rest in the top ten are passives.
Laith Khalaf reckons there may be a couple of reasons for this: “Clearly there has been a longstanding trend towards passive management, though in 2022 it may have also been accentuated by a generally poor showing from active managers… Only 27% of active equity managers outperformed a passive alternative in 2022.”
“The popularity of ETFs also suggests investors may have been acting somewhat tactically, and buying the market dips. Because ETFs trade throughout the day, they offer investors a live price they can buy at, whereas funds work on a forward pricing basis, which means markets may have rebounded by the time your fund purchase has produced your purchase price. In the long term one day’s movement won’t make too much difference, but it’s understandable that when volatility is high, investors prefer the immediacy and certainty of ETF pricing.
“There may well be a silver lining for active managers here, as some investors may well be using ETFs and passive funds as temporary placeholders, buying quick exposure to the market using an index tracker, and returning at a later date to replace it with an active fund after they have bought themselves some thinking time.”
2) Investors are sticking with star funds Fundsmith and Scottish Mortgage despite poor years
It’s not been a great year for Fundsmith and Sottish Mortgage, down 13% and 42% respectively. Both are investors in high quality companies growing at a rapid clip – a style that has been on a tear over the past decade but hammered in the last year due to rising interest rates, resetting how much investors are willing to pay for growth shares. Instead, the value style has crept back into favour – buying companies trading at low valuations.
Laith adds: “Neither Scottish Mortgage nor Fundsmith have changed their spots, so there’s no real reason for investors to jump ship simply because these funds are enduring a tough patch. But this year’s rotation from growth to value does illustrate why investors should hold a balanced portfolio with a foot in both camps, and just as it was unwise to bet the whole farm on growth last year, it’s imprudent to swing the other way and go Hollywood or bust on value funds now. Growth will have its day again, but no-one knows when that will be, so it’s best to own a blend of growth and value managers in your portfolio.”
3) Investment trusts could be the place to look for active management
Investment trusts are a small corner of the investing market – there are around 400 vs 5,500 funds – but they remain a “hotbed of active management” and an attractive proposition for private investors due to some of their unique features. For example, they have independent boards looking after your interests and keeping costs low, they can borrow extra money to boost returns (although it must be said it can exaggerate loses too), and they can save some income back from underlying investments to create a more reliable and smooth dividend payment to investors. It why they are often called the City’s best kept secret.
4) Investors have been keen on Tesla shares despite falls
Laith explains what’s been going on individual shares: “The leaderboard of the most popular shares of the year contains a list of long-standing London Stock Exchange stalwarts, and Tesla. Clearly the likes of Shell and BP have had an exceptional year of performance, and like many of the other stocks in the leaderboard, they provide a healthy dividend yield, which is likely to be a more prized asset if growth falters.
“It’s interesting that investors haven’t been driven away from Tesla in a year when the stock price has fallen by 60%, which shows they still buy into the long term investment case. The erratic behaviour of the CEO does seem to be at the very least a distraction though, and with Musk now in charge of Twitter on a free speech mission, and a US presidential election on the horizon, the spotlight is unlikely to shift from his more controversial exploits.”