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Top-performing funds and outlook for rest of 2026 · On The Money

• 0:00
  Kyle Caldwell: Hello, and welcome to our latest On The Money Podcast, a weekly show that aims to help you make the most out of your savings and investments. So today's episode is a half time report looking at which types of investments have performed well in the first six months of the year, which investments have lagged, and what have been the key trends for investors. And then we're gonna look at the second half of twenty twenty six, highlighting the key things for investors to look out for. Joining me to tackle this topic is Dave Baxter, who is senior fund content specialist at Interactive Investor. Dave, welcome back on.
• 0:39
  Dave Baxter: Thank you for having me on.
• 0:41
  Kyle Caldwell: So Dave, let's start off with the scores on the doors. Mhmm. So the top three investment association sectors for the first six months of the year, and this is from FE Fund Info Data, technology sector, so the average gain of 29.5%. Then Asia Pacific, excluding Japan, the average fund gain of 26.6%. And then we have global emerging markets in which the average fund has retained 25.4%.
• 1:12
  So Dave, could you talk us through the key performance drivers for each of those three sectors?
• 1:18
  Dave Baxter: Yeah. So I'm perhaps slightly oversimplifying, but I think you can tie this together with one theme, which is the fact that the artificial intelligence trade has now quite forcibly widened out to include some of those kind of Asian and emerging market stocks. So if you were to look at the most prominent kind of countries in the Asian and EM indices, those are Korea, Taiwan, Brazil, India, and China. And the two top performers there over that six month period are Korea with around 120% ish return, then Taiwan with about 65%. And you just have some massive strong performers there.
• 2:03
  So you have TSMC was around up by around 50%. Over in Korea, you have Samsung Electronics up by more than a 100%, and SK Hynix up by around 220%. So what you're getting is big rally from those handful of stocks, perhaps the returns are concentrated around a few names, which I'm sure we'll get to, but that is lifting those regions, and it's also lifting kind of technology funds.
• 2:32
  Kyle Caldwell: So in terms of market concentration, as you just pointed out, so, I mean, a lot has been made about the so called magnificent seven stocks and Yeah. How they have become an increasing part of the The US stock market index. So I think for the S and P 500 index, those seven companies, they're over the third of that index, and we've seen those seven companies become even more influential in global markets. So for the MSCI World Index, those seven companies, things around 22, 23% overall. But as you just touched on, I mean, for if if you hold an emerging market or an Asia Pacific fund, the chances are, whether it's an index fund or an actively managed fund, there are a handful of names that have been influencing the overall performance.
• 3:20
  And if you look, for for example, Taiwan Semiconductor, that accounts for 15.1% weighting Yeah. To the MSCI Emerging Markets Index. And we often see active for managers, they have typically over 10% in that stock. It's quite hard for full managers to go against the company when it's such a big part of the index as, you know, if it has a you know, if it it performs well as it as indeed it has done, and a full manager doesn't doesn't hold it, then they they could underperform just by not holding that one stock because it's such a big part of the index. And other names, so Samsung electronics, that's 8.2% of the MSCI Emerging Markets Index, and the AI memory chipmaker SK Hynix, that is 7.7%.
• 4:13
  And, obviously, those weightings, they've they've been going up because the share prices have went up a lot for those companies, and they are big companies in their own right. In terms of what has been the best overall fund performer in the first six months of the year, so that the gold medal goes to Franklin FTSE Korea ETF. So that's up a 111%. Wow. And then we have Bearings Career Trust.
• 4:40
  So that's up just over a 105%. But the things that bear in mind is that these are very specialist funds. Know, if you are considering them, then they should be sort of, like, in the adventurous area of your portfolio, and it should, you know, ideally comprise a small weight and rather than being too much of your portfolio in such a specialist area. I'd say that for any sort of single country exposure in emerging markets. And also bear in mind, like, for example, with Bearings Career Trust, you know, even though that that's an actively managed funds, but, you know, it it does have 9.5% in SK Hynix and 9% in Samsung Electronics.
• 5:19
  But then if you look at the ETF, one of the bonus of that one, nearly half of that tracker fund is into stocks. So Yeah. As ever, David, it is important, isn't it, for investors to look under the bonnet and see how the fund is exposed to certain areas and certain themes, and then take on a view about whether that has become disproportionate or not.
• 5:41
  Dave Baxter: I think it's also worth looking at how these stocks and regions are creeping into all manner of different funds and how you might be getting kind of exposure through what you would see as kind of very different portfolios. So for example, a a generalist global fund might hold more in Korea, a tech fund might hold more in Korea again, and even, you know, if we look at a strong performer with a value style, you've had Artemis Global Income that has listed I don't know if it still does, but Samsung Electronics for quite a while was its top holding.
• 6:15
  Kyle Caldwell: And, of course, market concentration is not a new thing. Back in the early two thousands, for example, Vodafone at one point was nearly 15% of the put to all share index. So it's just something to always be mindful of. In terms of which other types of funds have performed well in the first six months of twenty twenty six and beyond Korea, We have Polar Capital Global Technology. That's up nearly 75%.
• 6:43
  Amundi MSCI Semiconductors ETF that is up over 70%, and also up just over 70% is the Polar Capital Smart Energy Fund. And then below that, we have a handful of ETFs providing exposure to Taiwan that performed very well as well around 70% returns. Dave, for investment trusts, you run the numbers. Yeah. Have there been similar trends playing out, or has there been some differences as well?
• 7:13
  Dave Baxter: Broadly similar with a couple of additional trends, I would say. So I'm gonna, again, slightly oversimplify it. I'm not gonna say a lot of the big games came from space, AI and Asia, and I suppose those last two categories you can sort of bunch together. So kicking off with space, of course we had the SpaceX IPO in June, was very hotly anticipated and there's been a lot of market movements around that, so you had Sarah from Space continues to do very well, and some of the Bailey Gifford Trusts held SpaceX, so Scottish Mortgage and so on also produced very big returns. Turning to AI, you had Polarcapsules Technology, so the open sorry, closed ended version of the fund you mentioned before.
• 7:56
  You also have Manchester and London, that's a very punchy fund that previously had massive bets on Microsoft and Nvidia. It's now cut those back and it has big positions in things like TSMC. And then turning to kind of Asia emerging markets and again sort of tech AI, you had names like the Baylor Gifford managed Pacific Horizon and things like Fidelity Emerging Markets. And finally, I would mention one interesting outlier, we've had big returns from Baker Steel Resources, so that's a commodities fund, had a very strong run last year and interestingly, it's continued that when we've had a bit more of a kind of mixed experience for those commodities funds.
• 8:39
  Kyle Caldwell: So overall, it's been a pretty solid first half of the year Yeah. For both funds and investment trusts. Of course, we had we did have that pickup in stock market volatility earlier this year in response to the Middle East Conflict, and there was also periods in which certain tech shares have had quite short sell offs. And we also had that sell off early on in the year again for software related companies, the likes of Relics and Experian, London Stock Exchange Group. They were caught up in that sell off amid fears over the impact that artificial intelligence will have in terms of disrupting their business models potentially.
• 9:20
  Yeah. In terms of the worst performing sectors, so only three fund sectors have actually lost money. So the India fund sector, it's at an average loss of nearly 7%. And then there's two bond sectors that have made very small losses of naught point one and naught point 2%, and that's for euro government bonds and euro mixed bond centers. Now global funds, very popular with investors.
• 9:50
  They like the amount of diversification those funds offer. They've delivered an average gain of just over 10%. And for UK funds, so if we look at the two main sectors, UK oil companies and UK equity income, the returns are 6.15.2%. And, you know, I think one of the stories of the first half of the year is that both global and UK equities, they've continued to climb higher despite lots of uncertainty, lots of potential headwinds, you know, due to the political tensions, a higher oil price, and in turn, also concerns over the inflationary impact the higher energy costs will have on consumers. Going back to India, Dave, what what are your thoughts on that fund sector being bottom of the performance pile?
• 10:38
  Dave Baxter: It's interesting because I think one reason is that it lacks a really obvious AI narrative. So a lot of the market momentum, again, has been around that theme, but India there's been interesting coverage of how India basically appears to lack those really obvious AI plays. So that's one problem. Also, it's a big importer of some of its NG. So, you know, when things were looking worse after the sort of advent of conflicts in The Middle East, that was one of the kind of big struggles.
• 11:11
  Another thing is it might simply, I suppose, still be having a bit of a hangover from its strong performance in the past. So for a while, it was a bit of a emerging market darling. You know, China was struggling. India was doing amazingly, and that led to these concerns that valuations were looking a little bit kind of frothy. So I guess we've seen a pullback from that.
• 11:33
  But, of course, you know, whenever something's down, it might be an interesting contrarian play, so perhaps people will start to kind of turn an eye there. But I suppose they do need to look at these valuations and whether they do seem to have come off enough to look attractive.
• 11:49
  Kyle Caldwell: And in terms of global funds, so as mentioned, the average return for that sector in the first half of the year, just over 10%. But it there's a wide variety of different strategies Yeah. Sector. There's hundreds of funds. I mean, some funds focus on global energy stocks, for example.
• 12:06
  Others are more generalist. Are there any sort of trends or funds you pick out from the first half of year?
• 12:13
  Dave Baxter: Yeah. As you say, it's a very disparate sector, and you often see the very specialist funds both at the top and the bottom of the table. So at the minute, have things like cybersecurity and AI funds at the top. But I think it's an interesting time to look at the kind of so called generalist global funds. You know, they're doing quite different things at the minute in terms of whether they're, for example, bailing out of magnificent seven shares on the back of worries about AI spending and so on.
• 12:41
  I wanted to highlight one name which is the kind of best performer out of the generalists. That is Blue Whale Growth. It's returned, think, about 45% over the six months, which is, you know, no mean feat. It's a very growthy fund, has in the past been accused of being basically a tech fund, but does focus a fair bit on AI. It also holds some things like, you know, certain defense companies, that kind of thing.
• 13:09
  And it was one the funds to slash its exposure to mag seven companies last year on the back of concerns about AI spending.
• 13:17
  Kyle Caldwell: I mean, we've both interviewed pretty well, a full manager over the years, Steven Yu. And he is he is very active, and he's not afraid to change the direction and position of the fund. And, you know, some for managers, you know, the the top 10 holdings, you look back and think three years ago, quite similar to what they were then. But with Blue Well growth, I've noticed over the years that that even the biggest holdings in the funds, they do over time they are over time, they have changed as he's adapted to where he thinks are the the next best opportunities.
• 13:50
  Dave Baxter: Yeah. He will make quite dramatic moves and suddenly turn kind of sour on a sector and completely bail out of one particular part of the markets and then focus on something else. I guess in the past people might worry about that, they might worry about a lack of consistency, but what's interesting is in recent years we've seen some of those classic buy and hold managers are actually having quite a challenging time, and then these more flexible names are kind of doing pretty well.
• 14:16
  Kyle Caldwell: So let's now move on to the session after podcast in which we'll get our crystal ball out and discuss prospects and key considerations for investors for the rest of 2026. So, I mean, Dave, one of the big questions for me is whether the good times for stock markets are gonna continue. Yes. In particular, the strong rally that we've seen, and in particular across semiconductor and memory chip stocks, which have performed phenomenally well. And so for me, it really does heavily hinge on whether the world's biggest technology companies, the so called magnificent seven, whether they continue to deliver the earnings growth that investors are expecting on the basis of our on on whether the the valuations justify the potential earnings growth as well.
• 15:04
  And and ultimately, a big question mark is whether the scale of capital expenditure on AI advancements is gonna lead to the earning trove from profits that investors are expecting down the line Yeah. In the future. And I know that one thing that many full managers are keeping a very close eye on is how much of that capital expenditure is being spent through debt, or is it being taken out of the business in other ways?
• 15:33
  Dave Baxter: Yeah. Yeah. It's interesting, isn't it? You have this kind of, I guess, dichotomy where the equity markets are still very excited, but the and we've seen that with things like SpaceX as well. But now you also have these kind of companies turning to the the bond markets, and bond markets are a bit more kind of cautious and a bit more concerned.
• 15:58
  Yeah. It will be interesting to see whether that spending comes through, and, of course, there are these arguments about the past if you look at the kind of Internet boom and .com boom and bust. You did have a kind of life changing technology, but it didn't actually lead to, you know, profits in the short term for a lot of these companies. So there is potential for a shakeup. There could be jolts.
• 16:25
  I guess, though, perhaps you have to turn back to the original principles. Maybe you just need to stay diversified, but you also probably need to avoid knee jerk reactions, and you need to kind of stay invested if you can.
• 16:38
  Kyle Caldwell: There's a quote that came in my inbox that I thought summed up the situation very well. That was from Anthony Willis, who's senior economist at Columbia of Red Needle Investments. So he said I mean, this is part of his quote. He said, the critical question is whether companies can monetize that spending and generate an attractive return on investments. Expectations around AI related capital expenditure, revenue growth, and profitability are now high, which means earnings results could become an important source of volatility.
• 17:09
  For I thought that sums up the situation very well because I think every time these big companies now report, there's a lot of expectation. And because there's a lot of expectation baked into how high the valuations are for the share prices.
• 17:22
  Dave Baxter: Do you also, I suppose, have to watch out for kind of what I'm gonna call AI washing in reports? So company we've already seen some companies kind of slashing head counts at, you know, their organisations and they've tried to attribute this to AI, but actually they've had kind of poor performance anyway, so they're perhaps finding an excuse for it. And we, you know, arguably used to have this with Brexit where UK companies would have a rough quarter and they just find this kind of catchall excuse. So maybe, I guess, as always, investors need to be a bit savvy and, you know, a bit discerning when they read through these kind of statements and maybe take things with a pinch of salt in terms of what management are trying to tell them.
• 18:04
  Kyle Caldwell: Yeah. It's a really interesting point, Dave, and I think it it's a case of, you know, if if you're if you're investing in an individual company, it's a case of looking under the bonnet and then making a judgment call yourself about how much is that company pivoting into AI. I think also for investors, I think it's a case of considering how much exposure overall you have to technology and by extension to the artificial intelligence theme. And you may wanna, you know, invest in certain funds or areas that have, you know, less exposure to the AI theme and also technology. And one of the ways to reduce and also reduce concentration risk for the magnificent seven names are equally weighted ETFs for the S and P 500.
• 18:51
  So Yeah. Two that we have on Interactive Investor are the Invesco S and P 500, equal weight ETF, and X Tracker's S and P 500 EW. And they're also over the past couple of years, there've been some new full launches of global tracker funds that have been stripping out US exposure. Yep. So and two that we have, Interactive Investor, are Amundi MSCI World ex USA ETF and X Trackers MSCI World ex US.
• 19:23
  And I think the third option, I mean, that's not exclude I have to exclude, I think there are other ways to do it as well, is to consider active funds that are just giving you vastly different exposure to the global stock market index. And one key way that you can sort of judge whether or not that that is the case is to look at the active share ratio if it's available. In a nutshell, the higher the percentage, the more different that fund is from the global stock market. Dave, you wrote an article recently in which for your weekly column, in which you pointed out the you could actually look at more sort of board and funds that you know? So they give you more sort of give you a blend of exposure to different area, but but but you're getting different exposure to areas that, you know, are underserved by other fund options.
• 20:16
  Dave Baxter: Yeah. This is my valiant call for people to look beyond the exciting parts of the market and look purely at the or additionally at the boring parts. So go for those kind of unloved sectors, go for those sectors that may be performing well, but aren't really sort of bringing investors in. So one I mean, this is admittedly niche, but one that we discussed briefly earlier is India. It's quite out of favor.
• 20:41
  It doesn't have the kind of obvious AI play it seems. So maybe things like a trust I always quite admired was Ashokya India equity and takes a very active approach. It also has a kind of performance fee system where it doesn't actually have a a regular fee. So in theory, the team are quite well incentivized to try and, like, pick those winning shares. Beyond that, you could just look at areas that are kind of a bit less, you know, sexy than The US.
• 21:09
  So both Europe and The UK in recent years have actually been performing very well. But if you look at fund flows, they're not really drawing people in. So I don't know, you could look at things like Lightman European, the kind of European value funds. I was gonna mention premiumizing European opportunities, which is mid cap focused, but its performance is outrageously strong in recent months, just in the last three months. So maybe that's kind of slightly toppy.
• 21:41
  And then UK funds, you do have strong performance like Temple Bar, but you also have things to offset them like Marlborough special situations and so on. So I guess, again, it's just that, you know, mantra of diversifying.
• 21:53
  Kyle Caldwell: Plenty of food for fourth day, Dave. Two other options I I consider more sort of blander options for investors are Polar Capital Global Insurance and UTLICO emerging markets. So I think the Polar Capital fund is investing in, obviously, a specialist area of the market, but I don't think it's really got many competitors, if not any, at all, that are fishing in that same pool. And then the UTLCO Emerging Markets Investment Trust. This is a a way to gain sort of different exposure to emerging markets, and it's it's more of a defensive way to to own, you know, a higher risk area, which which is what emerging markets is providing investors and why you should always consider investing over the long term, you know, at least five years, ideally, more than that ten years, typically.
• 22:46
  Let's now move on to another thing for investors to watch for the rest of 2026, and that is interest rates. Mhmm. So at the start of the year, the expectation was that we get at least one interest rate cut in The UK, if not two or maybe even three. However, the Middle East conflict sort of postponed any potential UK interest rate court. And,
• 23:13
  Dave Baxter: you know,
• 23:13
  Kyle Caldwell: I think at the moment, the consensus is that the next move might actually be an increase Yeah. Rather than a than a decrease. And this has also postponed the sort of potential recovery for certain areas of the market. I'm thinking here, UK smaller companies have been out of favor for the whole time that UK interest rates have went up, And also renewable energy infrastructure Yeah. Investment trusts.
• 23:39
  Again, those rises in in UK interest rates have been a real headwind for that sector. So, Dave, what are your thoughts? I mean, are we are we waiting here for interest rates to be caught for a potential catalyst for those two sectors?
• 23:56
  Dave Baxter: I guess it doesn't help if it takes longer for them to get cut. There's an interesting argument that, as you arguably saw with some of the kind of growth portfolios globally, like Scottish Mortgage, that perhaps some companies have become a bit more used to higher rates, and they've kind of toughened up in the face of that challenge. So things might not be as bad as they were in, say, 2022, but, yes, it definitely it removes one of the kind of obvious triggers for a strong recovery for those sectors. And, you know, you mentioned some of those areas that were affected. I was gonna put some numbers on what the damage has been.
• 24:39
  So, you know, the last five years in aggregate have been good for lots of markets, but if you look at the average UK smaller companies funds over five years to early July, it's down by around 12%. And if you look at the average renewable energy infrastructure trust over that period, that's down by around 16%. And that's if you, you know, you're stripping out a lot of trusts that have just disappeared because they've gotten so cheap and been bought out or merged away. So it definitely means that if you're focusing on those areas, you might need to be more patient, but perhaps it also offers you a kind of cheap way in again if you're the kind of very patient, adventurous contrarian.
• 25:21
  Kyle Caldwell: I think, yeah, I think if you are a patient and contrarian investor, I think the renew the yields that are on offer for renewable energy infrastructure, you know, typically 10% plus. I can see, you know, why some people own them as, you know, those yields in theory, they're paying you to wait. But as you said, Dave, you do need to be patient because, you know, it'd be over three and five years, you know, overall total returns for some of those investment trusts have been negative. So, yes, you may have been getting the dividends come in, but if you look at the overall total returns, capital plus income, you've actually it's actually not worked out that well over those periods.
• 26:02
  Dave Baxter: Yeah. And also with the paid to weight thesis, I suppose over time, some of these trusts have started just to kind of wind up. And if you're you're a renewable energy infrastructure trust, then you hold a load of kind of private assets like wind farms, and those are not easy to sell if you wanna suddenly wind up your portfolio and hand the cash back to investors. So you're gonna have to wait a much longer time potentially than you would expect.
• 26:28
  Kyle Caldwell: And it's not just being those increases in interest rates from rock bottom levels, the peak of 5.25%, have been a headwind for that sector. There have been some political interventions that have that have harmed that sector.
• 26:42
  Dave Baxter: Yeah. And there's also the prospects of further, I suppose, bits of bad political sentiments. There's this argument that if you do, at some point, have something like a reform government, then that's gonna become even more hostile to to that space.
• 26:58
  Kyle Caldwell: And that moves me on to the final points I wanted to make in terms of what investors should watch out for and be mindful of, which is political risk. Of course, at some point, we will have a new UK prime minister, and that that does create uncertainty for stock markets as we don't know how then Pearson will put their stamp on the role and what policies will be introduced. And also, you know, beyond that, I mean, geopolitical risks, if not disappears. I think ultimately, Dave, the the message for investors is to, you know, have as much of a resilient portfolio as possible to be diversified and, you know, to ultimately to stick to your long term plan.
• 27:37
  Dave Baxter: Yeah. Yeah. And also just monitor, particularly if it's active funds, monitor what you hold because, you know, we've spoken about global funds in the mag seven, but say, you talk about The UK, UK equity funds, some have been digging a lot more into mid cap shares because they've been beaten up, you might have more exposures to The UK consumer, and there are you need to kind of balance out these different exposures that you have within those funds.
• 28:01
  Kyle Caldwell: Dave, well, thank you very much for coming on to chat through both the first half of the year and prospects for the second half of the year.
• 28:08
  Dave Baxter: Thank you for having me on.
• 28:11
  Kyle Caldwell: And that's it for our latest On The Money podcast. We love to hear from listeners, and the best way to get in touch is by emailing us on otm@ii.co.uk. We have plenty of analysis articles related to funds, investment trusts, and ETFs on the Interactive Investor website, which is ii.co.uk. And, hopefully, I'll see it again next Thursday.