It’s been a year like no other with a string of unpredictable events including soaring inflation, a sharp rise in interest rates, political instability, and even war. Such events resulted in challenges for investors, sparking a shift in investment behaviour. Two of the biggest DIY platforms reveal which funds, shares and trends ordinary investors have been backing.
Popular funds – active v passive
Overall, 14 of the 20 most-bought funds by those using Interactive Investor’s platform invest passively. While Fundsmith Equity was in the top spot, In second, third and fourth place were three of Vanguard’s LifeStrategy funds. These multi-asset funds give investors low-cost exposure to shares and bonds and the yearly charge per fund is a bargain price at 0.22%.
Kyle Caldwell, collectives specialist at Interactive Investor said, “the increased demand for passive strategies reflects scepticism over the ability of fund managers to add value when stock markets are volatile. Usually, one would expect choppy markets to play into the hands of active funds, due to the ability of managers to make changes to portfolios.”
The six active funds in the top 20 were Fundsmith Equity, Baillie Gifford American, Baillie Gifford Positive Change, Rathbone Global Opportunities, TB Guinness Global Energy and FTF ClearBridge Global Infrastructure Income.
At AJ Bell it was a similar story with eight of the top 10 funds bought being passive funds. Laith Khalaf, head of investment analysis at AJ Bell, said, “In a year when most markets have fallen and long-standing trends have gone into reverse, you might have expected investors to flock to active managers, who exercise discretion over what to buy, rather than simply following the index.
“But quite the opposite has happened, with our most popular funds list being dominated by tracker funds. Only Terry Smith of Fundsmith and Jeremy Podger of Fidelity Global Special Situations are holding the active fort against the passive hordes storming the top ten.”
Investment trust trends
Investors were still keen to snap up investment trusts in 2022, however. Scottish Mortgage topped the leader board at AJ Bell and Interactive Investor despite being down around 40% since the beginning of the year.
Khalaf said “There’s no real reason for investors to jump ship simply because this fund is enduring a tough patch. 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.”
The other popular investment trust names appearing in most bought were Scottish Investment Trust, City of London, BlackRock World Mining and Greencoat UK Wind, which as the name suggests invests in UK wind farms.
Unsurprisingly, banks and oil companies topped the majority of the most popular stock picks. Higher interest rates are good news for banks as it allows them to make a higher net interest margin. Oil companies have prospered and are broadly in robust health with sound balance sheets, strong cashflow and low debt. In both cases, these sectors provide a healthy dividend yield.
It was no surprise then that BP, Lloyds and Barclays featured in the top 10 most bought stocks for both AJ Bell and Interactive Investor. Tesla featured on both too. Other names in the mix were Rolls Royce, Legal & General and International Airlines Group (IAG).
Notably absent were the tech giants — the famed FAANG stocks — Facebook, Amazon, Apple, Netflix, and Google, which suffered a huge sell off this year. Technology companies — and tech-related companies — had been doing well for some years as a low growth and low interest rate environment. Covid then acted as the ultimate catalyst for accelerated adoption of their services.
But the reopening of economies and uncertainty as to whether these companies had over-extended themselves in assuming the new levels of increased demand were sustainable, coupled with the return of inflation and interest rate rises caused the stock prices to take a hammering.
AJ Bell says that Meta, Amazon, Apple, Netflix, Alphabet and Microsoft hydra combined shed US$4 trillion in aggregate market cap between them since their individual peaks. However, their combined price tag is still a healthy US$6.8 trillion.
Looking ahead to 2023
In times of volatile markets and grim newspaper headlines, investors are routinely reminded to try and remain calm.
Some of the worst performing days on the stock market have been followed by some of the very best. It’s time in the market that matters, and not timing the market.
The key will be finding those areas that can outrun a slowing economy and earnings downgrades.
Happy new year!