Best, and worst, of times – a tale of two markets

The difference in performances in the year to date of the US and UK markets is glaring

There may be recovery evidence a-plenty across much of the UK economy – but on the stock market, while tech stocks have continued their breathtaking run, the bellwether FTSE100 index struggled to hold the 6,000 at the end of last week.

It drifted below the 6,000 mark despite strong UK retail sales, manufacturing and services data. Signs of a stalling recovery in the eurozone and a further new peak in UK government debt left investors apprehensive as to what the future may hold.

The UK blue-chip index fell 16 points, or 0.3 per cent to 5,997 at one point on Friday despite the Office for National Statistics (ONS) reporting strong UK retail sales in July, up 3.6 per cent over the month and three per cent higher than in February, prior to the coronavirus pandemic.

By contrast, readings for the eurozone showed a plateauing of the recovery, pointing to a fall in services activity in France and Germany while manufacturing data was mixed.

ONS borrowing figures showed government debt passed the £2 trillion mark for the first time, heightening fears of tax rise ahead.

In America, Apple and the S&P 500 have defied the Covid-19 disruption by soaring to new highs. The iphone maker became the first US company to reach a $2 trillion valuation.

Truly what is unfolding is a tale of two markets. Because of the stellar performance of tech stocks, the difference in performances in the year to date of the US and UK markets is glaring.

The S&P 500 index has clawed back from its Covid-19 plunge to reach a new record high last Wednesday. By contrast, the FTSE100 is still down more than 20 per cent since the start of the year.

The key difference is the US market’s exposure to tech – and the FTSE’S lack of it. The Fang+ index is made up of the top ten tech stocks and includes Facebook, Apple, Amazon, Alphabet, Netflix, NVIDIA, Twitter, Tesla, Alibaba & Baidu. This index is up more than 63 per cent this year after nearly doubling in just a few months – up more than 97 per cent from its March low.

Even a jumbo-sized elephant travelling at blistering speed can be faulted by a gnat. The top-performing, tech-rich Scottish Mortgage Investment Trust has been accorded the highest accolades. But investment fund watcher Morningstar has downgraded its rating on cost grounds, claiming that its low ongoing charges were pushed up by the trust’s use of borrowing. Analyst Robert Starkey cut the £13.4 billion trust’s rating from “gold” to “silver”, under a new rating methodology, which places more of an emphasis on costs. He says the ongoing charge of 0.36 per cent is offset when the cost of debt is considered, pushing the representative cost up to 0.77 per cent. Says a spokesman for the trust’s manager Baillie Gifford: “We are disappointed that cost of debt is now included in their analysis without accounting for the actual returns produced from the borrowing,” Quite.

SMT’S ongoing charges are the lowest in the Association of Investment Companies’ (AIC) Global sector, where the average is 0.5 per cent. Gearing stands at 6 per cent – also the average across the sector.

The trust has surged 94 per cent from March lows. At end July the trust had a 13.4 per cent position in Tesla and 9.7 per cent in Amazon, its top two holdings.

Over a decade, the trust’s shareholders have enjoyed a 781 per cent total return, versus the MSCI AC World index’s 191 per cent rise. While there may now be an argument for profit-taking and shifting the portfolio towards more “value” stocks, investors may feel the need for magnifying glass and Hubble telescope to spot the impact of Morningstar’s new cost calculation methodology.

Some fund performance is so lamentable that mercy killing is the best option. Aberdeen Standard Investments is shutting its UK Recovery Equity, the worst-performing fund in the country this year after its largest investor announced plans to pullout.

The fund has struggled with years of poor performance, tumbling 42 per cent this year alone, the heaviest losses of any fund in the Investment Association’s sectors. Over three years it is down 54 per cent, also the worst performance across funds in all sectors.

The fund’s largest investors at the end of June were ASI’S own Myfolio funds, which held £42.6 million of the fund’s £48.6m assets. ASI declined to comment.

The closure marks an ignominious end for the fund, which was launched in March 2009 at the very bottom of the financial crisis and enjoyed blistering early performance under the stewardship of David Cumming. He later quit the firm in 2017 to become Aviva’s chief investment officer.

In a letter to investors, the managers said that “following consideration of the available options, we believe it is in the best interest of all shareholders to close the fund, liquidate all of the underlying assets and return the proceeds to investors”.

Some attempt at explanation may have been in order.