The manager of Finsbury Growth & Income talks about the trust’s recent performance and explains why there are still opportunities in the UK for growth investors.
“Frustrating” is the word that Nick Train, manager of Finsbury Growth & Income, has used to qualify the performance of his investment trust in recent years.
While the trust has comfortably outperformed the FTSE All-Share over the past decade, it has lagged its benchmark over three years. The trust’s results, published yesterday, showed its net asset value continued to underperform the index in the year to 30 September.
The lack of exposure to cyclical sectors such as energy, basic materials and financials has been one of the main reasons for this underperformance as Train prefers branded consumer goods, software and data analytics companies. One of Finsbury Growth & Income’s key holdings, Diageo, has also disappointed in recent years, which has been detrimental to performance.
In addition, UK equities have fallen out of favour with both global and domestic investors and are left with no obvious buyers.
Yet, Train believes that fundamentals will eventually reassert themselves and is hopeful he will be able to continue to deliver the same level of returns that he has since he took over the management of Finsbury Growth & Income in 2000.
Below, he discusses the trust’s performance, explains why UK equities deserve a place in growth investors’ portfolios and implores active managers to take risks.
Performance of trust over 10yrs and 3yrs vs sector and benchmark
Source: FE Analytics
What is your investment philosophy?
We run a concentrated portfolio of excellent businesses situated in advantaged industries and then hold them for very long periods of time.
The aspiration is to participate in the superior economics of these businesses and allow the wealth that they create over time to create wealth for our shareholders. It's a highly distinctive investment approach and the result of that is a highly distinctive portfolio.
Why should investors have the trust in their portfolio?
The trust offers the potential, but sadly never the certainty, for really differentiated and excellent performance. I would argue that the historic returns of the strategy give an indication of the sort of returns that, we hope, are achievable in the future.
If you look at the very long-term returns, Finsbury Growth & Income has outperformed not only the FTSE All-Share index, but also the S&P 500 in the United States.
Performance of trust over 20yrs vs indices
Source: FE Analytics
UK equities have been out of favour with investors for a long period of time. Is it a good moment to buy growth companies in the UK rather than globally?
There have been times, particularly over the past seven or eight years, when I've looked with envy and chagrin at the growth opportunities being captured in markets outside of the UK.
But notwithstanding the UK stock market’s reputation of being a ‘Jurassic Park’ made up of dinosaur businesses, there are in fact a measurable number of genuinely globally significant growth companies listed on the London Stock Exchange.
I don't want to exaggerate the opportunity, but perhaps there is an undervaluation of UK equities, including the obvious global growth businesses that are listed in London.
The portfolio is quite concentrated (85% in the top 10 holdings). What would you say to investors concerned with this level of concentration?
Every active fund manager must take some risks to credibly propose to beat an index. There are many low-cost products available to investors if they simply want to perform in line with the benchmark.
But if they want to achieve a higher rate of return, then they need to identify the risks that are being inevitably taken by a fund manager to try to generate returns greater than the benchmark.
I believe the businesses we have chosen to concentrate the portfolio on are inherently low-risk companies. They tend to be major, substantive, long established companies with very strong business franchises.
The trust has lagged the benchmark in recent years. How do you explain it?
Sometimes, you just can't make the whole portfolio work all at the same time. We've had some absolutely fantastic returns from big holdings this year, but also some deeply disappointing performance from other big holdings. It's amounted over the course of 2023 to another year of mediocre, slightly worse than benchmark performance. It is frustrating.
But we must stick to the strategy because if we don't our investors will lose all certainty about what it is that we do. We must stay extremely patient and own businesses that have demonstrated, and we believe can continue to generate, attractive returns over time.
What have been the main contributor and detractor to performance over the past 12 months?
I would assume that the biggest contributor has been Sage, which is arguably the biggest pure technology company listed on the London Stock Market.
The shares are up over 50% in 2023. I think it has been a combination of the announcement of a share buyback and the reassuringly strong double-digit growth of this software company.
Performance of stocks YTD
Source: FE Analytics
The biggest detractor is Diageo. The share price year-to-date is down over 20%. I did not expect that, and I don't like it, but it's understandable in hindsight. Interest rates have stayed higher for longer in 2023, so there's been a slight trading down of consumers, because their purses are feeling a bit pinched. That's been an unhelpful backdrop for Diageo.
The other thing is that the company got its physical stock wrong in Latin America. Diageo has over supplied the Latin American market. As a result, there's a sharp contraction in new shipments to Latin America until that excess stock gets mopped up.
We have been adding to Diageo again after this recent fall in its share price. Let's hope that's the right thing to do, but I have to admit I didn't expect to have the opportunity to buy it again at a share price below £30.
Several UK companies have chosen to relist in the US (or are considering to), while others have been the targets of M&A activities. As a UK investor, is it a concern to you?
At an abstract level, yes. It is conceivable that all the businesses that we might aspire to invest in would no longer be listed on the London Stock Market. In that case, the mandate that we've been given would be impossible to execute on.
I guess if that happened, we would need to consult with the board of the investment trust and say: ‘look, we simply cannot deliver the effects that we're trying to capture, because these companies have been taken over or they're no longer listed in London’. But to date, we're still able to find the type of companies that we're looking for.
What do you do outside of fund management?
I both practice and teach yoga. It's the most wonderful practice and discipline: it makes you a better investor and a better human being.
If your readers take nothing else from what I've said today, it is that they should take up yoga. It's never too late to start and the best time to start is tomorrow.
Hargreaves Lansdown data highlights drawdown investors' tech-heavy approach to funding retirement.
Self-Invested Personal Pension (SIPP) drawdown investors are showing an increasingly bullish attitude towards the market, favouring high-risk assets, particularly in technology and US-based investments, according to data from Hargreaves Lansdown.
A SIPP is a retirement savings plan available in the UK that allows individuals greater control over their pension investments. Unlike traditional pension schemes, SIPPs offer a broader range of investment options, including stocks, funds, and other assets.
Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said: "Optimism abounds amongst the golden oldies. Despite stubborn inflation, compelling cash rates and a hazy economic outlook, HL clients investing in drawdown are looking to artificial intelligence to fund their retirement."
As the growing popularity of technology-focused investments mounts, passive funds are also gaining traction among SIPP drawdown investors.
This shift towards passive investing is driven by a desire for simplicity and cost-efficiency with index funds effectively tracking the market's performance over time.
Key passive funds that have attracted the attention of SIPP drawdown investors include the World Legal & General Global Technology Index Trust and the iShares III plc Core MSCI World UCITS ETF.
The former offers broad exposure to the technology sector while minimising management fees, while the latter is a global equity tracker dominated by the US tech sector, making both attractive options for investors seeking to capitalise on the sector's long-term growth potential.
Retirees are opting for riskier investment choices, deviating from the conventional practice of de-risking during retirement. Although the bulk of the list is in high-risk strategies, some lower-risk assets such as gilt investments and multi-asset funds are present, albeit in fewer of them.
Source: Hargreaves Lansdown
In addition to technology-focused investments, emerging markets and income funds have emerged as popular choices among SIPP drawdown investors seeking to diversify their portfolios and generate regular income streams.
The Jupiter India fund has been a consistent performing sitting second in the IA India/Indian Subcontinent sector over one and three years and third over five years. The £898m fund is managed by Avinash Vazirani, who aims to capitalise on India's dynamic economy and potential for long-term growth.
Artemis High Income is managed by FE Fundinfo Alpha Manager Ed Legget, Jack Holmes, and David Ennett and has also been a top performer in the IA Sterling Strategic Bond sector, recording a top-quartile return over one, three five and 10 years. The £785m fund has attracted investors seeking consistent income streams. The fund's focus on high-yielding bonds provides investors with a regular source of income while aiming to preserve capital.
These funds, along with passive options such as the £9.7bn Vanguard fund offer SIPP drawdown investors a range of strategies to suit their risk tolerance and investment objectives.
Those SIPPs in the accumulation phase are also invested in predominantly tech-heavy investments such as Microsoft, Tesla, and BP, although one money market fund cracked the list. This divergence in investment approaches between drawdown and accumulation stages underscores varying risk appetites among pension investors.
Wall urged investors to evaluate their risk tolerance and investment objectives carefully, however. While US investments remain popular, concerns about valuations suggest a need for diversification across styles, sectors, and countries.
The market's current valuation suggests caution, especially regarding the overvaluation of top S&P 500 constituents compared to broader market indices.
Wall added: "Investors at all stages of their pension saving should consider their investment goals and their appetite for loss before investing, as well as what is already in their portfolio.
"Valuations in the US look close to fair value when compared to their history. The top 10 constituents of the S&P 500 are trading at significantly higher valuations compared to the rest of the market; the gap between the Magnificent Seven and their index siblings is a chasm and a widening one."
Trustnet editor Jonathan Jones considers his fund pick for next year.
In a couple of weeks the Trustnet editorial team will reveal our fund picks for the year ahead. Last year we took big swings and, with a few weeks to go until the end of the year, our selections from the end of 2022 have a long way to go if we are to get back to anywhere near a reasonable return.
Looking forward on a one-year view is never easy and, more often than not, it is ill-advised. We do this every year as an exercise, although most of our choices are with a long-term mindset in place.
This year I am struggling to think of something to get excited about. According to this morning’s article, core bonds should make a decent return, with experts at Insight Investment suggesting it would take a 100 basis point interest rate hike for fixed income to make a loss next year.
That is a pretty safe bet (as few people are anticipating any hikes next year at all, with cuts more commonly forecast) but not one that will ultimately beat my colleagues’ fund picks over the next 12 months.
Perhaps the contrarian way is best. Former reporter Tom Aylott chose China last year in what was an abject disaster of a fund pick. But the MSCI China has now dropped by double digits in each of the past three calendar years (2021-2023) – barring a miraculous last few weeks of the year. It is a boom or bust proposition, but surely the market must come back at some point?
Speaking of contrarian, perhaps commodities could be the way to go. Earlier this year experts were calling for a commodities ‘supercycle’, with much optimism around the price of raw materials that rocketed during the Covid years.
After two strong years making double-digit gains (2021-2022), this year the IA Commodity/Natural Resources sectors has dropped 7.5% – the second worst performance behind the IA China/Greater China peer group.
Healthcare funds and UK smaller companies portfolios have also dropped this year, the latter having also plummeted in 2022.
Earlier this week Ken Wotton, manager of the WS Gresham House UK Smaller Companies fund, made a compelling case for the sector, noting that small-caps tend to recover faster than their larger counterparts following a recession – something that is broadly expected at some point next year.
But they never truly recovered from the mini-Budget fiasco last year, so could also hold up surprisingly well during a recession, with valuations already pricing in a worse economic outlook than their large-cap cousins.
The converse option is to stick with the winners for another year. If this is the case, technology is the obvious choice. The IA Technology/Technology Innovation sector topped the charts in 2023, having been the second worst performer of all Investment Association sectors in 2022.
Last year was clearly an outlier. Technology has featured in the top 10 best performing IA sectors every year for the past decade except in 2022. This consistency suggests investors should no longer be surprised when tech comes out near the top each year. Is this the time I finally suggest a tech fund?
There is much to consider before making the decision. Of course there is no real money involved (just bragging rights) and I am keen to stress that this is an exercise and far from a recommendation.
But I have won in two of my three years back at Trustnet (this year looks like it will be my first without the aforementioned bragging rights) and I want to get the top spot back. Tough choices lie ahead.
Interest rates would have to rise 100 basis points before bonds made a loss.
Bond yields are so high now that it would be very difficult to lose money in fixed income next year and, depending on the speed and extent of rate cuts, returns from bonds could be in double digits, according to experts at Insight Investment.
Total returns from fixed income could even rival those from equities next year, Adam Whiteley, head of global credit, said. “The income is now back in fixed income and you’re being paid to be impatient.”
Gareth Colesmith, head of global rates and macro research at the firm, added that the prospects for absolute returns from core fixed income are better than they have been for 15 years. Total returns should be positive next year, he said, regardless of the economic scenario because yields are so high – and if there is a soft landing, risk assets across the board should do well.
The chart below summarises expected returns from a US core bond portfolio in four scenarios: yields remain unchanged and central banks keep rates on hold; yields rise; yields fall as rates are cut; and yields return to their average levels since 2021.
Total returns look attractive in most of these scenarios; yields would have to rise by 100 basis points for core bonds to lose money, which most fund managers agree is unlikely.
Total returns from a US core bond portfolio in relation to yields
Source: Insight Investment
For the data, Insight has used the Bloomberg US Aggregate Index as a proxy for a core bond portfolio as it includes government bonds and investment grade credit. The table is based on data to 30 November 2023.
Ultimately, returns will hinge upon whether, when and how much central banks cut rates. Insight expects central banks to keep rates near their current levels for longer than the market has priced in because inflation is likely to be remain volatile due to deglobalisation, demographic trends and decarbonisation.
Matthew Merritt, Insight’s head of multi-asset strategy, said that assuming July was the last hike, this is a good time to buy bonds and extend duration. Long plateaus while the US Federal Reserve pauses between the end of its hiking cycle and its first cut have historically caused rallies in both US equities and US Treasuries. This cycle has been a bit of an outlier, with steep falls in October then a rally in November.
Insight has been underweight duration for most of this year but shifted to become flat-to-long duration by mid-October, said Adrian Grey, global chief investment officer. “We’ve been leaning into that as markets have waxed and waned.”
Grey described investment grade credit as the “sweet spot” and “centre of gravity” because it will provide investors with a combination of duration and income. Within credit, investors are looking at shorter maturities where yields are as good as longer-dated bonds and there may be an added comfort factor, Grey said. Then investors are using government bonds when they want to make a duration play.
Investors no longer need to take as much risk to achieve their target returns, Whiteley added, so they are shifting one notch down the risk ladder, from high yield to investment grade credit or from investment grade to government bonds.
Beyond Insight’s base case, other outcomes listed in the table above are plausible, even a scenario where yields might fall as much as 100 basis points.
Like Insight, JP Morgan Asset Management’s global strategists expect central banks to demure, but once they eventually set out on the path towards monetary easing, they could cut interest rates severely, by at least 100 basis points. That would imply an 11.7% total return.
Even if the reverse occurs and yields drift upwards from here (which might happen if inflation remains stubborn and central banks defy expectations and become more hawkish) the high levels of income available from core fixed income portfolios would cushion investors against capital losses.
How to think about investing in the less glamorous side of AI.
Artificial intelligence (AI) has been a source of great enthusiasm among investors this year, keeping the US equity market afloat almost single-handedly.
But this might change very soon with the next wave of AI, which will be different, underwhelming and ultimately “boring”, according to Steve Wreford, co-manager of the Lazard Global Thematic Focus fund.
He has been learning about AI by talking to companies rather than by reading the headlines, and what came out of his conversations with managers might not sound very exciting, but has shaped his way of investing in the sector.
“It turns out that the next wave of AI is going to be in companies that do something boring, but better,” he said.
With early adoption of AI, we have seen problems emerging, including what people refer to as ‘garbage in, garbage out’, which refers to the fact that the model can’t distinguish between a truth and a lie in the data it’s fed, and the tendency to hallucinate, making up an answer to please the user instead of admitting ignorance.
The next wave of AI developments will be about fixing these problems – which some companies are already working on. The main example, said Wreford, is legal data.
“You cannot hallucinate on legal data – you get sued for it. RELX is working on an AI system that can be used by law firms for study cases, with curated data inputs and 100% accuracy,” he explained.
“It usually takes five days for a junior lawyer to go through case studies, with this technology they will be able to do that much faster.”
The AI will be able to process every case in the world, recommend a legal approach for each case, reference relevant documents and similar.
“If you're a law firm anywhere in the world, this is a must have. And we were there three years ago, with RELX’s stock doing very well.”
Performance of stock over 1yr
Source: FE Analytics
Tom O’Hara, co-manager of the Henderson European Focus didn’t go as far as to call it “boring”, but said AI is a “mixed basket” in terms opportunities, overhyped and predominantly a business-to-business story.
“AI is a great tool for software companies like SAP trying to sell or offer services to other companies,” he said. “A lot of it is going to be about sales of AI services by the large software groups. IPOs of bad AI companies which will ultimately go bankrupt is another risk and a thing to avoid.”
There was also fear that AI was going to leave a trail of destruction at companies such as Universal Music Group, one of the trust’s holdings whose share price tanked 20% in May this year over the debate around music-making AI systems. The stock, which made up 1.31% of the Henderson portfolio in September last year and was 1.5% as of 31 March 2023, has recovered since then.
Performance of stock over 1yr
Source: Yahoo! Finance
“People expected a graveyard of victims, but what will happen is many companies will simply adopt it and deploy it as an integrated system,” O’Hara concluded.
Someone who is expecting victims from the technology is Andy Merricks, co-manager of the IDAD Future Wealth fund, who predicted a humbling disruption, especially for some professions.
“There is a lot of complacency in some professions about how vulnerable they are. I remember seeing a list of the top 10 professions most at risk from AI and four of the top five were accountancy, legal, journalist and fund manager,” he said.
“There is a lot of arrogance and self-importance amongst some practitioners of these vocations as AI is very good at doing what has always been considered by humans to be very complex and ‘clever’. What AI is not good at is manual tasks such as to be found in nursing, hospitality, building etc.
“Many well paid practitioners will be surprised by what is coming. It won’t happen tomorrow, but seems to me to be inevitable in the next wave.”
Short term there is upside both in credit and equities.
After six months of campaigning and election surprises, Javier Milei was elected in a surprising run-off. The president-elect, a self-proclaimed anarcho-capitalist, has been an outspoken critic of public spending, export taxes, and regulations, vowing to privatise many state-owned enterprises.
However, his lack of political support from the other government branches, combined with Argentina’s deep economic wounds, will make it difficult for him to deliver on his agenda.
Argentina is untradeable in the long term
We have been keeping a close eye on Argentina throughout the year, with interest in both credit and equities. We have followed local politics and how the electoral cycle could unfold. Whilst we see potential short-term opportunities caused by temporary asymmetries, we believe that the uncertainty makes it difficult to justify long-term positioning. We believe that Argentina is untradeable on a long-term basis.
The degree of macroeconomic distortions and the limited visibility make it extremely hard. If a Milei administration nails a stabilisation plan and gets the market to support a staggering fiscal consolidation plan, Argentina could be the 2024 emerging market trade, but it’s not that easy. The consensus is that the muddle-through macro narrative just does not cut it and we may have a credit event sooner rather than later.
We work with what we have and even if we try to look through the fog the short-term is still extremely important as it may set the tone for the beginning of a Milei administration. Markets may respond positively to good news flow, but we will continue to adjust our exposure, keeping risk/reward as our main guiding principle.
Political & economic transition
There are many things to consider. The main question here is what happens to the currency (remember that Argentine Peso, or “Argy” for short, has a peg on the dollar at 355, while parallel markets trade around 900). Will the central bank be willing to have a more flexible policy? What will happen to the People’s Bank of China (PBOC) swap lines (increased by $6.5bn on the 18th of October) intended to pay the International Monetary Fund (IMF) maturities and finance imports?
More importantly, and perhaps the enormous, ugly elephant in the room, is the central bank’s balance sheet. On one hand, the central bank’s foreign exchange reserves are negative $10bn.
It’s crucial that the central bank does not lose any more reserves, as it could trigger financial stress in local markets. On the other hand, remunerated liabilities (the central bank issues bills at 133% to local banks to keep monetary aggregates stable) have potential explosive dynamics, which entails significant execution risk by Milei’s administration. As a reference, the stock of these central bank bills creates a new monetary base every three and a half months.
It’s difficult to see how an imminent dollarisation of Argentina’s economy would play out. The central bank has no reserves, capital markets are closed to issuance targeted for this, and Emilio Ocampo’s plan (Milei’s central bank chief) needs north of $30bn to buy back bills and peso deposits.
Milei and Ocampo have been toning down on this rhetoric, but market participants have been on the edge of their seats lately.
The canary in the coal mine here are banks (their balance sheet is stuffed with central bank bills) and local currency debt (dollarising involves swapping auction rate security (ARS) debt into dollar debt). Both banks and local debt are hanging in there. If we see banks outperforming, we can assume that the market is getting more comfortable with a ‘watered-down’ version of dollarisation.
So far, we’ve been seeing positive momentum on this front. Milei has made it pretty clear that this is a crucial ‘step one’ for any stabilisation plan. First, he needs to address the central bank balance sheet issue. Then, his administration can focus on capital controls, de-peg the dollar and, if possible, dollarise.
Milei will need Congress’ support to push through his highly ambitious reform agenda. La Libertad Avanza and Propuesta Republicana (PRO) parties (former president Macri’s and former minister of security Bullrich’s respective parties) will likely have over 30% of the seats in the lower house and 20% in the Senate.
Milei will also face a consolidated Peronist opposition in Congress. We have seen Milei inviting members of the more moderate Peronist parties to join his administration as well as getting further support from Juntos por el Cambio, which is seen as a positive.
Also, Milei’s choice for economy minister is crucial, as a stabilisation plan will not only need political capital but also credibility. Anchoring inflation expectations is vital to aligning expectations and correcting relative prices in an economy that’s upside down. In the very short term, this is the first catalyst. Market participants want to see names – it’s not amateur hour.
Where do we stand?
Short term there is upside both in credit and equities. In our view, equities (mainly utilities and oil & gas names) could outperform bonds as we move towards the start of a Milei administration. These companies are unlevered and will benefit from reforms and deregulation from the next administration. Regarding bonds, the default risk embedded in the curve is substantial.
While we don’t necessarily argue against that pricing, we think there is some convexity in the trade, in case a Milei administration can surprise the market positively.
Risk has been transferred from offshore into local holders in both credit and equities. Light positioning and a nimble approach are key, given that the market has been burned time and time again – and not only on these recent events.
Milei has been pretty vocal in the last few days on respecting contracts, paying debts and engaging proactively with the IMF. We believe that in the short term, he has the incentives to be market-friendly and signal a willingness to work with creditors on getting this ship ashore somehow.
Santiago Clarens, co-portfolio manager, Trium Larissa Global Macro fund. The views expressed above should not be taken as investment advice.
Both Asia and Latin America offer high-yielding opportunities.
Investors looking for high levels of income from emerging markets should look at the Asia Pacific Excluding Japan and Latin America sectors, data from FE Analytics shows.
There are six emerging market funds that yield more than 5% today (which is approximately what savings accounts offer at present) and all of them come from these two IA sectors.
The best payer, offering an income of 6.87%, is Schroder Asian Income Maximiser. It invests in quality-growth companies based in the Asia Pacific region that deliver a combination of income and capital appreciation.
Source: FE Analytics
FE Invest analysts said: “We like that the fund does not purely buy companies in only the highest-yielding sectors – capital appreciation is equally important.
“The fund has managed to grow the dividend payment consistently, even through difficult periods, when it has done a good job of protecting capital.”
Performance of funds vs sector over 1yr
Source: FE Analytics
The former is mainly invested in Brazil, Mexico, Peru, Chile and Argentina, while the latter is mainly focused in Brazil and Mexico only.
Both these strategies have a concentrated portfolio of approximately 40 stocks and underperformed their peer group over the past 12 months, as the chart above shows.
The largest fund by assets under management was Vanguard Pacific ex Japan Stock Index, a tracker that comprised of only developed markets in the region, excluding Japan and Korea, that pays out 5.68%.
It employs a full index-replication process, meaning that it purchases the same securities in the same weights as they appear in the index, resulting in stronger safeguards than investing directly in some of the emerging markets within the region, according to Square Mile analysts.
They praised Vanguard’s “strong controls” in place to protect the fund in the event of a default, and the risk of loss to fund holders is “remote”. The fund also benefits from the income generated by stock lending, though the impact on performance tends to be small.
Source: FE Analytics
On the investment trusts side, miles ahead of all other vehicles, Henderson Far East Income yields 11.78% through a portfolio of value-orientated Asia Pacific equities with what the managers deem to be sustainable and growing dividends.
Its main weightings are in Australia (17.1%), China and Hong Kong (14.4% and 12.6%) and South Korea (11.5%), followed by Taiwan (11.4%) and India (11%).
Performance-wise, the fund struggled over the past year, but the managers remain confident about the outlook for dividends, “considering the excess cash being generated and the low level of dividends paid out compared to earnings”.
The only China fund in the list, JPMorgan China Growth & Income offers 5.47%.
Performance of funds vs sector over 1yr
Source: FE Analytics
It struggled recently, as co-manager Rebecca Jiang explained, because of China’s “disappointing” economic recovery as consumer and business confidence “remains weak”.
“Stimulus measures are wide ranging, however the authorities are currently more focused on managing risks to growth rather than underwriting a broad-based recovery. Instead, we will need to wait for the cumulative effects to be felt as we move into 2024,” she said.
“However, we remain optimistic about the long-term prospects for the Chinese economy, which continues to be bolstered by the strong entrepreneurial ethos of China’s private businesses as well as the growing demand from the country’s burgeoning middle class.”
Finally, the Blackrock Latin American investment trust pays investors 5.4%.
It too was challenged by a strong US dollar with a decline in its Brazilian and Mexican names (Brazil was the main underperformer to the end of August 2023), but the managers views are still positive for both economies and Latin America as a whole going forward.
The wealth management company lost its main client and announced the closure of its institutional business.
Somerset Capital Management is to transfer its UK funds to a new investment adviser, as the firm will be closing its wider institutional business in London.
The announcement came this morning, one month after the firm’s main client, St. James's Place, withdrew $2.5bn, which constituted almost two thirds of the company’s assets. The move triggered wider outflows, leaving Somerset with just about $1bn on its books.
Co-founded by MP Jacob Rees-Mogg in 2007, Somerset is known for its emerging markets funds, the first of which, Somerset Global Emerging Markets, launched in 2008 and returned 136.2% since then, as shown in the chart below.
Performance of fund vs sector and index since launch
Source: FE Analytics
This and other UK vehicles managed by Somerset are set to transition to a new investment adviser, retaining the existing key investment team, fund and third-party infrastructure in an effort to “ensure the seamless continuity of these funds and their managers, while positioning them for continued growth”.
Partner Oliver Crawley remained confident in the future of the departing funds.
"The current teams have delivered strong performance for their investors and continue to do so,” he said. “We hope a transition can be secured which we believe will give the funds a bright future.”
The development is seen as a consequence of the latest Consumer Duty regulation encouraging asset managers to deliver good outcomes for their clients, on the back of which St James’s Place has started to reconsider its fee structure.
Fund pickers chose Ninety One Global Environment, Brown Advisory Global Leaders, CCLA Better World Equity and WHEB Sustainability.
In a sign that the $18.4trn sustainable investment industry has come of age, wealth managers and fund selectors are adding sustainable global equity funds to their ‘mainstream’ portfolios, choosing to include them over and above broader funds.
Data shows there are some strong arguments for this. Indeed, funds such as Janus Henderson Global Sustainable Equity and Schroder Global Sustainable Growth have outperformed most other funds in the IA Global sector over five and 10 years and feature in the sector’s top 20 return generators for both timeframes.
Performance of funds vs sector over 10ys
Source: FE Analytics
Janus Henderson Global Sustainable Equity is managed by Hamish Chamberlayne and Aaron Scully, who invest in companies with high growth potential that are having a positive impact on the environment and society. They think there is a strong link between compounding growth and sustainable development. Microsoft and NVIDIA are the top two holdings.
The £1.8bn fund has returned 15.6% over three years, 77.6% over five years and 220.2% over 10 years, compared to 14.9%, 48.9% and 136.4%, respectively, for the IA Global sector.
The smaller £394m Schroder Global Sustainable Growth fund has returned an even more impressive 26.5% over three years, 78.5% over five years and 218.2% over 10 years. Schroders also offers a £929m Global Sustainable Value fund.
Schroder Global Sustainable Growth is a joint effort; fund managers Charles Somers and Scott MacLennan work with closely the firm’s sustainability team, which conducts thematic research.
Schroders uses its sustainability quotient framework to assess each company’s business model and growth prospects. The top three holdings are Microsoft, Alphabet and Elevance Health, which offers health plans.
One Four Nine Portfolio Management has such high conviction in CCLA Better World Global Equity and Brown Advisory Global Leaders Sustainable that they feature across its actively-managed model portfolios, as well as in its sustainable strategies.
Bevan Blair, chief investment officer of One Four Nine, said CCLA Investment Management has generated impressive long-term returns for institutional investors so when it launched a retail fund last year, he was keen to invest. The fund now has £257m in assets and is managed by Charlotte Ryland and Joe Hawkes.
The engagement team led by Amy Browne has been working with companies on their approach to mental health and has been in dialogue with Amazon over its labour practices.
Rosie Cook, an investment analyst at One Four Nine, added: “CCLA seeks to be a catalyst for positive change for both the companies it owns but also for the wider investment universe and is well known for spearheading industry-wide initiatives to drive changes towards a better world.”
Performance of fund vs sector since inception
Source: FE Analytics
One Four Nine also invests in the $544m Brown Advisory Global Leaders Sustainable fund, which was launched in November 2019. Performance is top quartile over one year and second quartile over three years.
The fund’s managers, Mick Dillon and Bertie Thomson, conduct extensive fundamental research. They even survey customers to find out why they buy from a particular brand and the pros and cons of its products, Blair said.
Performance of fund vs sector and benchmark since inception
Source: FE Analytics
One Four Nine Portfolio Management is not alone in backing sustainable funds in portfolios with wider remits. Darius McDermott, managing director of Chelsea Financial Services, has added Ninety One Global Environment to the VT Chelsea Managed Aggressive Growth model portfolio because “it’s a really good global growth fund” and the transition to carbon neutral is a megatrend.
Ninety One Global Environment is managed by Deirdre Cooper and Graeme Baker who invest in companies involved in decarbonisation. The £1.8bn fund has three themes – renewable energy, electronification and resource efficiency. The concentrated portfolio of 22-27 companies has little overlap with broad global equity indices, so offers diversification.
The fund was launched in December 2019 and had a stellar first year, up 47.8% in 2020 versus 15.3% for the IA Global sector. More recently, the fund has faced a tough market for growth stocks and renewable energy, and its exposure to China was a headwind.
McDermott said the fund has performed as expected and continues to do its job in the diversified portfolio. “We still know why we own it,” he said.
Performance of fund vs sector and benchmark since inception
Source: FE Analytics
Meanwhile Louis Selby, investment research associate at Square Mile Investment Consulting and Research, said WHEB Sustainability deserves consideration. It is one of three impact funds run by WHEB Asset Management’s specialist team, which invests in companies that address environmental and social challenges.
WHEB Sustainability is managed by Ted Franks, supported by Seb Beloe, Ty Lee and Victoria MacLean. They take a thematic approach, linking critical environmental and social challenges to megatrends, Selby explained.
“For example, growing global populations alongside rising living standards are driving increased resource use, which ultimately leads to the depletion of critical natural resources and a breach of planetary boundaries,” he said.
To be included in the £702m portfolio, companies must derive more than 50% of their revenues from one of nine themes including clean energy, environmental services, resource efficiency, education, health and well-being.
Performance has lagged the broader IA Global sector recently, but Selby said WHEB Sustainability has the potential to offer meaningful financial returns. “It is an excellent example of a specialist fund group that specifically targets investments into positively impactful companies whilst at the same time delivering solid performance,” he said.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fixed-income manager’s case for a hard landing.
Investors should be positioned for a hard recession, as a lot of the enthusiasm currently found in the market is based on unsustainable, transitory trends that will reverse soon, according to Mike Riddell, manager of the Allianz Strategic Bond fund.
Today, the most subscribed-to monetary policy narrative for the year ahead is “higher-for-longer”, whereby interest rates should remain elevated for a long time. Markets expect interest rates to never go below 4% in the US and the UK, as shown in the chart below.
Market-implied forward overnight rates, monthly for the next 10 years
Source: Allianz, Bloomberg
At the same time, however – and this is where the contradictions begin – markets are expecting lower inflation rates.
“These two things can only be consistent if global economic growth accelerates, which is what is priced in by risk assets right now,” said Riddell.
“I was looking yesterday in horror at the S&P 500 index. It is about 3% off the all-time high right now. Which just seems wrong, taking recession risk into account. No one is expecting a hard landing or worse as a base case, and that is definitely our view.”
Google searches for ‘no landing’ or ‘soft landing’ are “just going crazy”, as everyone is assuming there will not be a recession, whether it's a no landing or soft landing.
But what people keep forgetting is that it takes 12 to 18 months before the impact of interest-rate hikes is felt by the economy, said Riddell, who added: “If interest rates are slightly lower than what is priced in, that's extremely positive for bonds”.
“Soft landings don't really exist. It's either no landing or a hard landing, there's not normally anything in the middle.”
So why are we going through a high-growth patch and why are people expecting this to continue? Riddell mainly attributes this to commodity prices.
“Nothing has structurally changed to sustain high growth, not the labour market, not corporate investment nor artificial intelligence (AI). Commodity prices are a really big part of this story,” he said.
“European gas prices are currently 75% to 80% lower than where they were in August of last year. This is one of the biggest positive economic shocks we have ever seen. The Bank of England earlier this year upgraded its GDP growth forecast by the most in its history, just because gas prices collapsed.”
This is “an enormous positive growth tailwind”, as commodity prices tend to be good lead indicators for economic growth about six months in advance. But looking forward, gas and commodity prices are basically flat.
“It's not yet a headwind, but it definitely isn't good news,” the Allianz Strategic Bond fund noted.
Under closer scrutiny, global growth doesn’t look as strong as people think either.
“The US consumer has gone completely bonkers between the beginning of July and about September. Their disposable income's gone lower but consumption has soared. This is not sustainable in any way and will reverse,” he said.
“This side of the pond, the UK economy today has felt about a quarter of the tightening cycle which started in December 2021. People look at the growth in the past nine months and assume that interest rates don't matter anymore because growth is okay and the global economy is immune to rate hikes. I could not disagree with that more.”
The cherry on top of the pessimism cake is the New York Federal Reserve’s recession probability model shown below, where the blue line indicates the probability of a recession 12 months ahead and the yellow line credit spreads.
Credit spreads versus New York Federal Reserve recession probability
Source: Allianz, Bloomberg, Moody’s.
“The model is based entirely on the shape of the yield curve, which has been one of the most successful indicators of recession that we've ever seen. There's only been one false positive in the late 60s, when the yield curve inverted and there wasn't recession. Otherwise every single recession has been preceded by an inverted curve,” explained Riddell.
“The US yield curve has been inverted for the longest period in history, so this seems entirely the wrong time to be pricing in a no landing narrative into markets, given what is likely to happen in the next six months.”
In terms of how this should translate into portfolios, Riddell “adores” government bonds, where he has maximised his exposure, and takes as long-duration positions as he can within the Allianz fixed-income mandates.
He is also “outright short” on credit because “spreads will widen, potentially aggressively, and we can actually make money out of that”.
RBC Brewin Dolphin’s Rob Burgeman picks four Christmas-themed UK stocks.
Gifting shares of well-known UK companies for Christmas is probably not a very common practice during the festive season and recipients may not be as enthusiastic compared with the latest games console or fine jewellery.
But they might change their minds over the long term as shares are the rare potential Christmas gift that can increase in value.
The season of good will is often one that can benefit some companies more than others. Retailers, for example, thrive during the festive period as people clamour to buy last-minute presents for their loved ones.
Below Rob Burgeman, senior investment manager at wealth manager RBC Brewin Dolphin, picked four Christmas-themed UK stocks that could be in line for a bumper end to the year.
Diageo is well positioned to be a Christmas winner as December is often a boozy month thanks to office Christmas parties, alcohol-themed gifts and New Year celebrations.
Burgeman said: “Diageo’s stable of businesses is a veritable who’s who of premium alcohol brands. Among them are the likes of Guinness, Smirnoff vodka, Tanqueray gin, and Johnnie Walker whisky. The group is widely seen as a real bellwether of the world economy, given its vast geographic spread.”
Performance of share YTD
Source: FE Analytics
Diageo’s share price has fallen 21.1% this year after the company issued a profits warning. While it is now below where it was in early 2020, Burgeman said that the company is well managed and diversified. Therefore, shares in Diageo could be a gift that “keeps on giving”.
Marks & Spencer (M&S)
Another company Burgeman believes to be in the pole position to benefit from the Christmas period is M&S. This is because families usually dig deep to spend a bit more in that time of the year, although the cost-of-living crisis has been a feature of 2023.
Burgeman said: “M&S is a company we all associate with Christmas in one way or another. After years in the doldrums, its turnaround programme has at last begun to yield results with a bumper set of figures in its last market update.
“There have been plenty of false dawns in the past, but this time there is good reason to believe that M&S has turned a corner. Profitability is the highest it has been for some time, its once waning clothes and homeware divisions are on the up, and management feels confident enough in the medium-term outlook to restore a modest dividend.”
Performance of share YTD
Source: FE Analytics
M&S’s annual Christmas advert caused a controversy last month as it has been accused of undermining the spirit of Christmas, but Burgeman called it a “storm in a teacup”, while the retailer could get the double benefit from both its clothing line and food business.
ITV is another end of the year staple, as most families in the UK sit down to watch Christmas programmes. Yet, shareholders will be aware that 2023 has not been a great year for ITV, as the shares of the broadcast television network are down 14% year-to-date.
Performance of share YTD
Source: FE Analytics
In fact, the shares have lost around half their value since February 2022 and have fallen even further over five years. For Burgeman, this is due to a weak advertising market, competition from streamers and worries about UK economic growth.
However, ITV’s shares come with a high dividend yield and there are reasons to hope that the company might be able to turn its performance around.
Burgeman explained: “With a dividend yield of more than 8% and potential growth coming from the likes of ITV Studios and ITVX, shares may well prove a gift for someone next year if they are willing to take the risk.”
JD Sports Fashion
End-of-the-year excesses as well as health-related New Year’s resolutions lead people to sign up to their local gym to get back in shape.
Therefore, JD Sports Fashion, which has been a City favourite for several years, could be a beneficiary of that seasonal cycle.
Performance of share YTD
Source: FE Analytics
The shares are up 31.4% year-to-date but is still far from its 2021 peak. As a result, Burgeman believes that now could be a “relatively” attractive entry point as UK consumer confidence suffers.
He said: “They could have further to fall, but the company is well managed and should be poised to bounce back when the UK economy recovers.”
Today we see near-term catalysts for a small-cap revival and encourage investors not to miss the opportunity.
The experiences of UK equity investors over the past quarter-century were shaped by major episodes of market stress – the Russian debt default, the dot-com bubble, the global financial crisis, and the Covid-19 pandemic, to name a few.
Amid market fluctuations, the psychological frameworks through which investors perceive risk and reward often shift in kind. Allocation weightings towards larger-cap companies generally increase in periods of economic weakness, as lower betas and relatively stable earnings appeal to a larger pool of investors in depressed market conditions.
Risk-off market sentiment has prevented investors from capitalising on the attractive fundamental opportunities available in the small-cap space. Our historical review of UK equity performance illustrates how under-allocation to small-cap stocks has resulted in UK investors foregoing superior returns in the aftermath of market turmoil.
Today, we see near-term catalysts for a small-cap revival and encourage investors not to miss the opportunity.
History does often rhyme
Small-caps weaken in line with the wider market’s performance during downturns, but history proves they bounce back with a vengeance, tending to outperform large-caps during recovery.
In each of the five market slumps between 1998 and 2020, the small-cap drawdown has roughly paralleled the broader UK market. For instance, during the Russian debt default of 1998, the Numis Smaller Companies Index fell 33%, compared to 25% for the FTSE All Share.
Similarly, during the global financial crisis of 2008-09, small-caps dropped 59%, while the FTSE All Share fell by 49%. Lastly, during the pandemic sell-off of March 2020, the 41% small-cap decline trailed the FTSE All Share’s 34% slump. In one instance following the bursting of the dot-com bubble in 2000, small-caps were marginally more resilient than the wider market, peak-to-trough.
However, small-caps shine when looking through the lens of trough-to-peak recoveries, approximately doubling the returns of larger UK equities over the past 25 years.
For example, as Russian fiscal balances stabilised between 1998 and 2000, the Numis Smaller Companies Index rebounded 102%, compared to 58% for the FTSE All Share. This pattern repeated as the world economy bounced back from the depths of the great financial crisis until 2011, with a small-cap return of 137%, ahead of 77% for larger peers.
Finally, smaller companies surged 121%, compared to 58% for the broader stocks, as markets reversed lockdown-induced losses and thrived into 2021.
Following the mini-Budget hysteria of October 2022, the past 12 months mark a break from history. The initial drawdown of the Numis Smaller Companies Index dwarfed the FTSE All Share, at 31% versus 14%, and the recovery to date has trailed the wider UK market.
The drivers of the intensified sell-off are complex, but the unique short-term effect of the liabiulity-driven investments (LDI) crisis on floating rate debt yields played a significant role. Simultaneously, a high volume of small-cap redemptions in a narrow timeframe pushed the supply of small-cap stocks far past demand equilibrium, and valuations have not materially recovered from the shock.
The opportunity is now
Despite this, if history is any guide, the market landscape looks ripe for an accelerated small-cap recovery. Importantly, market valuations continue to lag recent precedent transactions, exposing the asymmetry between trading multiples and company fundamentals across various sectors.
We expect private equity to sustain M&A activity across UK public markets as lowly valuation multiples compensate for higher interest costs. At some point, investors must consider this growing body of valuation evidence and bridge the arbitrage.
Positive news on inflation and base rates holding steady over the past two meetings may also help build confidence in UK equities. After the mini-Budget, rapidly increasing bond yields and decreased prices prompted investors to reduce exposure to equities to meet target asset class weightings.
An expected fall in risk-free rates next year could trigger another round of portfolio rebalancing, but this time more favourable for equity flows.
While geopolitical tensions and an evolving humanitarian catastrophe in the Middle East will compound volatility and uncertainty in the near term, we encourage investors to unmask the valuation opportunity disproportionately stacked at the lower end of the UK market-cap spectrum at present. In our view, the potential for medium-term value creation is compelling.
Ken Wotton is manager of the WS Gresham House UK Smaller Companies fund. The views expressed above should not be taken as investment advice.
Investors poured £525m into money market funds last month.
Investors remained cautious in November as they favoured money market funds over any other sector, according to new data from Calastone.
Inflows into money market funds reached £525m last month, which means that the sector has absorbed £4.1bn year-to-date. This is more than the combined £3.5bn over the previous eight years.
Edward Glyn, head of global markets at Calastone, said: “It’s clear investors are very cautious. There is a lot of concern that higher interest rates have not yet taken their full effect to suppress demand, which would impact company profits and therefore share prices.
“The returns on low-risk cash-focused money market funds are now better than at any time since the global financial crisis, providing an attractive alternative magnet for nervous investors – with inflation falling, these returns are even turning positive in real terms now too.”
Money market funds, which are considered the least risky category of funds available, received more than twice the amount that went into fixed income funds last month.
Nonetheless, investors added £256m into the sector as bond yields had their first sustained decline in November after a six-month period of increases, which pushed down prices.
Inflows into equity funds reached £449m last month after six months of net selling. This is, however, just a tenth of the net £4.5bn that investors withdrew between May and October.
Global equity funds were the most popular as investors poured £802m in. The continued resilience of the US economy also drove £481m of new capital into North American equity funds, while emerging markets funds attracted £414m and Japanese funds £111m.
The other way around, investors shunned Asia-Pacific, European, UK, income funds and infrastructure.
For instance, Asia-Pacific funds suffered their second highest level of outflows on record as investors withdrew a net £229m from the sector in November. The record outflow was recorded in August 2022 when investors removed £234m from Asia-Pacific funds.
As for UK equities, they experienced their 30th consecutive month of outflows, with investors withdrawing £330m from the sector. It is, however, their best reading since March 2023.
Glyn said: “Equity prices duly rebounded during the month, pushing the global index within a whisker of its high point for the year. This has tempted investors back into equity funds, favouring those parts of the world with better growth characteristics, such as the US, and those that benefit when US interest rates start to fall, like emerging markets.
“The surge in interest in Japanese equity funds reflects the flurry of excitement that Japan may finally be shrugging off its long stagnation. Regions such as Europe, Asia and the UK, which are suffering a weaker outlook remain out of favour.”
Elsewhere, mixed-asset funds suffered a record outflow of £1.6bn. Calastone suggested that investors are questioning the ability of those funds to offer a superior risk/reward profile when bonds and equities are moving in tandem.
Property fund outflows also rose in November, reaching £88m. This is the second-worst month of the year for the asset class after August when investors withdrew £121m from the sector. It is also a sharp month-on-month increase after October’s £52m outflow.
Glyn explained that property faces a triple squeeze of weak tenant demand resulting in commercial property rental growth lagging behind inflation, high market interest rates leading to falling capital values and high finance costs eating into profit margins.
He added: “Capital is in shorter supply too as investors who have spent a decade or more starved of income now have a multitude of high yielding alternatives acting as a magnet for their cash.
“Until we see a decisive turn in the UK’s growth prospects, commercial property is likely to continue to struggle.”
Investors also appear increasingly sceptical about environmental, social and governance (ESG) funds, which suffered their seventh consecutive month of outflows in November.
Investors withdrew £524m of capital from ESG-labelled funds last month, which takes total outflows since May to £3.7bn. It compares to just £431m for non-ESG equity funds in the same period.
The only outliers are ESG funds investing in emerging markets as they continue to attract inflows as part of a wider trend of record inflows into emerging market funds in general. Conversely, ESG funds focusing on North America and the UK have suffered the biggest outflows.
ESG fixed-income funds have also experienced outflows for nine months in a row, as investors withdrew £483m from the sector. This contrasts with £2.9bn of inflows into non-ESG fixed-income funds.
Glyn said: “The [Financial Conduct Authority] FCA is now taking action to counter allegations of greenwashing in the ESG sector, but investors are way ahead of them – they have been voting with their feet for seven months now by selling down ESG funds.
“The FCA’s action is likely to cast a further pall over the sector in the months ahead, however, and we will be monitoring the extent to which fund flows react.”
The UCITS ETF seeks to provide investors with a 7-9% income per year, paid monthly.
JPMorgan Asset Management (JPMAM) has launched an active global equity premium income exchange-traded fund (ETF): the JPMorgan Global Equity Premium Income UCITS ETF (JEPG).
The ETF is listed on the London Stock Exchange and Euronext Milan and will also list on Deutsche Boerse on 7 December and the SIX Swiss Exchange on 20 December.
The active element of the ETF will be overseen by portfolio managers Piera Elisa Grassi and Nicolas Farserotu, who will take small overweight and underweight positions in companies versus the index.
Income will then be generated using an options strategy, selling index options on the S&P 500 and MSCI EAFE – developed markets outside the US and Canada – against JPMorgan Global Equity Premium Income UCITS ETF’s portfolio.
Travis Spence, head of ETF distribution in EMEA at JPM Asset Management, said: “Investors continue to seek high levels of income, but they also want exposure to stock markets with less volatility.
“We have seen the rapid growth of our option overlay equity strategies in the past couple of years, and we are delighted to be bringing a global premium income version of our market-leading US-domiciled equity premium income strategy to the UCITS ETF market.”
In October, JPMAM expanded its fixed income range with the launch of the JPMorgan Active Global Aggregate Bond UCITS ETF (JAGG).
Ebi Portfolios explains why it prefers conventional asset classes.
A large majority of UK financial professionals believe that the current economic climate is conducive to investing in alternative asset classes as they provide diversification for investors in a complex environment, but not all agree.
According to research by TIME Investments, 96% of wealth managers, financial advisers, discretionary fund managers, fund selectors and investment analysts have allocated some of their clients’ money in alternative investments such as private equity, private credit, hedge funds, infrastructure and real estate.
Yet the team at west midlands-based discretionary fund manager ebi Portfolios purposefully avoids alternative asset classes, building its model portfolios exclusively with conventional asset classes.
Investment product manager Jonathan Griffiths explained that he does not believe there is “long-term value to be added through alternative assets”.
An asset class he is particularly worried about is property, and more precisely commercial property, although ebi used to have a separate property allocation in its portfolios.
He explained that this asset class is highly dependent on leverage to fund acquisitions. Yet, interest rates have rapidly surged from very low levels to the 5% range in the US, UK and EU, with borrowing becoming more expensive as a result.
Griffiths said: “The day of reckoning has been delayed as some more deals have been done and short-term patches have been applied, but I think it's going to be clear over the coming months and quarters that property, especially commercial property, is a very painful place to be.
“The extent of the write-downs of property has become apparent following the interest rate hikes. That's going to be an interesting asset class to watch, but unfortunately, not in a positive way.”
Another alternative asset class Griffiths is sceptical of is private equity as the current macro-environment is not favourable to unlisted companies. He pointed at the unhealthy state of the IPO market, the difficulty to exit positions and the fact debt refinancing has become much more expensive.
He said: “I don't have a crystal ball, but we could see some pain in the private markets over the coming months and quarters. There might be some deep default waves that would feature a lot of private equity-backed companies with high debt driven models.”
“A lot of the high returns we have seen in the private equity space was levered up through the cheap money era. That's over now and it's time to face reality.”
Independently of the macroeconomic environment, Griffiths does not like the opacity of private equity firms as it leads to massaging the figures, both in terms of volatility and returns over time. Therefore, he believes that public equities have always been and remain a “far safer” proposition.
Griffiths said: “When you're looking at a longer term timeframe, equities are the better value driver and that's what's driving the growth in our portfolios.
“We use bonds to provide the protection aspect with a tilt to shorter durations to reduce interest rates risk. It has been the right decision over the last few years.”
Michael Heapy, senior investment analyst at IBOSS, part of Kingswood Group, agreed that the outlook for commercial property is bleak as it is hard to imagine “people going back to department stores and malls” or “flooding back in numbers in an office environment”.
Yet, he disagreed with the exclusion of alternative asset classes from portfolios, reminding that equities and bonds fell in tandem in 2022.
He said: “Given the falls we saw in equities and bonds last year, alternative assets are increasingly important in ensuring a client's portfolio remains diversified during challenging market conditions.
“That said, the rearview mirror is a dangerous investment aid and bond markets, in particular, have a better risk-return profile than they have had for many years.”
Other wealth managers also believe that now could be an attractive entry point in private equities for long-term investors, but warned that they have to be selective with the firm they want to invest with.
Petrofac’s share price has fallen 70% this year and its bonds are trading at a deep discount to par.
Petrofac, which designs, builds and operates energy facilities, was the most shorted stock on the London Stock Exchange in November. Last month at least 7.5% of Petrofac stock was in the hands of short sellers, a significant increase from 2.7% in October.
The share price has fallen 70% this year but most of that downward trajectory occurred since 9 August when shares in the oil services company were worth 87.5p. Since then, Petrofac shares plummeted to 17p on 1 December.
The oil price has headed south since late September, pulling Petrofac’s shares down with it.
Total return of Petrofac shares versus the oil price in sterling this year
Source: FE Analytics
Markets have been concerned for some time about Petrofac’s weak operating profitability and high leverage.
Nonetheless, as Fitch Ratings pointed out on 27 September (when it revised Petrofac’s outlook to stable from negative) the oil services company has a strong book of new orders and a healthy pipeline of prospects.
Fitch stated: “We expect significant backlog growth to help gradually improve the group's weak operating profitability, which has been affected by low activity and ongoing completion of the legacy projects disrupted by the pandemic.”
The outlook has darkened since then. On Friday 1 December, broker Berenberg placed Petrofac under review, describing the oilfield services company as “precariously positioned” due to a “liquidity crisis”.
Financing facilities of about $250m are due to mature in October 2024, Berenberg warned. "In a worst-case scenario, Petrofac may be forced to renegotiate its financing agreements, potentially leaving shareholders significantly diluted,” analysts said.
On Monday 4 December, Petrofac disclosed that it will not meet its cash targets for this year due to delays in collecting advance payments for new contracts secured in 2023.
Petrofac’s management team is considering selling non-core assets to strengthen its balance sheet and is holding talks with investors to take a non-controlling position in parts of its business portfolio. The share price rallied on this news during Monday morning trading.
Tareq Kawash, group chief executive of Petrofac, said: “We are working hard to address short-term liquidity challenges and strengthen the financial position of the group.”
GLG Partners, Millenium Capital Partners, Helikon Investments, Astaris Capital Management, Tages Capital, TFG Asset Management and Whitebox Advisors all disclosed to the Financial Conduct Authority in November that they were shorting Petrofac.
Elsewhere, fashion companies ASOS and Boohoo, DIY giant Kingfisher and financial services companies Hargreaves Lansdown and abrdn were also amongst the most shorted stocks in November. Hargreaves Lansdown fell out of the FTSE 100 at the end of last month.
Other stocks under pressure from short sellers last month included green hydrogen specialist ITM Power, flooring company Victoria, Energean Oil & Gas and Primary Health Properties.
November was not a good time to bet against equities in general, even though some individual names had a tough time. The FTSE 100 posted strong gains in November as risk-on assets rallied in expectation that central banks have reached the peak of their hiking cycle.
Total returns of FTSE 100 and MSCI World this year
Source: FE Analytics
Trustnet rounds up the views from managers in various asset classes.
UK equities and tech names are expected to top the performance charts next year, according to a survey by the Association of Investment Companies (AIC), which polled the 343 members of its trust universe.
Around a quarter (26%) of those that responded said tech will top the charts, while industrials (19%), healthcare (15%) and energy (15%) are all expected to do well.
In terms of regions, some 44% expect the UK to lead the way next year, followed by the US (15%) and Japan (11%). Smaller companies should top their large-cap peers having underperformed in recent years, while just 11% think bonds will be the best place savers can put their cash.
On the economics front, 78% of managers believe interest rates have peaked, although more than half (59%) state the Bank of England base rate will remain above 4% by the end of the year. This is because inflation is likely to fall – 93% believe price rises will continue to slow.
The biggest potential tailwind is falling interest rates, 30% of managers said, while 15% said it was cooling inflation and 22% suggested the opportunities to buy cheap companies as the main reason for optimism in 2024.
However, it may not all be plain sailing. The biggest risk to investors is the potential for a recession, according to 26% of respondents.
Below, Trustnet rounds up the views from managers in various asset classes.
Andrew Bell, manager of Witan Investment Trust, said the best opportunities next year will come from Europe and the emerging markets as investors move away from the US.
“We are troubled by the risk that the outcome of the US election could be a withdrawal of the US from international affairs, at a time of global tensions and threats to peace and liberty,” he said.
“Although this is not specifically an economic risk, markets are moved by changing risk premia as well as underlying fundamentals and appeasing, rather than resisting, international aggression would be a negative factor.”
Alex Wright, manager of the Fidelity Special Values trust, agreed, stating that the biggest risk next year is the potential for a US recession.
“While there is increasing talk of a soft landing, there is considerable historical evidence on the impact of monetary tightening to keep us cautious on company prospects in the near term,” he said.
Simon Gergel, manager of Merchants Trust, said UK stocks were on near 20-year low valuations with the dispersion between the prices of stocks “extremely high”.
“Historically, this has been a good time to invest because the returns you get from investing are often linked to the price you pay for the assets, and currently these prices are very low,” he said.
Indeed, the FTSE All Share has lagged behind the MSCI World index over one, three, five and 10 years, making around a third of the returns of the global index over a decade.
Total return of indices over 10yrs
Source: FE Analytics
Wright noted the valuation of the UK market provides investors “a strong margin of safety” from the risk of a US recession, a sentiment echoed by Iain Pyle, manager of Shires Income.
“In contrast to some markets, we remain very optimistic on the UK given the low valuations for equities and the likelihood that any downturn will be short and shallow and is already priced in,” he said.
Here, some managers were more positive on the lower end of the market capitalisation spectrum. Pyle noted that UK mid-caps are “highly undervalued” while Ken Wotton, manager of Strategic Equity Capital, suggested smaller companies are “exceptional value”.
Emerging markets have failed to live up to investors’ expectations, particularly in China where a great Covid rebound underwhelmed.
However, Nick Price, manager of Fidelity Emerging Markets, said valuations are at odds with the much improved economics in the region – which differ from their developed peers.
“Nonetheless, the discount at which emerging markets are trading is at odds with the improving fundamental picture in many cases. This is especially the case given that inflation appears to have peaked in many economies, interest rates have started to come down and we are seeing many companies – particularly in China – return capital to shareholders,” he said.
“We see lower levels of debt-to-GDP in many emerging market countries, particularly relative to the US, where the near-breaching of the debt ceiling brought the country’s unsustainably high levels of debt into sharp relief.”
Real estate and infrastructure
Real estate has had a tough period with open-ended funds closing on the back of investor redemptions, but Jason Baggaley, manager of abrdn Property Income, said next year could be more positive for the asset class “with interest rates beginning to decline and the cost of debt falling”.
Infrastructure has also struggled under the recent interest rate environment, but Jean-Hugues de Lamaze, manager of Ecofin Global Utilities and Infrastructure, said listed infrastructure, particularly utilities exposed to the energy transition, are trading at record lows.
The world’s largest manager has identified climate resilience as an emerging investment theme.
Climate resilience, financing for emerging markets and policy are the three main themes the BlackRock Investment Institute is watching for at the UN climate conference in Dubai (COP28).
Christopher Kaminker, head of sustainable research and analytics, said climate resilience is an emerging (although underappreciated) investment theme. Companies with products and services that help society prepare for, adapt to and withstand climate hazards are an attractive investment opportunity, he explained.
“Solutions such as early monitoring systems to predict floods or retrofitting buildings to better withstand extreme weather make the technology and industrial sectors standout to us,” he said.
As the cost of damages from climate-related disasters increases, demand for climate resilience solutions will increase. “Case in point: demand for home air-filtration appliances in the northeastern US spiked during the Canadian wildfires in early 2023,” Kaminker said.
“We see investment opportunities in resilience solutions spanning sectors, including some subsectors underrepresented in typical transition exposures – such as healthcare, water utilities and professional services. We believe there are opportunities to invest in climate resilience solutions across public and private equity and debt,” he explained.
A further element of climate resilience involves rebuilding physical infrastructure after climate-related damages, as the table below shows.
Investing in climate resilience
Source: BlackRock Investment Institute, Aladdin Sustainability Analytics
Emerging markets are bearing the brunt of extreme weather events so have greater need of climate resilience, but have struggled to raise money both to adapt to the impact of climate change and to finance the low carbon transition. Investment is lower than in developed markets due to higher perceived risk and thus a higher cost of capital.
“We think closing the financing gap would require significant public sector reforms and private sector innovation, resulting in greater ‘blending’ of public and private capital,” Kaminker explained.
BlackRock estimates that emerging markets will account for over half of energy demand and carbon emissions by 2050. “We think successful reforms could see low-carbon investment in emerging markets rise on average by a further $200bn a year – or $4trn overall – above our base view of a major increase in investment between 2030-2050,” he said.
Kaminker expects policy to drive demand for renewable energy in developed markets as well. “Countries at COP28 look poised to agree to a goal to triple renewable energy capacity by 2030. We think further policy support may make the goal achievable,” he concluded.
The case for investing in risk assets is more attractive in an environment where the money supply is growing.
Investors have been through a tumultuous couple of years, with almost every risk asset hit at different times. Now that we live in an environment with higher rates, we are seeing substantial flows into the more reliable return profile offered by cash and money market funds.
But if we are looking for another constant we can hang our hat on, it would be the growth in levels of government debt. UK Public Sector Net Debt as a percentage of GDP is more than triple today what it was 20 years ago, and US national debt is approaching $34trn.
There are many political conversations about controlling this growth but it is hard to envisage the headline numbers shrinking when the interest payment on US government debt alone this year totals $1trn. So what does this mean for investors?
New debt, new money
In simple terms, taking on new debt creates a new supply of money. If you think about when you take out a loan for instance, you now have more money in your hands than you did yesterday.
Another good example of this would be a new mortgage customer in the UK. When they take out a mortgage, the money they hand over to the seller is borrowed from a bank, but the bank themselves also borrow money from the Bank of England.
The central bank creates new money each time it lends to commercial banks. The more money a central bank creates by lending, the more the balance sheet of their assets increases.
Central banks can also increase their balance sheet by creating money to buy government debt, known as Quantitative Easing (QE). This was one of the consequences of the global financial crisis, and that trend continued into the Covid pandemic, which saw one of the sharpest increases in the money supply as seen in the chart below.
Global central bank balance sheets
Source: BoE, BoJ, ECB, Fed, LSEG Datastream, J.P. Morgan Asset Management. Global central bank balance sheet is the sum of the balance sheets of the BoE, BoJ, ECB and Fed, in USD trillions
In turn, this led to a sharp rise in inflation, which central banks have been trying to address by raising interest rates and reducing their balance sheets. The higher rates have tempered the growth of debt, with individuals and companies now less inclined to borrow.
Governments on the other hand have continued to borrow to fund large fiscal deficits. However, despite this we have experienced one of the rare occasions where the money supply is contracting.
If inflation continues to fall, we may get the interest rate cuts that market participants are pricing in for 2024. This alone could bring about a resumption in the growth of the money supply, creating an environment where individuals and companies are happy to take on more debt.
It could also be boosted by a return of QE, which cannot be ruled out even if central banks are loathe to consider the possibility at this time. Longer-dated government bonds may still offer high yields even after a cut to the base rate, if the term premium is high (i.e. the extra yield investors get for taking on interest rate risk). In that scenario QE could help limit the interest expense on government debt and ease concerns about debt sustainability.
The Cantillon effect
In the 18th century the French banker and philosopher Richard Cantillon coined the term ‘Cantillon effect’ to describe a change in prices resulting from a change in money supply. This change is often uneven – take the impact of QE on the value of bonds for example.
The increase in the supply of money flowed directly into the bond market, which boosted their value, and consequently the value of riskier assets such as equities. The theory is that those who receive new money first profit most from the increase in the supply of money.
The case for investing in risk assets is more attractive in an environment where the money supply is growing, and is worth keeping an eye on as we head into 2024.
Colin Morris is an investment manager at Parmenion. The views expressed above should not be taken as investment advice.
The Henderson strategy announced its annual results today.
The Lowland investment trust has announced its annual results for the year to 30 September 2023, surprising to the upside despite headwinds to its small and mid-cap bias.
It achieved a net asset value (NAV) total return of 17.2%, 3.4 percentage points higher than its benchmark, the FTSE All Share, which stalled at 13.8%. The share price total return stood at 13.9%, as the discount widened from 11.5% to 14.2%.
The outperformance was attributed to stock drivers, particularly around takeovers in the small-cap side of the market, co-manager Laura Foll explained.
“Despite small and medium-sized companies underperforming, the key driver of outperformance for Lowland was the sheer number of takeovers that we had during the year,” she said.
“Because UK valuations are often at a discount to overseas peers, those peers are coming in and buying UK companies. This year, the key examples for us were the likes of Numis, which got bought by Deutsche Bank, and a company called Devro, which does sausage casings and got bought by a European peer.”
On the large-cap spectrum, which at 47% (as of 30 September) is an underweight for the trust when compared to its benchmark’s 84% allocation to the FTSE 100, the best performers were Diageo (not held), returning 1.3%, British American Tobacco (not held), which added 0.9%, and Marks & Spencer, which at 0.8% was among the best-performing positions, as noted by Winterflood analysts.
K3 capital and International Personal Finance followed, with the main drivers here also being takeovers, but shareholder returns via special dividends and buybacks, earnings recovery and structurally growing markets also added.
Detractors included Vanquis Banking (-0.9%), HSBC (-0.8%) and Serica Energy (-0.7%).
FE fundinfo Alpha Manager James Henderson disagrees with market valuations and the “deep scepticism” about the sustainability of UK earnings.
“When we look ahead to 2024 we continue to see pessimism reflected in both company valuations and economic growth forecasts. The best remedy is to meet company management teams, who serve as a reminder of the dynamism and innovation that exist in the UK,” he said.
“The challenging backdrop of recent years (Covid, the Ukraine war) has forced companies to look hard at their cost base and run leanly. On any pickup in sales, it is therefore our expectation that the boost to earnings will be meaningful.”
Other announcements included an earnings per share growth at 10%, alongside positive dividend growth of 2.5%, with the dividend for the year standing at 6.25%.
Also of note, chairman Robert Robertson announced his intention to step down at the 2025 annual general meeting.
Charles Montanaro examines what normal really looks like.
A decade of ultra-low interest rates and inflation, supercharged market returns and anaemic yields have warped what investors have come to expect as normal.
Now it feels as though we are “returning to normal”, according to Charles Montanaro, chairman of Montanaro Asset Management, who explained why in his latest annual letter to investors.
He highlighted cash deposits and bonds offering around 5%; inflation at 2%-3%; GDP growth of 1%-3% (depending on the country); large-cap stocks delivering real returns of 6% and small-caps around 9% as signs the world is returning to long-run averages.
“This is how it has been ‘normally’ on average throughout my career. Sentiment will turn positive when no one expects (as in March 2003 when all the Irish banks were predicted to go bust and didn’t; and in March 2009, when another Lehman Brothers bankruptcy was expected and never materialised),” the veteran investor said.
“The days of free money and negative interest rates are over. [Quantitative easing] QE had to be reversed. The ‘magic money tree’ we all loved has been chopped down. Fairy tales do not last forever. It is time to go back to the real world.”
Below he looks at what normal looks like in a number of areas including inflation, recessions, cash rates and the long run returns from UK equities.
There have been six periods after the Second World War when CPI in the US was 5% or higher, according to a White House paper from July 2021 called Historical Parallels to Today’s inflationary Episode.
Source: Montanaro Asset Management
Oil shocks (like the one experienced in recent years following Russia’s invasion of Ukraine and the sanctions imposed on the exports of Russian oil and gas) caused the three most recent periods of inflation, including in July 2008, when the price of crude doubled to $140.
But this is not the only cause of inflation. Indeed, Montanaro pointed out that the first (1946-48) was caused by the elimination of price controls after rationing.
“During the second world war, the government rationed consumer goods such as sugar, coffee, meat and cheese as well as durable goods like cars, tyres and shoes. All recovered strongly,” he said.
“Wind the clock forward, Covid caused businesses to shut down and forced people to stay at home. Spending on restaurants, travel and entertainment collapsed. Unsurprisingly, pent-up demand led to a boom in retail sales as the economy opened up once again.”
However, five years after the second world war, inflation had normalised. It has been an even more rapid return this time around. Since US consumer prices index (CPI) hit a 40-year high in 2021, it has fallen back down to 3.3%, a “more normal level”. Indeed, since 1980, US CPI has averaged around 4%.
One benefit to the rapid rise in interest rates to combat rampant inflation has been the rise in the amount paid out by savings accounts. Data from Barclays shows since 1980 the average return on cash has been 4.8%, as the below chart shows.
Average interest on a cash account with a UK building society
Source: Montanaro Asset Management
“Today, the average UK bank offers a return of around 4% on cash deposits. We are pretty much back to ‘normal’,” Montanaro said.
The economic cycle and recessions
Montanaro said his “impression” was that the UK would fall into recession every six to seven years, arguing that they used to be viewed as a good thing and a “necessary way of cleansing the system to eliminate excess”.
“People get worried about recessions due to the negative impact on company earnings and share prices. In reality, the average ‘normal’ US recession has lasted just 17 months leading to an average real fall in earnings of 28%,” he said.
“Not much fun, but for long-term investors, no reason to jump out of a window. And since the second world war, recessions have lasted only 10 months and have become less frequent.”
Stock market returns
Investors enjoyed a boom post the financial crisis, albeit a slow one. From the end of 2009 to the start of 2020 the MSCI World index rose 201.2%. The FTSE All Share meanwhile made 118.3%.
Total return of indices from 2009-2020
Source: FE Analytics
Since 1899, the annual real return of UK equities stripping out inflation has been 4.8% per year, with only two decades out of the 11 registering a loss in real terms (1912-1922 and 1972-1982).
“UK-quoted smaller companies have delivered higher returns over the long term, reflecting better earnings growth. The so called ‘small-cap effect’, which has averaged around 3% per annum over the past 68 years, is the reason that we established Montanaro way back in 1991,” he added.
Investor allocations to the UK
Over the years the amount investors have allocated to their home market has changed dramatically in favour of more global equities. Fixed income, real estate and alternatives have also eaten into this though, he noted.
“Exposure to UK equities is now at the lowest weighting that I can recall,” said Montanaro. The average UK investor has almost halved their allocation to UK stocks over the past decade or so, down from 56% in 2009 to 30% today.
“Just when the UK may be at the most attractive level in decades relative to other equity markets, investors have the lowest weighting. You couldn’t make it up,” he said.
The yellow metal surges to a new record high as investors seek a safe haven amid rising geopolitical tensions and central bank buying.
The price of gold jumped nearly 2% to $2,111 (around £1,665) per ounce in Asian trading overnight, surpassing the previous record set in August 2020. Several factors have fuelled the rally, including heightened geopolitical risk, central bank buying, and expectations of lower interest rates, according to Hal Cook, senior investment analyst at Hargreaves Lansdown.
Investors are now betting on interest rate cuts from central banks in the US and UK as inflation is starting to ease. Another factor that has boosted the price of gold is a weaker US dollar. The US dollar has lost value against other currencies in recent weeks, making gold cheaper for investors using other currencies to buy gold.
“Real interest rate expectations (interest rates that account for inflation) have come down in recent weeks, following the market view that central banks in the US and UK have hit peak rates. Historically, the Gold price has moved in the opposite direction to real rates,” Cook said.
Geopolitical risk is also a factor that has boosted the price of gold. The conflict between Israel and Hamas in Gaza has increased the demand for gold as investors seek a safe haven for their assets.
Cook added: “The big question is whether this is a new break out in the gold price and the rally will continue, or whether the $2,000 figure will act as a technical limit, as it has done twice since mid-2020 (three times if you count the price of around $1,970 in March 2022).
“The peak earlier today was around the $2,100 mark, with the price as I type back down at $2,030. It’s hard to know for sure, but geopolitical risk and central bank buying are unlikely to go away anytime soon. Real rates and the dollar on the other hand are harder to be confident about.”
Investors could use gold as a hedge for when stock markets plunge, seeking solace in the yellow metal due to its global recognition as a store of value and high liquidity, which has long served as a sanctuary during economic uncertainty.
Cook added: “Gold’s a popular choice because it’s recognised globally as something of value. It’s also highly liquid, so you can buy and sell it quickly and cheaply. So, it can be a useful diversifier in a portfolio, particularly during periods of market stress.
“But it does come with risks. Prices can sometimes be volatile, affected by things like natural disasters, political tensions, or wider economic events like supply constraints.”
Trustnet asks the experts to suggest funds to buy and hold for the next decade or so.
Evenlode Global Income, Templeton Emerging Markets, TwentyFour Dynamic Bond and Odyssean Investment Trust were all put forward by fund selectors as potential building blocks for junior ISA (JISA) portfolios.
Fund selection is something many parents will be grappling with. Having looked at asset allocation yesterday, here experts tackle which funds to buy once you know the asset classes in which you want to invest. All of these picks have been selected for a child around nine years’ old with about a decade before they will receive the ISA.
What’s the ideal number of funds for a JISA?
There is no perfect number of funds, even for relatively small JISA portfolios – a lot will depend on how much research and monitoring parents are willing to do.
Edward Allen, private client investment manager at Tyndall Investment Management, said it’s crucial to understand all the JISA’s investments “because when one or more of these investments performs poorly it will be tempting to sell and rotate into something else that is doing well. A good starting knowledge of the strategy will help you to hold through tougher times.”
Laith Khalaf, head of investment analysis at AJ Bell, said if parents chose to invest passively, “you could happily have one globally diversified fund” but with active managers “it’s better to have at least two or three managers, just in case one goes off the boil.” Four or five funds would be “reasonable”, he added.
Darius McDermott, managing director of Chelsea Financial Services, prefers more diversified portfolios to “limit the risk of one fund going out of favour and doing badly”.
“I would recommend a portfolio of at least 10 funds, which will allow exposure to different geographies, styles and market caps,” he said.
Start with diversification
My son’s JISA is currently invested in just one fund, Lindsell Train Global Equity – a popular developed markets portfolio that invests with a quality-growth bias.
Emma Wall, head of investment analysis and research at Hargreaves Lansdown, suggested anyone with a developed market equity fund could diversify by adding a bond fund such as Artemis Corporate Bond and an emerging markets fund such as iShares Emerging Markets Index.
“Those three components would give you broad asset class and geography exposure, and also keeps the JISA simple to manage on an ongoing basis,” she said.
Which global funds should parents pick?
The $3.4bn GuardCap Global Equity fund has a concentrated portfolio of just 20-25 holdings and a quality-growth style. Its largest positions include the derivatives marketplace CME Group, healthcare giant Novo Nordisk, eyecare company EssilorLuxottica and Google parent Alphabet. The fund is managed by Michael Boyd, Giles Warren, Bojana Bidovec and Orlaith O’Connor.
Evenlode Global Income invests in 39 companies that provide value-adding goods and services, generate high returns on invested capital and have strong free cash flow. Top holdings include Microsoft, Unilever and professional services firm Wolters Kluwer. The £1.8bn fund is managed by FE fundinfo Alpha Managers Ben Peters and Chris Elliott.
Given the long-term horizon, for the environmentally conscious Wall suggested adding an impact fund such as WHEB Sustainability. The £698m fund is managed by Ted Franks, Seb Beloe, Ty Lee and Victoria MacLean. They focus on nine themes, including clean energy, environmental services, resource efficiency, education and health.
Performance of funds vs benchmark over 5yrs
Source: FE Analytics
For parents who want to take advantage of the wide discounts on offer in the investment trust space, McDermott said Scottish Mortgage is one of the “bombed-out Baillie Gifford growth trusts trading on big discounts” that he likes. It was trading at a 12 month average discount of 16.3% as at 31 October 2023.
Formerly the UK’s largest investment trust, the £10bn company is managed by Alpha Manager Tom Slater and Lawrence Burns. They have grouped their investments into three themes – technology meets healthcare, decarbonisation and a digitalised world – and then a fourth bucket for other companies, from SpaceX to French luxury group Kering. The fund’s top holdings are ASML, whose technology is used to create microchips, NVIDIA and Amazon.
How should investors tap into attractive valuations in the UK?
Some parents may prefer instead to invest in the UK, which has lagged other developed markets for the best part of a decade and could now be considered cheap.
UK small and mid-cap stocks are heavily discounted relative to their history, even more so than their large-cap rivals, so Wall tipped Amati UK Listed Smaller Companies, while Allen mentioned Odyssean Investment Trust and Aberforth Smaller Companies.
“Odyssean takes a private equity approach to public market investing, buying meaningful stakes in growth businesses, often when out of favour with the market, targeting a 15% annualised return. It actually trades at a small premium, but I wouldn’t be put off by that given the nine-year time horizon,” Allen said.
“Aberforth Smaller Companies can be bought on a price-to-earnings ratio (P/E) of 6, taking the 10% (ish) discount into account… which suggests a good starting point for investment and perhaps even a margin of safety.”
Fund and trusts vs sectors over 5yrs
Source: FE Analytics
For broader UK equity exposure, Wall suggested the £1.9bn City of London investment trust, which is managed by Job Curtis and David Smith from Janus Henderson Investors. Whilst many investment trusts are trading at substantial discounts, City of London had a discount of just 0.8% at 31 October.
One of the UK’s oldest investment trusts, City of London focuses on large companies with international revenue streams that are sufficiently robust to increase their dividends. It has a yield of 5% and a long track record of increasing its dividend. It was one of five UK equity trusts added to Square Mile’s Academy of Funds when it admitted investment companies for the first time.
What about emerging markets strategies?
Alongside any developed market exposure, Hollands recommended a 10% allocation to emerging markets for diversification.
“A little exposure to high growth regions such as Asia ex-Japan provides access to a wider set of opportunities,” he explained. “It’s also true that emerging market valuations are more compelling currently as riskier assets have come under pressure and China has been deeply out of favour for a couple of years.”
Hollands put forward the Templeton Emerging Markets investment trust, which is trading on a 14% discount to its net asset value, while Allen highlighted JP Morgan Emerging Markets because its co-manager Austin Forey “talks persuasively about his companies’ ability to generate meaningful returns on capital in markets that are evolving and growing.”
Total return of trusts vs sector over 5yrs
Source: FE Analytics
Dampening down risk with some bond funds
Finally, despite the long time horizon, Hollands suggested a 20% bond exposure split between government bonds using the iShares Core UK Gilts UCITS ETF and a strategic bond fund such as the £1.5bn TwentyFour Dynamic Bond.
Allen owns TwentyFour Dynamic Bond, which has a yield to maturity of circa 8% (before fees) and a bit of duration as well. “It’s a little complex but worth looking into,” he said.
TwentyFour Dynamic Bond is top quartile in the IA Sterling Strategic Bond sector over one year and second quartile over three years.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The investment bank’s eight made-up events with the potential to shake the world.
The future is always different to what is expected, but as most experts try to finetune their crystal balls and predictive models, others decide to go all-in on creativity.
Every year, as end-of-year outlooks are released, Saxo Bank publishes its ‘outrageous’ predictions, which no matter how far removed from the truth they seem, can come true – the most recent example being that in 2022 the plan to end fossil fuels would get a rain check.
This time around, chief investment officer Steen Jakobsen said the world will enter an inflection point in 2024 and reach “the end of the road”.
"The smooth road the world has travelled on since the great financial crisis, with stable geopolitics, low inflation, and low interest rates, was disrupted during the pandemic years," he said.
But the disruption could continue. Below are a few points as to how this might happen and what the knock-on effect could be on markets.
Generative AI deepfake triggers national security crisis
An artificial intelligence (AI)-generated deepfake where a high-ranking official is seen handing over top-secret state information will lead to a national security crisis and trigger a crackdown on AI technology, with governments implementing stringent regulations. This marks a turning point in the perception and use of generative AI, as concerns over misuse and security risks come to the forefront.
Traditional, government-approved media companies will see a surge in value, as trust shifts away from unregulated AI-driven content. On the other hand, companies involved in the creation of deepfake technology, such as Adobe, will face severe backlash and a decline in share prices.
Tax-free treasuries mark the end of capitalism in the USA
Facing a financial crisis, the US government will take the drastic step of making income from government bonds tax-free to stabilise borrowing costs, blurring the lines between public and private capital allocation.
US Treasuries will rally across the board, causing the yield curve to aggressively flatten. Conversely, the stock market will experience a significant downturn, except for a select group of cash-rich companies that could benefit from lower borrowing costs and an inverted yield curve.
Saudis buy Champions League franchise
Oil will reach $150 a barrel, emboldening Saudi Arabia to make a move on the international stage by buying the UEFA Champions League franchise and creating a World Champions League. This will be seen as part of Saudi Arabia's strategy to diversify its economy beyond oil and aiming to become a global hub for tourism, leisure and entertainment. This acquisition will lead to a doubling of Manchester United’s stock price.
Robert F. Kennedy Jr. wins the US presidential election
Running as a third-party candidate, Robert F. Kennedy Jr. will garner support from both traditional Democratic voters and disenchanted Trump supporters, promising to end “forever wars” and combat drastic inequality and injustice.
Defence, drug and healthcare companies will experience a significant decline in their stock prices due to Kennedy’s pro-peace stance and promises to reform healthcare and challenge corporate power. Internet and information technology monopolies could also trade nervously, with concerns about potential anti-monopoly actions and broader regulatory changes.
EU introduces wealth tax, impacting luxury market
As a response to growing social unrest and perceived tax inequalities among the ultra-wealthy in Europe, the European Union will introduce a 2% wealth tax on billionaires to fund climate change mitigation, healthcare and education.
Shares of luxury brands such as LVMH, Porsche and Ferrari will plunge by 40% as market expectations for luxury goods demand plummet.
Obesity drugs work too well
The widespread adoption of GLP-1 obesity drugs will lead to a decrease in public interest in maintaining healthy lifestyles. People will begin to rely on the drugs instead of diet and exercise, increasing global obesity rates and related health problems. This trend is exacerbated by supply shortages of these drugs, leading to a significant health crisis and a decrease in global productivity.
This scenario will lead to a surge in demand for processed food industries, with companies such as McDonald's and Coca-Cola benefiting. Their stock prices could outperform the broader markets by 60%.
Deficit countries form trade coalition
In response to unsustainable long-term current account imbalances, a group of deficit countries including the US, UK, India, Brazil, Canada and France will form a ‘Rome Club’, an alliance aiming to cooperate on reducing deficits by collectively negotiating new world trade terms with surplus countries.
Faith in the fiat money system will plummet and spark significant gains for alternative stores of value including gold, silver and cryptocurrencies.
Japan will experience an unexpected economic boom, resulting in a 7% GDP growth rate driven by increased domestic demand, wage growth and technological advancements.
The Bank of Japan will abandon its yield curve control policy, leading to a significant adjustment in global bond markets as Japanese investors repatriate funds back home. The yen will strengthen against major currencies, pushing the dollar-yen below 130, euro-yen below 140 and Australian dollar-yen below 88.
Lance’s recommended reading to commemorate Munger and his ‘brilliant’ advice on the psychology of human misjudgement.
Warren Buffett’s long-time partner Charles Munger died on Tuesday last week. While he was “the silent partner” in Berkshire Hathaway, with Buffett being the more public face and the more often quoted, many give him equal credit in determining the company’s success.
Redwheel’s Ian Lance described him as “as sharp as a tack, even as he got older” and he recommended every investor to read Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, edited by Peter D. Kaufman.
The book is a collection of speeches and writings with “invaluable advice” for investors on a wide range of subjects, “frequently presented in an amusing fashion” and full of “incredible” common sense.
“After the news of Munger’s death came in, it felt appropriate to dig out one of my prized possessions – a signed copy of Poor Charlie’s Almanack, whose subtitle sums up the book and Munger himself perfectly,” said Lance.
“I have been inspired to read the entire thing again. When someone as intelligent and successful as Munger generously shares his wit and wisdom, it would be foolish not to take advantage of it.”
The collection opens with a foreword titled Buffett on Munger and inevitably a rebuttal Munger on Buffett.
“Munger was a polymath who prided himself on the fact that he read all the time and across a wide range of subjects,” said the manager. “Throughout the book his encyclopaedic knowledge allows him to cite references that range from Cicero to Nietzsche and from Galileo to Johnny Carson.”
In Munger’s words: “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
The main takeaway that Lance drew from the book came from the section Ten Talks, which covers a wide spectrum of Munger’s interests from acquiring worldly wisdom to how his Multiple Mental Models can be applied to business. Each talk is followed by a postscript written in 2006, allowing Munger to reflect and comment on some of his earlier thoughts.
“Possibly my favourite is Chapter 10, The Psychology of Human Misjudgement. As an investor who believes that behavioural biases in investors lead to share prices trading significantly above and below the intrinsic value of businesses, it is fascinating to see Munger identify 25 of these which range from ‘Simple, Pain-Avoiding Psychological Denial’ to ‘Overoptimism Tendency’,” said Lance.
Another part that resonated with Lance as a value investor was the chapter Mungerisms: Charlie Unscripted.
“It is so full of brilliant advice that it was hard to single one out, but as a value investor in a world in which hardly anyone still employs this investment philosophy, I was drawn to an answer that Munger gave to the question of why more investors don’t copy Berkshire Hathaway.”
In the book Munger said: “It’s a good question. Our approach has worked for us. Look at the fun we, our managers and our shareholders are having. More people should copy us. It’s not difficult – but it looks difficult because it's unconventional.”
One stock firmly in the spotlight in 2023 and one which epitomises the change in sentiment is Toyota
Japan is back. After years of being overlooked, recognition of more profit-driven corporate behaviour is finally gaining deserved attention from global investors. Japanese equities have been cheap versus ‘potential’ for decades. Today, this potential is increasingly being released. The long-standing ‘if only’ bull-story has finally turned into a reality. Luckily, several chapters remain.
Whilst media attention understandably gravitates to what the Bank of Japan (BoJ) is thinking in terms of monetary policy, the fundamental driver of renewed optimism for Japanese equities stems from something a little less headline grabbing: arduous acts of behavioural change and self-help that have been delivered over the course of several years at the individual company level.
Where Japanese companies might have historically put little focus on profitability or shareholder alignment, the past decade has seen significant and deliberate efforts by the corporate sector to improve. Steps to become more effective, efficient and competitive have translated into impressive profit growth in the decade since we first heard about Abenomics.
Zooming back out, recognition of this micro reform has combined with optimism over a structural shift in inflation dynamics to drive the market to its highest level in 33 years.
One stock firmly in the spotlight in 2023 and one which epitomises the change in sentiment is Toyota. The company is having an extremely significant year. Firstly, the presidency passed from Akio Toyoda, grandson of the company’s founder, to former Lexus CEO Koji Sato.
Casual observers of Japan might not see this as a particularly big deal, but we believe it reflects an important and intentional cultural shift. The company is becoming more open than ever before, determined to do whatever it takes to lead the world in mobility solutions.
Secondly, Toyota has used enhanced disclosure concerning its technology stack to shed unfair perceptions that it lags peers on the electrification front. This has been effective. Investors now appreciate that Toyota has world-leading technology in areas like solid state batteries.
Thirdly, the company is in the midst of a sensational earnings year. Whilst the weak yen has helped somewhat, Toyota deserves credit on multiple fronts for the strength of its earnings. The company has managed supply shortages across the industry better than most, allowing undue volume losses to be avoided in what has been a robust demand environment.
Moreover, the company’s strategy to focus on hybrids and plug-in-hybrids as a transition technology along the road to net zero is proving to have been well considered after all. Not only can Toyota boast one of the lowest emission fleets in the world, it also has one of the strongest and most profitable product line-ups in the industry.
Toyota is not alone in Japan in terms of companies that have their swagger back. There are many such examples where intentional improvements in operating models have not only driven growth in profits, but also in self-confidence and a willingness to invest and pursue growth.
The changes we see are not short-term events. These are seismic shifts that have taken multiple years to build up. Results will be yielded for several years to come as positive feedback loops start to unfold.
So what of 2024? No doubt volatility in the yen and interest rate markets will have investors confused and anxious at various points in the year ahead. But don’t let tactics trump strategy. Thanks to transformation of corporate culture since Abenomics came along a decade ago, Japanese companies have delivered impressive earnings growth and a repeat in the decade ahead is a very reasonable base case assumption.
Strong earnings, strong dividend growth and growing buybacks offer the prospect of mid-teen market returns for many years to come… in a cheap currency no less. Patience and a realistic time horizon in Japan offer the prospect of handsome rewards.
Carl Vine, co-head of Asia Pacific equity team at M&G Investments. The views expressed above should not be taken as investment advice.
Trustnet researches the small-caps funds that have bucked the trend and proven worthwhile investments.
Smaller companies funds have been among the worst performers in the past three years, with average fund in the IA UK Smaller Companies and IA Global European Smaller Companies sectors making negative returns over the period.
The IA North American Smaller Companies sector fared better but the average fund’s returns would not have been enough to protect investors from inflation.
Below, Trustnet looks at the smaller companies funds that have not only delivered positive returns but also beaten UK inflation, meaning domestic investors have made a real return.
In total, nine funds have achieved this feat, with a majority of them specialised in North American small-caps.
The best performer has been a passive fund, SPDR MSCI USA Small Cap Value Weighted UCITS ETF. This tracker fund’s benchmark is a variation of the MSCI USA Small Cap index with an emphasis on lower valued stocks.
FTF Royce US Smaller Companies is another applying a value bias that has been able to beat UK inflation over three years, but with an active approach.
Manager Lauren Romeo looks for valuation discrepancies among US smaller companies, but also pays attention to downside risk as she considers avoiding losses in down markets to be essential for total returns over the business cycle.
Stablemate FTGF Royce US Small Cap Opportunity, which also has a value tilt, has achieved the same feat. Managers Jim Stoeffel, Brendan Hartman and Jim Harvey look for undervalued companies that they believe have the potential for financial improvement. They typically hold 245 to 320 stocks in the fund and none should be larger than the largest company in the latest Russell 2000 index.
Performance of funds over 3yrs vs sector, benchmark and CPI
Source: FE Analytics
The former is managed by Nicolas Janvier who aims to identify US smaller companies that can improve their quality more than the market is forecasting over the medium term.
Janvier and his team consider capital allocation, profitability, margin growth and environmental, social and governance (ESG) integration as four key indicators of quality. They also like to invest in early-stage businesses to benefit from the rapid growth phase of their lifecycle.
Performance of funds over 3yrs vs sector, benchmarks and CPI
Source: FE Analytics
Analysts at FE Investments said: “The focus on stock picking, while limiting sector and factor bets, allows the fund to produce more consistent performance relative to the small- and mid-cap market, regardless of the stylistic and macroeconomic environment.”
Federated Hermes US SMID Equity has also beaten UK inflation over the past three years. The managers invest in quality companies they consider to be attractively priced and aim to hold them for the long term. To make it in the portfolio, companies should have a competitive advantage, sustainable earnings, sensible financial management and ESG-compatible.
Performance of fund over 3yrs vs sector, benchmarks and CPI
Source: FE Analytics
While the majority of small-cap funds that have beaten the UK inflation are investing in US smaller companies, a few funds exploiting the potential of the lower echelons of the home market have also produced real growth.
For instance, Fidelity UK Smaller Companies has outperformed the UK Consumer Price (CPI) Index by 17.3 percentage points in the past three years.
The manager, Jonathan Winton, is a value investor with a contrarian approach, yet he also focuses on downside risk and protection of capital in times of market distress.
Analysts at Square Mile find the overall strategy “extremely sensible” and believe it should reward investors with “impressive returns” over the long term. Yet, they also stressed that there will be periods where this contrarian approach will be out of favour.
The fund is currently open to investors but Fidelity has soft closed it in the past because of the liquidity constraints of the underlying asset class. Square Mile analysts’ warned that this could happen again if the fund goes through a period of strong inflows.
Performance of fund over 3yrs vs sector, benchmarks and CPI
Source: FE Analytics
Aberforth UK Small Companies has also beaten UK inflation with a value approach. The managers typically buy stocks when they are unloved, resulting in a portfolio cheaper than the broader UK small-cap market.
The fund has an investment trust version (Aberforth Smaller Companies Trust) currently trading on a circa 10% discount. Yet, unlike the open-ended version, the trust has not generated real growth over the past three years.
Performance of funds over 3yrs vs sectors, benchmarks and CPI
Source: FE Analytics
Finally, Artemis UK Smaller Companies has outperformed the UK CPI by 3.5 percentage points.
Managers Mark Niznik and William Tamworth are bottom-up stockpickers following a ‘growth at reasonable price’ approach. Investee companies should, therefore, be trading on reasonable valuations, have sound financials and preferably be in market leadership positions.
Niznik and Tamworth build their portfolio without reference to the fund’s benchmark. Yet, a single holding will generally not exceed 3% of the fund and not account for less than 0.5%.
Performance of fund over 3yrs vs sector, benchmarks and CPI
Source: FE Analytics
The managers regularly re-balance the portfolio. This can be due to higher conviction stock ideas replacing existing holdings, investee companies hitting higher valuations or to limit exposures to common macro-economic factors.
It should be noted that no fund in the IA European Smaller Companies sector has managed to beat UK inflation over the past three years.
The UK’s largest wealth manager has replaced managers on three funds.
This is part of a wider effort from SJP to adjust to the Financial Conduct Authority’s Consumer Duty. This new piece of regulation, introduced by the City watchdog last summer, aims to enforce value for money and good client outcomes across the financial services industry.
For its Global Smaller Companies fund, SJP has replaced current manager Paradice with Northern Trust Global Investments Limited. Robert Bergson will take over from Paradice’s Kevin Beck as lead portfolio manager.
The external fund manager charge for the fund will reduce from 0.60% to 0.06% per annum, although it could evolve into a multi-manager fund over time.
Performance of fund since launch vs benchmarkSource: FE Analytics
Elsewhere, Somerset Capital was replaced by Robeco Institutional Asset Management as manager of its Global Emerging Markets fund. The external fund manager charge will be cut from 0.30% to 0.15%, while Tim Droge and Han van der Boon will take over from Edward Robertson as lead portfolio managers.
Tom Beal, executive director of investments at SJP, said: “The changes we are making to the Global Emerging Market and Global Smaller Companies funds are designed to specifically add lower-cost strategies to our platform and therefore continue a theme of providing investors with more choice.
“Active quantitative strategies can be incredibly effective when accessing less covered areas of the market at an attractive price point. This is key to our fundamental belief to offer choice, innovation, and variety to investors of all type.”
Performance of fund over 10yrs vs benchmark
Source: FE Analytics
Yet the manager charge on the Emerging Markets Equity fund will increase from 0.37% to 0.39% with the introduction of Aikya Investment Management to the current manager line-up, which already includes ARGA Investment Management, Lazard Asset Management and Wasatch Global Investors. Aikya’s Ashish Swarup will be the lead portfolio manager, with Somerset Capital removed.
Beal explained: “The Emerging Market Equity fund is already a top-decile performer amongst peers over the past five years and this change should help maintain the fund’s strong track record. The team’s defensive, quality oriented approach blends especially well with the existing growth and value managers in-situ.”
Performance of fund since launch vs benchmark
Source: FE Analytics
These changes come two months after Justin Onuekwusi joined SJP as chief investment officer to lead the development of the firm’s investment proposition, asset allocation approach and selection of external fund managers.
The wealth management firm also scrapped its controversial exit fees from most of its new investment bonds and pensions products in October.
While SJP’s share price has stumbled in recent years, experts still keep faith in the prospects of the UK’s largest wealth manager as an ageing and wealthier population is likely to result in a higher demand for financial advice.
Diversification will be the key if central banks get their interest rate decisions wrong.
UK wealth advisers are strategically repositioning investment portfolios in anticipation of potential challenges in 2024, citing central bank policy missteps as the primary concern, according to a study by Principal Asset Management.
Almost seven in 10 respondents (68%) identified central bank errors as the most significant risk affecting portfolio performance over the next six to 12 months.
The other most common risks that investors could face include corporate defaults, the prospect of a selloff in technology stocks and a higher oil price, the survey found.
Wealth managers have grown more cautious on the US, with around 35% expecting to cut their allocation to the world’s largest market, while private equity is in vogue – more than a third (37%) plan to boost allocations to the sector, which offers the potential for attractive returns over the long term.
Fixed income is also in favour, with advisers noting they are likely to increase than decrease allocations to government bonds, investment grade credit, high yield credit, and emerging market debt.
Alan Glendon, managing director & head of distribution UK & Ireland at Principal Global Investors, noted that real estate could also be a bright spot for wealth managers. “Real estate plays an important role in protecting portfolios against high inflation,” he said.
Here, UK advisers identified mixed-use, data centres, and retail sectors as offering the best risk-adjusted returns within real estate investment opportunities.
Glendon said: “Data centres in particular stand out as a compelling long-term investment opportunity, as through the datafication of social infrastructure the demand for data storage is only going to grow.”
However, he warned there was a “significant home bias” in this asset class, advising investors to “look beyond their own economies”.
Overall, Seema Shah, chief global strategist at Principal Asset Management, said the key will be to spread money across assets, rather than narrowing in on one in particular.
She said: “The post-pandemic recovery is starting to ebb as global storm clouds gather. The global outlook looks troubled as rising rates, oil prices and the US dollar threaten to exacerbate economic slowdowns. Diversified asset allocation is critical as market uncertainties grow.”
The survey canvassed insights from 100 wealth managers, IFAs, private bank advisers, and family offices across the UK.
Experts recommend investing in global equities, with some side bets on UK small-caps, emerging markets and bonds.
Junior ISAs (JISAs) are meant to be long-term savings, with parents putting their cash in higher risk, higher return strategies for their children as they can only be accessed at 18. But as the years go by does the asset allocation need to change?
This is something I am wrestling with at the moment and am currently reviewing my son’s JISA investments now he is nine years old.
My husband and I have amassed £16,000 by investing £100 a month since our son was two. The whole JISA is held in Lindsell Train Global Equity, which has made us a £3,000 investment return.
Total return of fund vs benchmark over 10yrs
Source: FE Analytics
Although we have achieved a decent return, my husband and I feel we should add some more funds to the mix given that the JISA has grown.
However, before diving in, parents (myself included) need to think about how long they have until the money will be handed over and what spread of assets they want to include, according to the experts Trustnet asked.
The first thing to get right is the asset allocation, which will have a much larger impact on returns than fund selection. A key consideration is whether a child will need the money at 18 or whether they might stay invested for longer, for instance to save for a first home.
Either way, nine years is a long enough time to keep most of the JISA in return-seeking equities, but if there are plans to redeem on the child’s 18th birthday (to fund university education, for instance) then a bond ballast might be sensible.
A further option when a child reaches adulthood would be to encash part of his or her JISA each year and use the proceeds to reinvest in a lifetime ISA, which would benefit from a 25% top-up from the government.
Using my son as an example, Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said that if he wishes to keep his JISA invested beyond 18, we could follow Hargreaves Lansdown’s ‘adventurous’ asset allocation, putting 88% in overseas equities and 12% in UK shares.
If he plans to use the money straight away to pay for university, Wall recommended a ‘moderately adventurous’ asset mix instead with a bond component: 16% in investment grade bonds, 4% in other bonds, 66% in overseas stocks and 14% in UK shares.
Laith Khalaf, head of investment analysis at AJ Bell, also suggested focussing on equities for now. “As you get closer to the big 18th birthday, you can perhaps switch towards bonds or multi-asset funds,” he said.
Jason Hollands, managing director at Bestinvest, would keep the majority of the portfolio (70%) in developed market equities, then have 5-10% apiece in credit (via a strategic bond fund) and government bonds, as well as 10% in emerging market equities.
Hollands’ target asset allocation could make the most sense as now appears to be a good time to move into fixed income. With interest rates at their peak, we could lock in the current high yields and then achieve capital gains when central banks start cutting rates.
This is a theory that Wall concurred with. “While it is almost impossible to call the exact top of the rate cycle, there are indicators to suggest that we are at or nearing the peak. This means that bond funds are currently offering a great income – and have the opportunity to offer great capital growth from here, though of course with investing nothing is guaranteed,” she said.
“Bond quality in the index is broadly high too, meaning that fund managers are able to find bonds with good credit ratings for a good price – reducing the risk of defaults if the recession does appear next year.”
Edward Allen, private client investment manager at Tyndall Investment Management, was more circumspect about allocating to bonds. “Buying a short-term bond fund would only make sense if you sniff the opportunity to invest in risk at a later date,” he said.
Khalaf agreed that bonds are not essential at this juncture, especially for someone in my situation who intends to drip feed £100 a month into the JISA. “Even if there’s a market fall in the next few years, you’ve got fresh money going in and buying at lower prices,” he explained.
“If you’re more cautious and can’t stomach the ups and downs of full stock market exposure, then of course you can add some bonds for ballast and diversification now.” He recommended looking for bond funds which hedge back to sterling to avoid currency risk.
“Alternatively, you might select some conservative multi-asset funds which invest in a mix of shares, bonds cash and alternatives so you don’t need to worry about asset allocation,” Khalaf added.
Another option would be to outsource asset allocation decisions completely to a model portfolio. These are widely available on platforms and are usually organised by risk appetite. Some of them can be very cheap, too; Bestinvest’s ‘smart’ range which uses low-cost ETFs and passive funds only charges about 0.3%.
I want to pick my own funds, however, as I have the luxury of spending my working days interviewing fund managers. As such, I asked my panel of experts to suggest some funds to add into Harry’s JISA and will reveal their top picks tomorrow.
With one month to go before the end of the year, tech funds have extended their lead once again.
Technology equity funds are going into the final month of 2023 with a substantial lead on their rivals, data from FE fundinfo shows, after their bull run intensified in November.
While investors went into 2023 with a sense of nervousness around inflation, rising interest rates and economic growth, the year so far has been largely positive after inflation started to ease and central banks slowed the pace of rate hikes.
Add to this the rise of generative artificial intelligence and 2023 to date has been an especially good one for tech stocks – as shown in the chart below. Indeed, the companies responsible for the bulk of the US stock market’s gain as the ‘Magnificent Seven’ tech giants of Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft and Tesla.
Performance of global stock sectors in 2023 to so
A market dominance of this extent is reflected in the performance of the Investment Association sectors over the first 11 months of the year. At the top of the leaderboard is the IA Technology & Telecommunications sector, where the average fund has made a 31.4% total return this year.
As an article on Trustnet highlighted last week, this comes after tech funds benefited from a near-10% gain in November alone after investors upped risk on data showing that the US economy is stronger than expected and hope that interest rates have reached their peak.
The IA Technology & Telecommunications sector has a clear lead on IA Latin America for the year so far, which is in second place with a 13.9% gain. IA India/Indian Subcontinent and IA North America are the only other sectors to have made a double-digit average return in 2023.
Performance of Investment Association sectors of 2023 so far
But there are 15 sectors making a loss this year with IA China/Greater China being the biggest faller. The average fund in the sector has made a loss of 18%. The world’s second largest economy has been struggling in 2023 while investors remain nervous over regulatory crackdowns in several key sectors.
Turning to individual funds and the top of the performance table is packed full of tech funds – 21 of the 25 funds with the highest total returns dedicated to tech stocks.
Specialist exchange-traded funds (ETFs) have done particularly well, owing to their focus on specific parts of the market.
HANetf Grayscale Future of Finance UCITS ETF is the highest returner in the entire Investment Association universe with a 64% total return, following by the 62.5% from HAN ETC Group Digital Assets & Blockchain Equity UCITS ETF.
Outside of tech funds, 2023’s best performers include a couple that concentrate on US large-caps. This means they have significant exposure to the leading technology companies as well as those from other sectors.
Other funds in the top 25 are HANetf Sprott Uranium Miners UCITS ETF, rallying off a 15-year high in uranium prices, and Nomura Japan Strategic Value, reflecting the surge in Japanese stocks that is another of 2023’s investment themes.
Specialist ETFs are also common at the very bottom of the performance table, again because of their focus on a narrow band of stocks.
Many of the worst-hit funds of 2023 invest in clean energy stocks. They are suffering under higher interest rates because of a reliance on debt to fund their projects.