Funds for the vaccine trade

The development of a number of COVID-19 vaccines has been a game-changer when it comes to investment markets. In my newsletter titled 'Through the looking-glass' I explained how following Pfizer's vaccine announcement on 9th November investors rushed to rotate out of everything that had worked well during the COVID-19 pandemic and buy everything that had lagged. The rotation was as aggressive as it was sudden.

The pre-vaccine 2020 winners became the ‘vaccine trade’s’ laggards. Within equity markets, technology and communication sectors lagged along with the likes of consumer staples. On the flipside, economically sensitive sectors, such as financials, consumer discretionary and energy soared. There has been a rotation from growth stocks to value stocks. But even at a company stock level, there were some big individual winners and losers. It also meant that there was some significant rotation at a geographical level in equities (money flowed into UK equities and emerging markets) but also between asset classes (as money flowed out of government debt and into riskier assets).

The good news is that even those sectors that have lagged since the vaccine announcement have generally still risen in value, albeit to a much lesser extent. However, there is a very definite divergence between those funds that have benefited from the vaccine trade and those that haven't. The impact of the rotations will ultimately be reflected in the 80-20 Investor tables if it is sustained. Remember that 80-20 Investor looks beyond the short-term, placing more emphasis on the trends that last beyond just a few weeks.

However it raises the interesting question, how could you invest (or at least diversify your portfolio) to benefit from the vaccine trade, if you believe that it will continue and the vaccine rollout will be the panacea to the world's health and economic woes.

To answer this I have spent the last week analysing the performance of key unit trust sectors and their constituent funds to identify those that are positioned well for the vaccine trade.

Methodology

As I explained in my note titled 'Through the looking-glass' the aggressive market moves around the time of the Pfizer announcement gave the biggest hint as to those funds that will benefit from a continued 'vaccine trade'. By analysing the performance between the 6th and 10th November I was able to produce heatmaps of sectors and funds that performed well (or badly) during the market rotation.

Of course, one issue was that the pound also strengthened during those days which slightly clouds things, but not enough to invalidate the results. In any event, I also analysed the performance of the funds/sectors between the Pfizer announcement date and the end of last week. This allowed me to look at the performance of those funds over the weeks that followed the first vaccine announcement when the vaccine trade continued (admittedly at a much slower pace). In doing so I could determine those funds/sectors that have benefited from the vaccine trade (or not) as opposed to those that coincidentally outperformed/underperformed in the days that followed the Pfizer news, perhaps because of currency moves.

Analysis

First of all, the table below shows my analysis at a sector level. The first column shows the initial response to the vaccine news (6th November to 10th November) while the second column shows the performance in November (from 6th November onwards). If you wanted to play the vaccine trade then you would really want to choose sectors that were darker green (or at least green) in both columns.

You can see among the biggest beneficiaries were UK equities and European equities. But interestingly US smaller companies have performed well in the vaccine trade but the performance in the first column was hampered by the rally in the pound. So you can see why I've used both periods to test the data and identify the vaccine winners and losers.

However, I didn't stop there. I then performed the same analysis on ALL of the funds within key sectors. I have pdfs for each sector which you can download by clicking on each sector name below. I am unable to show the heatmaps in this page as an image as some of the sectors have over 200 funds which means that the image can't render properly.

Each heatmap will very quickly help you identify, at a glance, those funds that are well-positioned for the vaccine trade whether it be due to their asset mix, geographical bias, equity sector bias or value vs growth mix.

• Asia Pacific excluding Japan
• Europe excluding UK
• Global bonds
• Global Equity Income
• Global
• Mixed Investment 20-60% Shares
• Mixed Investment 40-85% Shares
• North America
• Sterling High Yield
• UK All Companies
• UK Equity Income
• UK Smaller Companies