Building on last year’s rapid recovery, equity markets delivered robust returns in the first half of the year as the global economy gradually reopened from lockdown, but the overall gains masked a marked change in the best performing stocks.
After two years of being dominated by a small number of US mega-cap growth stocks, market returns broadened out. Small and mid-sized companies outperformed their larger counterparts, and developed markets outperformed emerging markets. In terms of sectors, Information Technology’s dominance faded, leaving Energy to take up the running, and the value style of investing outperformed growth, although growth staged something of a comeback towards the end of period as doubts about the pace of economic recovery from the pandemic started to emerge.
With broader market conditions now more in line with historical trends, the Company’s portfolio, measured by net asset value, benefitted from its diversified exposure to a wide range of countries, sectors and investment styles, outperforming the MSCI World All Country World Index by 3.7%. Stock selection was the key driver of this outperformance, with Alphabet among the largest contributors. Not owning Apple, which underperformed the benchmark, also boosted relative performance, showing the benefit of a selective approach to investing in mega-cap tech stocks.
Seven out of ten of the Company’s stock pickers contributed to the portfolio’s outperformance. After a long period in the doldrums, the value managers investing in cyclical shares delivered the strongest absolute and relative returns, but even with a headwind against their style for most of the period, growth managers such GQG still outperformed the benchmark. Sands also did well, though they were only appointed in March, and SGA underperformed.
Craig Baker, Global Chief Investment Officer of Willis Towers Watson and Chair of the Alliance Trust Investment Committee, said the changes to market trends witnessed in the past six months reinforce the importance of maintaining a diversified stance across investment styles, sectors and regions and focusing on stock selection as the main driver of returns.
“Up until recently, investors were handsomely rewarded for taking big bets on a small group of very large US tech stocks, especially through lockdown when they got another leg up from people staying at home. But nothing lasts forever. Now many other businesses are now beginning to profit from the global economy reopening, though not all to the same degree or at the same pace.
“And to complicate matters further, in recent weeks large US tech stocks in general have shown signs of staging a comeback. With no real clarity on whether the global economy will, at one extreme, experience an inflationary boom as vaccine roll outs defeat the virus or, at the other, new variants cause another deflationary downturn, investors face a much more complex situation. This requires forensic examination of individual company prospects, as opposed to simply overweighting individual sectors, countries or styles, to deliver attractive long-term performance. In our view, the first half outperformance shows that the Alliance Trust portfolio is well positioned to take advantage of the broader market environment.”
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