In this article we look at equity returns and the returns of top performing US equity Mutual Fund to show that increasing yields has a tangible effect on equity and mutual fund performance. We also show that by holding the top 10 invested stocks for this fund you can out-perform the entire portfolio.
Towards the end of February, we have seen higher yields (the 10Y yield went from 1.10% to 1.56% in the thirty-day period leading up to the 8th of March) and lower equity valuations, specifically in technology. Naturally this has spilled over into equity and fixed income mutual fund returns. The rise in rates has affected longer duration equities which have benefited from historically low yields. As seen in figure 1, the difference in yield curve for US Treasuries vs. last month (as of the 8th of March) is dramatic. We are in an environment of rising rates; this can also be seen in Figure 2 comparing the Yield Curve today vs. 1 Year ago.
US Tech stocks are frequently referred to as long duration due to the fact they are high growth (reinvested dividends) and because of the recent historically low-rate environment. In table 1, below, we have looked at the top 10 constituents for the Baillie Gifford American Class B Acc. (GBP) fund. This fund was selected as a top performing Mutual Fund invested in US Equities vs. its peer group. These top holdings are mainly non-dividend paying US Tech stocks which have seen incredible returns over the past year but have taken a substantial hit this month – except for Wayfair Inc. ($W) and Alphabet Inc. ($GOOGL).
If you held a portfolio of these 10 stocks the 1-year return (09/03/20 – 08/03/21) would have been 214.81% and the 30-day return (22/01 – 08/03) would be -11.38%. In contrast the 1-year return for Baillie Gifford American Class B Acc. (GBP) is 119.45% and the 1-month return is -11.74%.
|Equity||Ticker||Weight||Tech Stock (Y/N)||Dividend (Y/N)||1 Year* Return||1 Month* Return|
|Trade Desk Inc. (The)||TTD||5.96%||Y||N||213.54%||-16.49%|
Source: Morningstar, Yahoo Finance as at 08/03/21
*09 Mar 20 – 08 Mar 21 | +30-day Return Jan 22nd – March 8th
1 Weights adjusted as a percentage of total portfolio.
In conclusion, the rise in rates has had a tangible effect on returns for equities in February which has spilled into mutual fund returns. As rates are at an historic low there may be further increases which may influence equities. We can out-perform one of the top performing, US focused, mutual funds by investing in the top 48.63% of assets at the same weights over one year. However, due to the sensitivity of these top 10 equities to rates, the investor would have seen a sharp decline in the past month.
N.B. This article does not constitute any professional investment advice or recommendations to buy, sell, or hold any investments or investment products of any kind, and should be treated as more of an illustrative piece for educational purposes.
To trial a truly powerful and comprehensive analytic software for investment decisions, fund allocation, and our new, innovative digital due diligence visit alternativesoft.com , call us on +44 20 7510 2003, or email us [email protected]
71 Carter Lane, London,
+44 20 7510 2003