Investors could be forgiven for dumping underperforming funds from their portfolio, but acting too soon could mean missing out on bumper returns. For those who doggedly stuck by 2018's laggards, 2019 has been an incredibly rewarding year.
Some of the worst performing funds last year have topped the performance tables over the past 12 months. Morningstar Direct data shows there are at least four funds which were in the bottom decile of performers in 2018, which are among the top 10% of performers this year.
We look at the funds that have gone from zero to hero:
Artemis UK Select
The three-star rated Artemis UK Select fund was down 20.3% in 2018, but 2019 has proved to be a transformative year for the value-focused fund, which is up an incredible 24.1% year to date.
As the name suggests, the fund has a domestic bias, investing more than 90% of its assets in British businesses. Brexit uncertainty has weighed heavily on UK-focused funds such as this one, which was hit hard during Theresa May’s tenure when domestic stocks struggled as the UK failed to firm up its exit from the bloc.
But a forthcoming General Election has helped domestic stocks. The Conservatives are widely expected to sail to victory in the polls, which would help both the pound and the UK stock market.
Edward Legget, manager of the Artemis UK Select fund, admits 2018 was a bad year for a series of reasons. In particular two macro fears weighed heavy on performance: a global economic slowdown, and the trade war between the US and China. Changes in investor sentiment have seen a "de-rating and re-rating of stocks", he says, but the manager believes the outlook has changed in recent weeks.
Clothing retailer Superdry was a particularly poor performer in 2018, says Legget. The company, which is best known for its coats and hoodies, saw profits plunge taking with it the share price, which has fallen from £20 at the start of 2018 to just 484p today.
But Legget is sticking to his value style of investment, looking for shares he believes are mispriced. One example is British American Tobacco, one of the fund's largest holdings. The manager thinks the firm is undervalued and out of favour but is attracted to its hefty 7.5% dividend yield in a world of rock-bottom interest rates.
He also likes International Airlines Group, because it “makes good returns on capital and it’s incredibly cheap; a market leader in a consolidating market.”
This year, manufacturer Oxford Instruments and infrastructure investment company 3i Group have helped the fund recoup some of its losses. The latter saw its share price climb from 756p in December 2018 to £10.88 today.
GAM Global Diversified
The two-star rated GAM Global Diversified fund has also made a serious U-turn – down 20.5% last year, it is up 16.6% year to date.
Fund manager Ali Miremadi says a contrarian approach was a difficult stance to hold as volatility hit at the end of 2018, but has served the fund well in recent months.
The fund invests in companies across different regions and sectors – currently around 43% of assets are in the US, 19% in the Eurozone and 14% in the UK. Miremadi’s philosophy is to buy good businesses when they are out of favour and hold them for the long term; a strategy he thinks sets the portfolio apart from its index and its peers.
Industrial companies have been some of the best performing stocks in the portfolio this year: “Our holdings in stocks such as St Gobain, UPS, FedEx and Deutsche Post have been terrific this year after being weak into the end of 2018,” he says. “Also bank stocks that were very depressed have recovered well.”
Harris Associates Global Concentrated Equity fund
The four-star rated Harris Associates Global Concentrated Equity fund is up more than 20% year to date, comfortably beating its benchmark – the MSCI ACWI Value, which is up 17.3% over the same period.
The fund porfolio is concentrated, with just 25 holdings, and fund manager Tony Coniaris admits that can mean the fund is more volatile than rivals. That was evident in 2018, an all-round tough year for value investors. Coniaris says: “In 2018 fear took over and when emotion takes over, fundamentals don’t matter as much.”
In 2019, one of the biggest contributors to performance has been Charter Communications, a US cable TV company that went through a large acquisition a couple of years ago and is now seeing an accelerated growth as a result.
Coniaris also thinks that Google-owner Alphabet is very undervalued and has the potential to grow over the coming year: “Google might not appear to be a stock for value investors; you see the company trading at $1,300, but when you dig deeper and peel back the onion, you realise it is worth more than that."
UBS US Equity
The three-star rated UBS US Equity fund has been managed by Thomas Digenan since its inception in 2002; down 9.6% in 2018, it is up 28.5% year to date in 2019. The fund invests in US companies with the aim of outperforming the Russell 1000 Index over the medium to long-term period.
Digenan credits a strict adherence to a value investment strategy as the main reason for turnaround in performance. “Between fears of a recession and worries over trade, the market took an extreme risk-off positioning at the end of 2018, but we remained focused on valuation and stayed with and added to some positions that had sold off the most,” he says.
This year, the healthcare sector has been a strong performer for the fund. With the US elections approaching in 2020, concerns about caps on drug pricing among other factors caused the sector to fall out of favour, but it has since bounced back. "Technology also saw a strong recovery as worries about the trade war between the US and China abated," says Digenan. He names computer data story firm Micron Technology and industrial company Stericycle as two of the top performing stocks in the portfolio.
