JEFF PRESTRIDGE: Stay confident in my 2023 mutual fund tips – they WILL work out well

When I predicted this time last year that making money from your investments could become a challenge in 2023, I secretly hoped I would be wrong.

Unfortunately, I was rightly pessimistic. Despite a strong performance by the US stock market, mainly driven by the big technology companies (such as Alphabet, Apple and Nvidia), equity investments have proven to be very volatile. The result of a mix of factors – from uncertainty about the global economy to ongoing geopolitical tensions and a toxic mix of persistent inflation and high interest rates.

The performance of investment funds reflects this uncertain backdrop. These investment vehicles are a popular way for investors to gain exposure to the stock markets for a variety of reasons. They are easy to buy and sell, especially through an online investment platform. They are managed by an investment expert with market knowledge, hold a range of stocks (risk diversification) and are not too greedy when it comes to fees.

Yet all these compelling factors do not guarantee positive returns year in, year out. Stock investing is not a one-way ticket to riches. It is invariably a fleeting journey that rewards long-term patience and nerves of steel (and not bailing out when times get tough).

So of the 380 listed funds under the trade body, the Association of Investment Companies, only 210 (55 percent) have generated positive returns by 2023 – returns including both dividends and capital gains, but excluding investors' costs. Include these and the number of positive returnees continues to decrease.

The best performers were a mix of technology trusts, Indian funds, private equity and specialist investment vehicles – with returns between 35 per cent (India Capital Growth) and 89 per cent (private equity giant 3i).

Among the worst performing countries are those investing in China, an economy that has yet to reset from the Covid-19 crisis and continues to be plagued by political interference. Just a few days ago, Chinese authorities imposed new rules that limit the time and money people can spend on gaming. The move caused shares of Chinese companies Tencent, NetEase and Bilibili to fall sharply – all of which have major interests in gaming.

Real estate trusts, which invest in commercial real estate or residential properties, also had a torrid 2023.

If we look at the performance figures over five years, the picture obviously changes. Many more funds (three-quarters of them) have delivered positive returns.

This time last year, I put together a portfolio of mutual funds that I thought could deliver spectacular returns. Not necessarily immediately, but certainly in three to five years. The portfolio consisted of ten trusts, all managed by different investment groups (an important diversification factor). The funds were also complementary, rather than similar: they invested in different parts of the world, some for growth, others for a mix of capital and income returns.

Their risk profile spanned the entire spectrum. At the high end were funds investing in the stock markets of India (Abrdn New India) and Vietnam (VinaCapital Vietnam Opportunity) – choices made based on the superior economic and corporate earnings growth that these two countries enjoy. Broader exposure to emerging markets was gained through Templeton Emerging Markets, a trust that led the way in investing in embryonic countries more than thirty years ago.

There was also the exciting investment theme of space (covering everything from travel to satellite networks) and the world of fintech – through the Seraphim Space and Augmentum Fintech funds respectively.

The growth segment was completed by Herald, a trust that invests in smaller companies around the world. To provide some ballast, income-biased trusts were also selected – these get their dividend income from all parts of the world, be it Asia (Invesco Asia), the UK stock market (Aberforth Smaller Companies and Schroder UK Mid Cap) or globally. (Brunner). What linked these ten trusts a year ago was the fact that their share prices did not reflect the value of their underlying assets. They received deep double-digit price discounts, or, to put it more crudely, they were dirt cheap.

My thesis was that these bargain prices would not last forever – and at some point would result in a performance improvement. I thought the discount propellant might start this year.

HAS THE PORTFOLIO RESISTED THE STORMS?

What has happened to these trusts in the past year? Did they deliver the great returns I thought they were capable of? The answer is no. I know this because I invested £100 in each of these ten trusts at the start of the year through my stocks and shares Isa. Looking at my Isa yesterday, the combined value of these assets was £845.32. Add to this the dividend income I received of £15.09, and my £1,000 investment is now worth £860.41.

In percentage terms, this is a significant decrease of 14 percent. To put it mildly, the cost of buying such small blocks of shares (each purchase is subject to a fixed transaction charge of £11.95 plus 0.5 per cent stamp duty) was a terrible drag on the amount invested. In addition, over £40 of the £1,000 was not invested as only whole shares could be purchased.

If we ignore the purchase costs of €123.25 and the uninvested money (€40.28), my portfolio has actually grown in value by 2.9 percent. Yes, I would have been better off with cash, but I still believe this portfolio will prove itself over time.

Significant: the table. left shows that nine of these trusts still have share prices at a large discount to the value of their underlying assets. These discounts will disappear as market sentiment improves. Maybe that will happen next year, maybe not. But I will hold on to these ten trusts until they shine.

FINALLY – A PROMISE

As promised last year, I will donate £139.59 (the paper loss I made on my wallet in 2023) to charity. The beneficiary will be Prostate Cancer UK, a charity close to my heart.

This time next year, any profits or losses I make in 2024 will also be donated to charity. Keep investing.