Stocks in just a handful of industries have been able to make strong returns across the first 10 months of coronavirus-hit 2020, although recent events have added to the argument that they could start to falter. But which funds have been most correlated to these winners? 
At the same time, a number of sectors have performed poorly as the pandemic hammered investor sentiment in areas such as banks and energy. However, the prospect of a coronavirus vaccine has prompted these stocks, and the funds holding them, to surge.
Up to the start of November, 2020’s two strongest industries by a clear margin had been information technology and consumer discretionary.
FE Analytics shows that while the MSCI AC World index posted a 1.33 per cent total return over this time (shown in the first chart below), the MSCI ACWI/Information Technology index was up 23.86 per cent while its consumer discretionary counterpart rose 20.87 per cent.
Performance of indices in 2020
Source: FE Analytics. Performance date to 23 Nov 2020
Both of these sectors – along with the likes of healthcare and consumer staples – tend to the home of so-called quality-growth companies. These have performed strongly for much of the past decade and their relatively defensive nature saw their shares jump in the challenging conditions of 2020.
More cyclical sectors like energy and financials, which are home to many of the value stocks that have been shunned by investors in recent years, had a terrible 2020. MSCI ACWI/Energy was down almost 45 per cent, while the financials index had lost over 20 per cent.
However, the second chart shows how this ranking reversed in November, following the election of Joe Biden as US president and the announcement of several successful vaccines against coronavirus. The prospect of a more normal economic backdrop without the need for extensive lockdowns prompted a surge in sentiment for stocks more geared to economic growth.
Tom Stevenson, investment director at Fidelity, said: “For those investors who remember the market in 2000, this situation looks all too familiar. And many will be hoping that it resolves itself in the same way as it did 20 years ago.
“The popular technology stocks on sky-high ratings fell sharply while companies languishing on rock-bottom ratings because they were seen as dull, old-economy businesses suddenly looked like safe-havens. Of course, no-one knows when or if the market will repeat this style rotation. But the valuation extremes do stack the odds in favour of a change in leadership next year.”
With this in mind, Trustnet has examined how correlated equity funds have been towards the different sectors in the global stock market. While this can help identify which funds have been driven by these sectors, it’s important to note that past performance is not a guide to the future.
Source: FinXL. Performance date to 23 Nov 2020
The above table reveals the 20 equity funds with the highest correlation to global tech stocks (a score of 1 would be a perfect correlation with the index), along with their returns across 2020 so far. As would be expected, many have been among the best performers of their peer groups this year.
Interestingly, relatively few dedicated tech funds are in the list above although this could be down to the fact that their specialised nature means that they are more likely to look further down the market cap scale for investments rather than relying on the large-caps that populate the index and many generalist strategies.
Source: FinXL. Performance date to 23 Nov 2020
When it comes to the consumer discretionary space, all of the funds with the highest correlation this year reside in the IA Global sector.
There are a small number of funds in this peer group that focus on consumer brands and some can be seen on the above list. Several index trackers also appear.
Source: FinXL. Performance date to 23 Nov 2020
Turning to the sectors that just started to outperform after a long period of lagging behind, Trustnet’s research found that the 20 above are most correlated with global energy stocks.
The standout issue here is that, aside from specialist energy mandates, many of the highest correlated funds are in the UK equity sectors – especially those that track the index. Of course, this reflects the fact that the UK market has a heavy bias towards oil & gas companies.
Source: FinXL. Performance date to 23 Nov 2020
Finally, correlations to financials are highest in the above 20 funds. While some have a specialist focus on this part of the market, many of those highly exposed to financials are in the IA Global sector, although it is a popular option for income investors particularly those in the UK.
But while many are now expecting a rotation from quality-growth winners to more unloved stocks, investors should be wary of completely dropping one investment style in favour of another. Even if market leadership is on the brink of rotating towards more cyclical sectors, portfolios should maintain a relatively balanced allocation.
When considering whether to stick with quality-growth winners or shift portfolios into beaten-down cyclicals, the BlackRock Investment Institute concluded: “We believe this is not an ‘either/or’ question – and advocate a more nuanced approach.
“A ‘barbell’ strategy that includes allocations on one side to quality companies benefiting from structural growth trends; and on the other to selected cyclical exposures. This can help achieve greater portfolio resilience amid still high levels of uncertainty about vaccine deployment and the prospects for further pandemic relief, we believe.”