One way the £1.3bn Baillie Gifford Strategic Bond fund has managed to beat the bond market is by simply lending to the businesses of the future.
Baillie Gifford’s approach of focusing on the long-term picture appears to have also worked for its £1.3bn Baillie Gifford Strategic Bond fund, which is ranked top quartile in the Investment Association’s Sterling Strategic Bond sector over a five-year period.
Manager Torcail Stewart explained that much of this performance can achieved by simply lending to growing businesses with improving balance sheets and avoiding those in structural decline.
“We look at markets in a different manner,” he said. “Rather than being just fixated on the next set of numbers, we’re looking for what is the long-term trajectory and that offers you quite a lot of benefits.”
He believes that it pays off to lend to companies that are producing goods and services for the future, not the past - regardless of how attractive the yield may be.
“If you're lending to a business that you know is going to collapse or in structural decline, you don't know when that's going happen,” he explained. “It could happen tomorrow, or it could happen in three years. But it is not going in the right direction.”
Stewart said this leaves bond investors who lend to those companies at risk of being left with a business that “defaults out of almost nowhere”.
Whereby lending to businesses where the future direction is clear, it can result in the upward re-rating of bonds to the benefit of the bond investor.
Stewart highlighted Baillie Gifford Strategic Bond’s position in global streaming giant Netflix, as an example.
“It's been great business we’ve lent to,” he recalled. “It’s gone up over 20 points because we can see unit costs are falling, it's growing, and it's creating much better original content.
“So identifying companies where we see that balance sheet improving, that generally means that you find that the risk premium also compresses.
“That spread - the extra cushion above government bonds – compresses, and that can be quite fortuitous for the ultimate pricing of those bonds. That often results in rating upgrades, which of course is good for the risk premium.”
Stewart does this by focusing on long-term processes that are playing through within businesses, such as diversifying or growing in scale. In the case of Netflix, it has grown massively in scale.
On the other hand, in the same way that bond prices can re-rate upwards to the benefit of bond holders, they can also re-rate down.
This is where avoiding declining industries really can pay off in terms of preventing capital loss.
In the last year as oil prices continue to rally, it has direct impacts on the profit margins of many energy companies producing oil at relatively fixed costs. In the space of a year, crude oil prices have almost doubled.
Performance of Bloomberg WTI Crude Oil Sub index over 1yr
Source: FE Analytics
This has also caused a major improvement of the short-term credit profiles of many oil & gas producers, benefitting funds holding these bonds which may have re-rated upwards as a result.
However, despite this short-term rally, Stewart believes that it still does not eliminate the structural decline of many businesses in the industry.
“I think that [oil & gas] is an area where you're going to see increased pressures because of the decarbonisation strategy that is becoming more and more predominant throughout the industry,” he said.
So, whilst the bonds of many of the industry have rallied in recent months, Stewart believes the willingness of capital providers to lend to them at low interest rates will not be what it used to be in the past.
He said: “There's a really strong trajectory towards reducing carbon within funds, and so I do ponder if some of the more risky entities out there might be in a bit more of a difficult situation in terms of actually receiving capital and the level that they'll have to pay in the future to actually able borrow.
“If I were an oil & gas finance director, I’d be looking run with less leverage than I have done in the past, because the cost of capital could be much higher.”
In the same way that many equity funds at Baillie Gifford will avoid declining industries, Stewart will also back his winners for the long run.
Baillie Gifford Strategic Bond’s biggest position is a 2.8 per cent weighting to Netflix bonds due in 2029, a position which the fund has held for several years. The next two biggest positions are a 2.6 per cent position in National Grid bonds and a 2 per cent position in Rabobank bonds.
“It’s in keeping with overall Baillie Gifford philosophy of backing your winners - but just within the bond context,” he said.
“Obviously, our max position is 3 per cent, so we’re not going to the very sizable positions of Scottish Mortgage.
“We don't have unlimited upside, we’re more constrained, but it's still a different approach to bond markets which has worked.”
Performance of the fund over 5yrs
Source: FE Analytics
Baillie Gifford Strategic Bond has delivered a total return of 33.53 per cent over the last five years, compared to 24.47 per cent from the IA Sterling Strategic sector average.
It currently yields 3.3 per cent and has an ongoing charges figure (OCF) of 0.52 per cent.
F&C Investment Trust manager Paul Niven explains the recent changes to the portfolio’s allocation and the macro outlook informing them.
Coming into the new year, Niven had already begun a programme of reducing the trust’s growth exposure and increasing its value allocation following the market’s shift into value in early November.
This continued into the opening quarter, where “very early in 2021 was another further cut to US growth stocks and a rise in exposure to value”, Niven said.
The £4.5bn trust has a large-cap bias and invests in a mix of defensive, cyclical and sensitive areas of the market.
F&C Investment Trust has been managed by Niven since 2014, although it has a long history before this as the world’s first investment trust. It invests in global equities and is also able to invest in unlisted securities and private equity.
At the end of 2020, the trust’s allocations stood at around 25 per cent in the T Rowe Price US Growth strategy (“an unusually high proportion”, Niven said) and just 13-14 per cent in the Barrow Hanley fund, the trust’s main value allocation.
Currently the growth and value allocation are almost level, at just below 20 per cent each.
There were several reasons for this, Niven said, including the narrowing of growth and value stocks valuations, very strong growth expected in the US and global economy, bond yields moving higher and an overall broadening of the market performance from just the cluster of lockdown ‘winners’.
“So really, the changes that we've made this year have become much more balanced in terms of exposure between growth and value,” Niven said.
All of this was informed by the manager’s overall macro outlook, which he explained was a generally bullish on developed markets’ recovery.
Back in 2020, Niven was projecting a short, rapid recovery from the financial losses of Covid-19, a recovery he still thinks will continue to be particularly strong in the US and UK.
Focusing on the US, he expects it to lead the developed markets in terms of growth during the recovery trade and period.
“I think [the] consensus is now expecting something north of 6 per cent into the US growth this year, it could well be that when 2021 is done that it ends up being something north of seven, maybe closer to even 8 per cent.
“So it's going to be a really strong year in growth terms,” he said.
On the UK, the manager said that the “economy here is set to surge, could be broad based”, supported by a strong housing market and manufacturing and services sectors showing a “very, very robust upturn”.
“It's going to be a real strong recovery in the UK in our view, following a very [significant] contraction in 2020,” Niven said.
Still, a strong recovery outlook was somewhat contingent on the ongoing vaccine rollout and a lack of new variants.
“The rapid deployment of vaccines, in our view, and markets view should defeat Covid,” Niven (picturedi) said.
These strong growth expectations are centred on two main reasons: stronger fiscal stimulus and increased consumer savings.
“Last March, we started discussing fiscal packages, which are really beyond anything that any of us had ever seen before in terms of sheer scale,” Niven said.
These massive doses of fiscal stimulus, supplied by governments at rapid pace at the outbreak of Covid-19 to offset some of the financial and economic impact of the pandemic, are a key contributor to strong growth in the UK and US, according to Niven.
The sizeable fiscal packages contributed to the second factor, increased consumer savings, or the “Covid piggy bank”.
In the US it’s estimated that savings as a proportion of disposable income is now around 20 per cent and in the UK around 17-19 per cent.
When these pent-up savings are spent, however, is more of a debate, but Niven feels that “consumers are likely to only start spending when they've got confidence and a lot spending depends on mobility. So vaccinations really do matter here”.
“You can think of these savings as representing pent-up demand, and basic successful vaccine deployment will be a catalyst for consumers to spend,” he continued.
Niven added that Europe has had a lower rate of savings so less pent-up demand and a smaller catalyst.
“But [the] important point, and to repeat what I said earlier on, in the US it is likely that certainly before the by the fourth quarter, we will have recovered lost output,” he said.
“And that's a significant milestone. I think that people had not expected that six or 12 months ago.”
Although bullish on the developed market recovery, Niven did highlight the concerns around rising inflation, which ironically are being supported by the factors encouraging a strong recovery.
Inflation has been rising for several months with investors pricing in higher levels.
In the latest data from the US Labor Department found that US inflation increased by 5 per cent in the 12 months through May, making it the largest yearly increase since August 2008.
This week the Office for National Statistics (ONS) in the UK found that inflation had increased 2.1 per cent, above the Bank of England’s 2 per cent target.
“It looks certainly unambiguous and this is coming through in the data. We can see cyclically we're going to see higher inflation and markets have priced this in. The question really is whether we're going to see a secular change in the inflation outlook,” Niven said.
“Now, I don't think you have to argue for a return to the 1970s to expect some general rise in inflation. This is not likely to be a period of rampant price rises. But I think and I've said this before, that we're going to be in for a long period of negative real yields.
“Real interest rates in terms of government bonds are negative, inflation is higher than nominal bonds.”
“This really fits with priorities for governments and central banks,” Niven added, as they have a have an extreme amount of debt on their balance sheets, increased by the fiscal Covid spending. To eliminate this the manager doesn’t think taxes will be increased because “[they] don't want to kill the recovery at the time you want to grow your way out of it”.
“A fair bit of inflation and negative real yields really helps to reduce the stock of debt over the long run,” he said.
One of the key things occurring in the macro picture is a shift in the “strategic backdrop”, meaning that the response from policy makers is now different to what it was pre-pandemic.
“They need to allow economies and inflation to run a little bit hotter than may have been the case if you compared to the previous, not only years but very recent decades,” he said.
Over 10 years the F&C Investment Trust has made a total return of 238.04 per cent, outperforming both its sector and benchmark.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust currently has 9 per cent gearing with the 1.4 per cent dividend yield. It is running at a 5.9 per cent discount and with charges of 0.52 per cent.
Artemis’ Simon Edelsten looks at the changing nature of consumer preferences and asks how this might change as the world emerges from the coronavirus pandemic.
Investors believe that consumers are pretty reliable and buy the same things for decades in a predictable way. For this reason, many companies producing consumer products trade on quite high multiples of earnings. Their earnings are expected to vary little even when economies are weak.
Although the lockdowns of the past year have tested this resilience, consumer stocks have again proven stable – if prone to some unexpected underlying changes. For instance, Nestlé sold less bottled water when restaurants were closed, but lots more pet food and litter as the pandemic’s ‘pet boom’ took hold.
These companies may be central to our lives, but we cannot take their resilience for granted. Consumers can change habits quite suddenly at moments of social upheaval.
In the 1950s, for example, housewives – yes, mainly wives – often went to the grocer, baker and butcher daily, as food did not last. This is why tinned goods, developed for troops, became so popular, enabling products for the larder, such as Spam and Ovaltine, to become established. In the 1960s refrigerators became affordable and frozen foods took off – trends that facilitated the rise of supermarkets and the once-a-week shop.
Lockdown’s empty roads suited the home delivery fleet of 2020. From Ocado and Amazon to Riverford Organic, the surge of demand last spring was eventually met by increased capacity to supply. Now households will not easily surrender their delivery slots. If we select our weekly shop online, how might consumer trends change?
Changing expectations around sustainability
Online shopping allows many consumers to take their time in selecting their lists of favourites. For those who want to know how their food is sourced or the standards of farms that produce it, for example, an online site can give much more information than is available on packaging.
Information about sustainability may sway some consumers – sometimes steering them to more expensive items – but it needs to be convincing and easily absorbed. This part of the market may be high-margin, but it is important to recognise that the largest share of food shopping is likely to remain very price-sensitive.
Currently, as the price of commodities rises, it may prove difficult for the bulk of food producers to increase prices when consumers can easily compare costs and shop around online. This will, of course, squeeze profitability and returns. Perhaps the older food brands will struggle to pass on cost inflation when it is easy for consumers to shop around. And it may prove difficult for many to adapt to trends such as the growth in veganism, but the larger companies are moving towards more sustainable or recyclable packaging. It takes a long time and considerable investment for food companies to change their production processes; unfortunately, at inflexion points consumer demands can change rather swiftly.
The clothing market faces quite different pressures from shoppers, who expect higher standards of sustainability. We have recently seen Nike and H&M questioned by the BBC about their sourcing of cotton from Xinjiang.
Younger consumers in particular are concerned about where and how their clothes are made. That said, some retailers who target this cohort sell fashionable clothes cheaply that they expect will be rapidly discarded and replaced. Most are price-sensitive buyers, which means producers have to squeeze margins all the way down the supply chain – making them vulnerable to the practices of ‘sweatshop working’.
By contrast, buyers of luxury goods are generally price-tolerant. Companies can charge much higher prices and enjoy larger margins. This means they can stay with their expensive supply chains – even when inflation is squeezing margins – to ensure excellent quality. As a result, they are less susceptible to scandals over working practices and materials.
Personal care companies may enjoy the best of both worlds: the volumes of mass market but fewer concerns about sustainable supply chains. From toothpaste to shampoo to soap, consumers are fairly loyal – and margins for established companies remain healthy. One aspect of online shopping is that new brands can reach a wide market through endorsement and sell direct if they want to avoid the supermarkets. In the personal care area we have seen a number of new entrants, such as Kim Kardashian West selling her cosmetic brand to Coty. However, L’Oréal’s purchase of the Thayer Natural Remedy skincare brands seems more obviously geared to addressing current trends.
Changes in distribution – from market to supermarkets and now to home delivery – often mark a moment where long-lasting brands decline and new forms of consumer goods take their place.
The antique shops of middle England are full of nostalgic Ovaltine tins and Oxo cube boxes.
You don’t want to be invested in companies whose goods are destined to be joining them soon. For investors, there seems less risk in staying with luxury goods and cosmetics manufacturers. Their high margins better equip them to cope with inflation and to ensure production meets consumers’ growing expectations around sustainability.
Simon Edelsten is co-manager of the Artemis Global Select fund and the Mid Wynd International Investment Trust. The views expressed above are his own and should not be taken as investment advice.
Trustnet searched across the AIC sectors to find the investment trusts that are trading on a historically attractive discount compared to five years ago and that have still maintained performance.
Henderson EuroTrust, Miton UK Microcap and BlackRock Frontiers are just three of the investment trusts that are trading at a wider discount than they were five years ago, research from Trustnet has shown.
We used historic statistics from QuotedData to compare trusts’ discounts from May 2016 with May 2021, to see which are looking cheaper than they were.
However, a widening discount to net asset value (NAV) can be a sign of persistent underperformance. Therefore, only trusts with positive returns were considered and the table below is ranked according to their five-year performance.
That said, not all the funds selected have been top-quartile performers over five years, but for long-term investors keen on the mandate or the manager, the current discount could be a valuable entry point.
Those in the list have been selected after Trustnet looked across all the main sectors to find the trusts that may have gone under the radar with recent impressive returns or that could be poised for a bounce-back or correction.
James Carthew, head of investment trust research at QuotedData also provided his thoughts on some of the funds below.
Source: QuotedData/FE Analytics
In first place, as ranked by five-year performance, the £318.8m Henderson EuroTrust has achieved a 106.59 per cent return over the period and is currently trading at discount of 10.6 per cent, 6.6 percentage points lower than the 4 per cent it was at in 2016.
Jamie Ross took over management of the fund in 2018 and it has overseen a marked improvement. Despite a difficult environment EuroTrust has made 77.56 per cent since the March sell-off.
Ross told Trustnet in September: “The EuroTrust approach is finding the good companies of today – compounders, or the good companies of tomorrow – improvers. The primary metric for compounders is to have high sustainable returns on capital.”
While the compounders are for the short term, improvers are marked out to be the good companies of the future, but on current metrics look average.
Telecom Italia, which is the largest position in the portfolio, is one that Ross described as a classic “improver” given its valuation had reached historically low levels.
Its most attractive element is the potential of an upcoming merger with Italian fibre company called Open Fiber, this would create a fixed broadband spin-off FiberCop, creating a single national operator.
Second on the list is the North Atlantic Smaller Companies trust, run by Christopher Mills.
The £634.2m fund has made a 101.67 per cent return over five years and is currently trading at a 24.1 per cent discount to NAV, a further 10.1 percentage points below its 14 per cent discount in 2016.
However, while the trust has persistently been on a discount, this is the widest it’s been in five years.
Carthew said: “In some ways, it’s a value approach, but Mills buys growth companies and sometimes you get the best of both worlds.”
Performance of trust vs sector over 1yr
Source: FE Analytics
Over one year, North Atlantic Smaller Companies has made a total return of 63.91 per cent, while the average fund in the IT Global Smaller Companies sector has made 48.09 per cent and its Russel 2000 index posted 50.03 per cent.
Next up is Gervais Williams’ Miton UK Microcap Trust, which has been boosted by the strong vaccine rollout in the UK and greater certainty around the relationship with the EU post-Brexit.
Carthew agreed: “It seemed for a long time the fund was getting left behind – but the vaccines have proved to be a great catalyst for this being re-rated.”
The environment for UK micro-caps is conducive to this outperformance and the manager explained that in this climate micro-caps can make “transformational” returns.
Williams said: “I’ve never known a market quite like this. I’m finding stunningly cheap stuff at the wrong price and the best thing about micro-caps is they can grow when the world’s not growing.”
Considering, it was trading on a premium of 4.1 per cent in 2016, it is now on a small discount of 2.6 per cent.
From the IT Environmental sector, the £83.6m Menhaden PLC Trust is trading at a discount of 27.5 per cent to NAV, compared to 18.6 per cent five years ago.
The trust, despite being in the IT Environmental sector, gives exposure to two tech giants with a 24 per cent stake in Alphabet and 9 per cent position in Microsoft.
This, according to Carthew, is where the trust falls down from his perspective.
“It’s supposed to be environmental, but the portfolio doesn’t look like it to me,” he said. “It’s a strange portfolio for what it does and I’m not sure what the theme is.”
Managed by Luciano Suana, Ben Goldsmith and Graham Thomas, the trust announced on 15 June that it will change its name to Menhaden Resource Efficiency, perhaps to better reflect the investment strategy of owning businesses that are making efficient use of energy and resources.
CC Japan Income & Growth may seem an odd addition to this list, but for those interested in the long-term investment case in Japan, now could be an opportune moment to invest in the fund.
Performance has suffered over the long-term, but over three and six months, it’s been in the top quartile of the IT Japan sector.
Carthew said: “As it’s an income fund, it has more of a value tilt to it and so while things like JPMorgan Japan were flying - this fund was left behind.
“It’s slightly better this year but the ongoing problem in Japan is vaccine-related and, despite cases being under control, the slow vaccination roll-out hasn’t helped at all.”
A 52.75 return over five-years isn’t outstanding, but it is on a 7.9 per cent discount, considering it was on a 5.2 per cent premium five years ago it could reap rewards if Japan rebounds strongly next year.
The short-term performance suggests that a value-orientated approach is working well in Japan now.
Finally, and another trust that may be one to consider for its potential to rebound, is the £234.3m BlackRock Frontiers Trust, run by Sam Vecht and Emily Fletcher.
This rebound is already occurring in countries like Indonesia and the Philippines, according to the managers, and in a “post-Covid world awash with record liquidity, investors will remember the considerable attractions of our investment universe”.
Carthew agreed, adding: “Frontier markets have been more or less left behind for a while and consequently a lot of those stocks are really cheap.”
He conceded that it again depends on the Covid experience of each country.
“However, if you had to pick one of these trusts that could have a breakout and perform really strongly, it would be BlackRock Frontiers,” he said.
A 1 per cent premium in 2016 was certainly less attractive than the 6.7 per cent discount it currently trades at, and for those bullish on the investment case for emerging markets – it could be a worthwhile asset.
According to analysts at Rayner Spencer Mills Research: “The trust is a worthy addition as a satellite holding to supplement overall EM exposure where there is a global expansion taking place.
“The managers are seasoned and well versed in the pitfalls as well as the opportunities in the emerging market world.”
Whether it’s through breweries or a pub chains, Bestinvest’s Jason Hollands shares five funds where the managers are backing the return of beer.
After the end of ‘Beer Day Britain’, Bestinvest managing director Jason Hollands thinks investors might want to consider these five funds to invest alongside their love of a pint.
‘Beer Day Britain’ - the national annual celebration held on 15 June – would have brought pubs, bars and breweries much welcomed extra business after a period of hardship.
Ever since Covid-19 pandemic brought the entire industry to a virtual standstill last year, pubs and bars have long-awaited a full re-opening.
Combined with the arrival of sunny weather and regular sporting events, their eventual re-opening is expected to provide a much-needed boost to their sales.
Hollands said: “Both brewers and pubs have had a really tough time during the pandemic, particularly rural pubs, many of which will sadly not be reopening their doors again.
“While breweries were able to refocus on sales through supermarkets and off-licences, this has been tough for smaller breweries who were less geared up to switch to the demand for larger packs. The rocketing price of both hops and packaging have also squeezed margins.
“Yet over the longer-run, beer has proven to be very resilient in most economic ups and downs. When times are tough you might put a long-haul holiday or new car purchase on hold, but few regular beer drinkers will forgo their favourite pint.”
Whilst there are many smaller brewers and pub chains for UK investors to take advantage of the potential surge in beer drinking, Hollands said the “really big money in the world of beer is with the large international giants”.
These include Belgian-headquartered brewer Anheuser-Busch InBev, British multinational Diageo and the Dutch firm Heineken.
With this in mind, Hollands shared five funds that have varying levels of exposure to beer and pubs.
Lindsell Train Global Equity and LF Lindsell Train UK Equity
“When it comes to backing beer, the fund management company planted firmly at the corner of bar is Lindsell Train,” Hollands said.
“Managers Nick Train and Mike Lindsell are long-term, buy and hold investors prepared to take big positions in their preferred companies.
“They like businesses which generate lots of cash, which brewers do. In the Lindsell Train Global Equity fund they hold a whopping 8.52 per cent of the fund in Diageo and 7.72 per cent in Heineken, making these their two largest holdings.
“Both stocks are also held in their LF Lindsell Train UK Equity fund, with Diageo in top place at 9.86 per cent and Heineken at 6.04 per cent of the fund. The latter fund also has a small holding in Young & Co.”
Performance of funds vs sector & benchmark over 5yrs
Source: FE Analytics
Over the last five years, Lindsell Train Global Equity has made a total return of 130.70 per cent, outpacing the 102.57 per cent from the MSCI World Index and 97.52 per cent from the average IA Global peer. It has an ongoing charges figure (OCF) of 0.65 per cent.
LF Lindsell Train UK Equity has returned 76.66 per cent over the last five years, compared to 52.73 per cent from the IA UK All Companies sector and 49.8 per cent from the FTSE All Share. It has an OCF of 0.65 per cent.
BMO European Select and ASI Japanese Equity
“While no other funds come quite as heavily weighted to beer stocks than Lindsell Train, other larger holders of breweries include the BMO European Select fund, which has a 5.58 per cent position in Heineken, and the ASI Japanese Equity fund which has 4.93 per cent invested in Asahi,” Hollands said.
“Alongside its iconic Japanese lager brand, Asahi’s beer portfolio includes Pilsner Urquell, Peroni and London Pride as well as craft beer names Hophead and Meantime.”
Performance of funds vs sector & benchmark over 5yrs
Source: FE Analytics
Over the last five years, BMO Select European Equity has delivered a total return of 82.58 per cent, compared with an 85.6 per cent gain from the FTSE Developed Europe ex UK index and 81.45 per cent from the average IA Europe ex UK peer. It has an OCF of 0.83 per cent.
ASI Japanese Equity is up 50.17 per cent over the last five years, compared to 72.18 per cent from the average IA Japan peer and 66.87 per cent from the MSCI Japan Index. It has an 0.87 per cent OCF.
ASI UK Equity Unconstrained
The last strategy Hollands pointed to is the £445m ASI UK Unconstrained Equity fund run by Wesley McCoy.
He said: “When it comes to investments in pubs, the ASI UK Equity Unconstrained fund has 3.13 per cent invested in Mitchell & Butlers alongside 1.52 per cent invested in brewer Marston’s and a 1 per cent position in The Restaurant Group which owns rural pub chain Brunning & Price alongside its other chains.”
In February this year, Martson’s - which owns around 1,400 pubs - rejected an offer worth roughly £690m from a US private equity firm.
At a time when UK shares are relatively cheap for overseas investors, Hollands argued that there is potential for further acquisition attempts by overseas buyers.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Over the last five years, ASI UK Equity Unconstrained has delivered a total return of 39.79 per cent, compared to a 46.54 per cent gain from the FTSE 350 (ex IT) Index and 52.73 per cent from the average IA UK All Companies peer. It has an OCF of 1.15 per cent.
The winners of the 13 categories in the 2021 FE fundinfo Alpha Manager Awards have been announced, with Baillie Gifford taking four of them home.
Baillie Gifford’s Douglas Brodie has won the coveted Best Alpha Manager of the Year award, following an incredibly strong 2020 for the Edinburgh-based investment house.
The FE fundinfo Alpha Manager Awards celebrate the best fund managers from among those who have been able to consistently create risk-adjusted alpha.
Brodie – who is the head of Baillie Gifford’s global discovery team and manages the £2.1bn Baillie Gifford Global Discovery fund – scooped the top prize in the award – being named the best overall FE fundinfo Alpha Manager.
Baillie Gifford Global Discovery is currently in the IA Global sector’s top quartile over one, three, five and 10 years. During 2020, when the firm’s quality-growth approach was very much in favour, the fund made a 76.80 per cent total return – the sixth highest of the peer group’s 414 members.
Performance of fund vs sector over 2020
Source: FE Analytics
Charles Younes, research manager at FE fundinfo, said: “Winning the Best Alpha Manager award is a phenomenal achievement.
“In what has been a highly challenging year for all active fund managers, Douglas’ performance has been simply exceptional. 2020 was clearly Baillie Gifford’s year and it was impossible to not recognise Douglas and the Global Discovery fund for its long and consistent track record in unveiling hidden gems and navigating the volatility seen in the global markets.”
Last year saw many of the Baillie Gifford’s funds generate some of their respective sector’s highest returns, as the pandemic and massive levels of stimulus prompted investors to back quality-growth stocks, especially those in the tech space – a preferred hunting ground of Baillie Gifford.
This means that the group won a total for four gongs in this year’s FE fundinfo Alpha Manager Awards – as well as Best Alpha Manager, Brodie also won the Best Alpha Manager – Global Developed Equities category.
Tom Slater, manager of the £6.7bn Baillie Gifford American fund, took home the Best Alpha Manager – US Equities and Best New Alpha Manager awards. Baillie Gifford American was 2020’s best performer of the entire Investment Association universe after making 121.84 per cent
Tanvi Kandlur, senior fund analyst at FE fundinfo, added: “Like Douglas Brodie, Tom Slater also enjoyed a phenomenal year with his Bailie Gifford American fund.
“This is the first year Tom was eligible for an Alpha Manager rating and we have been impressed by his ability in maintaining his position as the top performing fund in the IA North American sector and delivering an incredible return over 2020.”
Baillie Gifford was the only fund manager house to win more than one award in the 2021 FE fundinfo Alpha Manager Awards. The winners in the remaining nine categories can be seen in the table below.
Source: FE fundinfo
Younes finished: “Once again the 2021 Alpha Managers have demonstrated their value for investors and led the charge for good active fund management.
“Not only have they safeguarded assets during a period like no other in living memory – a global pandemic that triggered the worst economic downturn since the Great Depression – but also capitalised quickly on the opportunities in the global market recovery of the second half of 2020. We offer our warmest congratulations to them all.”
The managers have built up a highly successful fixed income team at Invesco.
Paul Causer and Paul Read will retire as co-heads of Invesco’s Henley fixed interest team at the end of 2021, handing over their leadership responsibilities to Michael Matthews and Thomas Moore.
Causer (pictured) and Read have worked together for 26 years. The managers, who are known as ‘the two Pauls’, started the Henley fixed interest team in 1995 with three people. It has since grown to have 28 members.
Their retirement will be the first fund manager departures in the team’s history.
Performance of Causer and Read vs peer group composite since 2000
Source: FE Analytics
Matthews and Moore will work closely with both Pauls for the rest of the year, ensuring a smooth hand over and will assume the co-head roles from 1 January 2022. There are no changes planned to the team’s investment philosophy, which is based around quality fundamental research.
Matthews has worked with Causer and Read for more than 25 years, joining their team at its foundation. He has a 15-year track record in fund management. Moore has more than 21 years’ fixed interest experience and joined Invesco five years ago from Morgan Stanley.
Causer and Read (pictured) said: “This has been a very big decision for us. We are proud of our achievements and enjoy our role and the people we work with.
“However, we feel that in Michael and Thomas we have two excellent leaders as well as a broad and deep team of people that is ready to take on the full responsibilities to serve our clients and take the team forward for many years to come.
“We have been planning this for more than 10 years and we will continue to use the rest of 2021 to help the team complete the handover and to give clients plenty of time to be comfortable with the final step of the transition.”
Ryan Hughes, head of active portfolios at AJ Bell, said Causer and Read have done “a phenomenal job for their investors over a very long period of time” and noted the strong outperformance of their peers over their careers.
“The ‘two Pauls’ have been synonymous with the fixed interest capability at Invesco for longer than most fund research analysts have been in the market and therefore their well-earned retirement at the end of the year will certainly be a loss to the business,” he added.
“However, the announcement a year ago that they were stepping back on a number of funds to allow their colleagues to take more of a front foot was a sign that this announcement would come sooner rather than later.”
When it comes to the new co-heads of the team, Hughes described Matthews as “hugely experienced” and noted Moore’s “significant experience”. This suggests to him that there will be strong continuity in the approach taken by Invesco’s fixed interest funds.
Hughes finished: “With a solid and experienced team, there is certainly no need for existing holders of any of the Invesco fixed interest funds to panic and given the well communicated handover, I expect little impact on the funds over time.”
The next instalment of the Investor’s Bookshelf series features titles the Schroders Value Investment team have drawn insights, lessons and inspiration from.
Books about amateur poker, the value investor’s ‘Bible’ and a World War II autobiography are among those Schroders’ Value Investment team think have made them better investors.
As part of Trustnet’s ongoing The Investor’s Bookshelf series, managers Andrew Evans, Simon Adler, Vera German and Juan Torres Rodriguez each chose several books which they think should be in an investor’s library.
The first member of the Schroders Value Investment team to contribute is Juan Torres Rodriguez (pictured), fund manager, Schroder Emerging Markets Value. He starts us off with two books: ‘The Biggest Bluff’ and ‘Is that a big Number’?’, which are both centred around numbers and mathematics but applied in very different formats.
“Maria Konnikova’s journey from amateur poker player to winning a couple big tournaments all in less than two years is a fascinating read. It takes the reader through her journey of understanding how luck plays a big role in everyone’s lives and how much control we have over the outcome,” Rodriguez said.
“She discovers that a probabilistic mindset is critical to decision making when playing poker. Maria continues to explain how she also applies the same approach to her life outside poker as a journalist and writer.
“In February last year, Maria appeared on the Schroders’s Value Perspective podcast where she talked about how important, yet difficult, it is to adopt probabilistic thinking.
“As she put it herself during our session: ‘Overwhelmingly the way our brain learns is through experience – that is what sticks – but, unfortunately, probabilities are not evenly distributed in life. We do not live in a perfect bell-curve distribution and so, if something is supposed to happen 25 per cent of the time, it does not automatically follow that, if it did not happen the first three times, it is going to happen the fourth time. That is not how probabilities work – and yet we continue to learn from what happens to us. So we will overestimate the probability of something when we know someone to whom it has happened or when it has happened to us. In contrast, we will understate the probability of something when we do not have any personal experience of it. It is always skewed.’
“For investors, there are some key concepts here that are valuable: the impact of compounding a small edge, embracing variance and its dark side, the importance of keeping a decision journal and maintaining a focus on the process.”
“Applicable to the world of investing as much to any other aspect of life. This book is about understanding the world through numbers,” Rodriguez continued.
“It provides useful tools and benchmarks that help to improve the readers’ numeracy and ability to contextualise data points which they are regularly consuming from newspapers or social media, for example. As Andrew Elliott says in his book: ‘Decision Making needs understanding. Understanding needs knowledge. Knowledge needs numeracy.’”
Vera German (pictured), fund manager, Schroder Emerging Markets Value, is next and being a value investor chose what could be called the value investor’s Bible as well as other books focusing on human behaviour.
“Well, we had to, didn’t we,” German said. “Nearly a century on, despite detractors, this book still has huge relevance and is the closest thing to a ‘religious text’ in the world of value investing.
“Warren Buffet’s preface to the fourth edition says it better than we could: ‘To invest successfully…what’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply emotional discipline’.”
“Emotional discipline is an important tenet of value investing. With this in mind, understanding human flaws is a subject which interests many team members,” German added.
“Kahneman’s ‘Thinking Fast and Slow’ is the obvious choice here. But this book gives a compact summary of the psychological biases we are potentially prone to, the academic research underlying the theories and suggestions for overcoming these biases.”
“Charlie Munger identified ‘human misjudgement’ as a key challenge in investing. His speech in 1995 at Harvard University on the subject pre-dated much of what Kahneman went on to popularise,” German said.
“Munger is also an advocate for accumulating and combining mental models from across different disciplines. This book does a great job of explaining some of these models.
“It also makes a case for the importance of looking at challenges from multiple angles, and why drawing on solutions from many different disciplines to solves these problems can be beneficial.”
Simon Adler (pictured) runs several global equity funds, including the £995.3m Schroder Global Recovery fund. He highlighted two contrasting books, one focusing on organisation and the application of checklists across personal and daily life, and second a profound personal recollection from World War II.
“If the previous books on this list had drawn us to the conclusion that the world is complex with hard to define risks, then this book offers some answers,” Adler said.
“In a world that has become increasingly complex, the simplicity of a checklist has a lot to offer and presents an opportunity for consistency in decision making. An influential book for our process and one of the reasons we currently have a ‘Seven Red Questions’ approach to identifying risks in stocks we look at.”
“No investor will go through the same adversity as Viktor Frankl describes in this book (his experience in concentration camps), but there is a lot to take from the way that Frankl dealt with the most appalling of circumstances,” Adler continued.
“Every investor will face a time when things aren’t going their way and having an ability to accept and deal with that adversity is an important facet of investing. A number of the team also benefit from reading Stoicism, either directly (Marcus Aurelius, Seneca) or through more modern interpretations (Ryan Holiday, Donald Robertson).”
Finally is Andrew Evans (pictured) manager of the Schroder European Recovery, Schroder ISF European Equity Yield and Schroder ISF European Value funds. His book picks focus on how humans have dealt with and approached risk throughout history, with special relevance to financial markets when luck and probability and uncertainty are added to the mix and examination of economic complexities.
“The management of risk is an essential part of an investor’s toolkit,” Evans said.
“As a subject, risk has probably been the most discussed topic on our desk over the years and a topic we have explored in huge detail. This book is a wonderful starting point for understanding how humans have thought about risk over time and how it has evolved to the present day.”
“Multidisciplinary thinking has been a core tenet of the Santa Fe Institute over time, along with complexity. In this book, one of Santa Fe’s external professors explores the implications of thinking about complexity in relation to economics,” Evans added.
“As a subject, economics has generally been taught as though the economy is a linear model with rational beings going about their business. This book looks at economics from a different angle and should be food for thought for anyone who thinks forecasting next quarter’s GDP is the right answer in investing.”
“This a cheat, because it’s four of Taleb’s books,” Evans finished.
“Taleb can be an acquired taste, but these books set out thought-provoking ideas for how we view the world and questions an investment world which is built on thinking about risk through the lens of the traditional statistics, based on the normal distributions.
“He makes the compelling case that reality doesn’t look like that and presents us with important mental models such as considering alternative realities.”
The latest data from the Office for National Statistics shows a rise in the consumer prices index (CPI), tipping inflation over the Bank of England’s target rate.
UK inflation jumped to 2.1 per cent in the 12 months to May 2021 and surpassed the Bank of England’s (BoE) 2 per cent target, data from the Office for National Statistics (ONS) shows.
The consumer prices index (CPI) measure of inflation rose from 1.6 per cent in April, according to the ONS, surpassing previous forecasts of a rise to 1.8 per cent.
This is the highest inflation has been since before the pandemic.
The rising prices for clothing, motor fuel and recreational goods as well as increased reactional spending with the easing of lockdown were the main contributors to the CPI spike, according to the ONS.
Rising inflation has been a growing concern for several months, since the Covid-19 vaccine rollout ushered in a recovery period for markets and economies.
Ben Laidler, global markets strategist at multi-asset investment platform eToro, said that this increase in inflation was predictable with the easing of lockdown and “inevitable as the government released the shackles from Britain’s lockdown economy”.
“The fact that annual inflation is now running at or above the Bank of England’s 2 per cent target for the first time in two and a half years will spook some investors, who will no doubt see soaring prices as a sign that a rate rise is coming closer,” he added..
“However, we are not at that point yet. The Bank of England has stated a number of times that it sees the most recent bought of inflation as ‘transitory’. Or, in other words, temporary.
“Wages are set to grow slower than prices and therefore this will act as a natural cap on inflation in the coming months.”
Still, there is some speculation on whether the BoE could let inflation run even higher, like has been seen in the US. Recent data there shows inflation increased by 5 per cent in the 12 months through May, making it the largest yearly increase since August 2008.
Emma Mogford, fund manager of Premier Miton Monthly Income fund, said: “The step up in inflation this morning is a sign of the continued strong economic recovery in the UK. While the overall figure is no cause for concern, there are obviously inflationary pressures building in certain sectors.
“UK inflation is below the level in the US, as the UK has been slower to lift Covid restrictions and sterling strength has helped keep imported goods prices low. With further opening up of the economy and potential for bottlenecks in both goods and labour post Brexit, the UK number could follow the US inflation number higher.”
However there is also the path of increased interest rates to tighten inflation, which Derrick Dunne, chief executive of Beaufort Investment, highlighted was what the BoE chose to do last time inflation began to spike.
“But the Bank of England may soon have to take tightening measures. Let’s not forget a few years ago when it started cautiously raising the base rate in the face of a post-Brexit inflation surge,” he said.
“That being said, the latest delay to our so-called ‘Freedom Day’ and the impending end of the furlough scheme should temper price rises in the short-term, but the breach of the Bank’s stringent 2 per cent target may already be provoking discussion of a monetary policy adjustment.”
For investors Dunne said that they should ensure their portfolios can withstand both inflationary pressures and a potential rise of the base rate.
“At this stage, nothing is off the table,” he said.
Manager Storm Uru lays out his case on why Tesla is not the best way to access the electric vehicle theme and which stock is a better option.
In the battle of the electric vehicle revolution, Tesla might not be the best bet, according to Liontrust Asset Management’s Storm Uru.
Electric vehicles (EVs) are becoming a growing force in the automobile market as a global focus on climate change and carbon reduction, combined with falling costs, have boosted the popularity of EVs over ‘traditional’ fuel cars.
Undoubtedly one of the biggest names in that space is Tesla. It has been able to make its electric cars the ‘It’ vehicle.
Last year, the company saw a 700 per cent increase in its share price, indubitably proving its popularity with investors. But not Uru.
Uru, manager of the Liontrust Global Equity fund, recognises the investment opportunity in EVs but doesn’t agree that Tesla is the best car manufacturer to access that theme.
“We prefer to access this disruptive innovation through more traditional auto names rather than the increasingly expensive companies currently leading the charge, at least in the public eye,” he said.
Uru highlighted that Tesla, while currently worth $650bn, only sold 500,000 cars last year.
“This might sound hugely inflated but is actually reasonable if you compare it to the recent SPAC (special-purpose acquisition company) transaction of Lucid (according to its CEO, the only EV company able to compete with Tesla), which is now valued at upwards of $20bn without even selling a car,” he said.
“And what about NIO, the Chinese EV company, which was worth $5.9bn at the end of 2019 and now has a total enterprise value of $72bn?
“With eye-watering valuations across the EV universe, who is actually winning?”
He said Tesla is the leader of this industry but there is still potentially decades ahead to fully building out its necessary infrastructure, manufacturing plants, supply chains, touch points with consumers and brands that stretch across cultures and geographies, Uru noted.
The closest competition to Tesla in terms of EVs car sales is Volkswagen with more than 422,000 plug-in vehicles sold last year. This is Uru’s pick in the EV battle.
Indeed, Volkswagen is one of the top 10 holdings in his FE fundinfo Five Crown rated Liontrust Global Equity fund, accounting for just over 3 per cent of the portfolio.
Uru said: “Volkswagen is closer than any market commentor or automobile chief executive would lead you to believe.”
Being regarded as a major player in the EV space is a long way from the company’s 2009 ‘Dieselgate’ scandal when it was found to be falsifying the emissions of its ‘Clean Diesel’ range.
“Battered by the ‘Dieselgate’ scandal, the company had no alternative but to reposition its strategy to align with all stakeholders,” Uru said.
“Immediately, the company restructured its organisation to encourage innovation and reallocated significant capital from traditional internal combustion engine development to EV technology. The size of the pivot is staggering and is highlighted by the $42bn investment the company is making in this technology over five years.”
This means that, according to Uru, Volkswagen has tackled one of the two main barriers to EVs in the battle of surpassing traditional combustible cars: pricing.
Using Wright’s Law to calculate the declining cost of EVs production, Uru said it will “collapse in line with the flow of capital investment into a new technology”.
“And with EV manufacturing costs tracking this predicted decline so far, we can expect EVs to challenge traditional combustion engines within the next five years on the same price point.” Effectively EVs will be at a more competitive price versus combustible engine cars.
The launch of Volkswagen’s new ID.4 range in the US could be a chance for Volkswagen to challenge Tesla directly, the manager argued.
“At a price point of $40,000 before tax incentives, it can not only go head-to-head with Tesla’s model 3, but also compete with traditional combustion engines on a level playing field. This means that if the launch is a success (unlike Tesla’s), Volkswagen can flex its supply chain and manufacturing base and meet demand across its dealership network.
“On the other hand, Tesla will have to contend with a big new competitor with many more to follow,” he said.
The second barrier is the driving range and the distance EVs can go between charges.
“The good news on range is that technology advancements in energy efficiency and charging are progressing at a rate that makes us confident EVs will be able to compete head-to-head with combustion engines soon,” he said.
Overall, Uru added: “It remains to be seen if the auto market will end in a winner takes all when it comes to EVs, but we suspect that just like the smartphone market, where Apple now struggles to maintain a 10 per cent market share, and the streaming wars, where a Blue Ocean for Netflix has turned a bit more red, there will be plenty of room at the table for companies able to compete head-to-head with Tesla.
“We think Volkswagen more than fits these criteria and offers a much better opportunity than the high-flying EV stocks.”
Liontrust Global Equity has made a total return of 129.80 per cent over the past five years, outperforming the MSCI ACWI index (98.99 per cent) and the IA Global sector (93.89 per cent) in that time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
It has an ongoing charges figure (OCF) of 0.89 per cent.
The latest Bank of America Global Fund Manager Survey found that asset allocators continue to position portfolios for above-trend economic growth and inflation.
Fund managers around the globe continue to position their portfolios with a very bullish slant as the world opens up from the coronavirus pandemic, Bank of America has found.
The monthly Bank of America Global Fund Manager Survey offers some insight into the thinking and positioning of asset allocators. The latest edition polled 92 fund managers with combined assets of $645bn and was carried out between 4 and 10 June.
It found that “investors [are] bullishly positioned for permanent growth, transitory inflation and a peaceful Fed taper via longs in commodities, cyclicals and financials”.
While the emergence of the Delta variant of Covid-19 has created a headwind, many are confident that the global economy will continue to open up in earnest as the vaccine roll-out progress.
Source: BofA Global Fund Manager Survey
Economic growth has already rocketed from the low levels posted in 2020’s lockdown conditions, while inflation has started to rise. These conditions are hallmarks of the early phase of the business cycle, which generally manifests after a sharp recovery from recession.
Indeed, 76 per cent of asset allocators are expecting to see above-trend growth and above-trend inflation over the months ahead. This is an all-time high for the survey and a much more positive reading than for much of the past decade, when the global economy faced persistently low GDP growth and deflationary pressures.
That said, inflation is regarded as one of the major factors for investors to watch at the moment. Data from the US last week, for example, showed headline consumer prices rose 5 per cent year-on-year in May, the fastest pace since August 2008 and higher than analysts were expecting.
Source: BofA Global Fund Manager Survey
Inflation is tied with a ‘taper tantrum’ as the biggest concern that fund managers are currently worried about, with each being cited by 30 per cent of the survey’s respondents as their main tail risk.
However, most managers think higher inflation will be a relatively temporary issue to deal with: 72 per cent told Bank of America that inflation will be ‘transitory’, while only 23 per cent expect it to be permanent.
Meanwhile, 68 per cent of fund managers do not expect another recession to hit until 2024 at the earliest, while 63 per cent think the US Federal Reserve will hold off announcing any tapering to policy until August or September 2021.
Source: BofA Global Fund Manager Survey
This bullishness has led fund managers to top up equity allocation to a year-to-high of 61 per cent. This is a 7 percentage point increase on May’s levels.
The net allocation to bonds, however, has fallen to an all-time low with 63 per cent of managers saying they are currently underweight fixed income.
Source: BofA Global Fund Manager Survey
Looking at positioning in more detail, portfolios are overweight more cyclical areas of the market, which would be expected to do well as the global economy rebounds from the shock of the 2020 pandemic.
UK equities – which shunned by investors for much of the recent past because of uncertainty around Brexit – are among these assets thanks to a high weighting to cyclical areas like banks, energy and materials.
The survey found that portfolios are “substantially overweight” late cyclicals, a net 30 per cent overweight banks, a net 11 per cent overweight energy and a net 23 per cent overweight materials. There’s a corresponding underweight to defensives – a net 39 per cent of portfolios are underweight utilities and a net 4 per cent underweight staples.
Source: BofA Global Fund Manager Survey
Most fund managers continue to expect value stocks to outperform growth over the coming year, which shouldn’t be too surprising given their current positioning.
In addition, a net 36 per cent expect high momentum to beat low momentum, which is the largest percentage ever recorded by the Bank of America Global Fund Manager Survey.
A net 23 per cent think high volatility will beat low volatility.
Source: BofA Global Fund Manager Survey
When asked what asset will be the best performing in the next four years, investors favoured a barbell of value stocks (picked by 24 per cent) and tech stocks (cited by 23 per cent).
Chelsea Financial Services’ Darius McDermott examines fund managers’ reasons why Japanese equities could be approaching a tipping point after being overlooked by investors for so long.
As of writing there are just over 40 days until the Olympics are set to kick off in Tokyo.
It’s the pinnacle of competition as over 11,000 athletes descend on the city to compete in 339 events in 33 sports. Covid has already delayed the games by 12 months and although Tokyo 2020 president Seiko Hashimoto is "100 per cent" certain the games will go ahead - despite a state of emergency in the city - a recent survey found more than 80 per cent of the population want the games to be cancelled or postponed.
The fact Japan only began vaccinating people in February – with only 3 per cent of the population fully vaccinated by the start of June – has not inspired confidence either.
The sensible bet is these games will take place, but you get the impression nothing is guaranteed. It’s a situation which resonates strongly with investor attitudes to Japanese equities in general - no matter how big the potential opportunity, there is always scepticism about whether it becomes reality.
Japan has undoubtedly split opinion since the 1990s when the economy suffered a prolonged recession that followed the collapse of the fabled economic bubble of the 1980s. Then there is the significantly high government debt, a shrinking and ageing population, and tight labour markets.
Despite it being the third largest economy in the world - home to more than 3,700 listed companies - it remains unpopular with around £1bn of net investor outflows since the start of 2019. The stock market hitting a 30-year high in 2021 seems to have done little to improve sentiment.
But the feeling is we are starting to see a tipping point for companies in the region.
The first thing I want to highlight is that hitting a 30-year market high does not mean the opportunity to invest is lost. Baillie Gifford Japan Trust product specialist Andy Brown says it shows where Japanese valuations are relative to other markets – despite improvements in corporate governance and profitability – citing the fact the US equity market is significantly higher than it was three decades ago.
But back to the inflection point. Brown points to the art of Nemawashi (the idea of consensus-based decision making) which is usually blamed for impeding some of the radical changes that we would otherwise see in Japan. Brown says they are fairly ingrained within organisational mechanisms within the corporate DNA and are culturally anchored to things such as the salary run cycle and seniority-based pay.
He feels this slow rate of change is offering opportunities for those types of businesses which are more entrepreneurial, innovative and risk seeking. He cites the likes of Bengo4.com or GMO Internet, both of whom are helping Japan to abandon its addiction to the Hanko Stamp through their digitalisation.
Digital is a classic example of this change from a Japan that was full of low or no growth companies and legacy industries to high growth firms, new business models and globally relevant technologies. We are also seeing changing spending habits as investors loosen the purse strings.
FSSA Japan co-manager Sophia Li says the 2011 Tōhoku earthquake taught us that significant external events can change consumer behaviour – adding that the longer the catastrophe continues, the more structurally embedded the behaviour becomes. She says that despite Japan boasting one of the largest annual IT expenditures globally, the pace of digital adoption there has been slow – however, Covid has started to see them pick up the pace.
In a recent market update, Lazard says Japanese officials have engaged in extensive monetary and fiscal easing to address the effects of the pandemic, but more importantly, public authorities have been pushing an altogether different set of policies aimed at improving corporate governance. This is an inflection point in itself as some of the most prestigious corporations in Japan have quickly moved to adopt the new ESG framework, while shareholders continue to ratchet up the pressure to embrace better governance practices, citing the likes of Nippon Steel, Toyota and Mitsubishi Heavy Industries as examples.
Lazard believes this inflection point “looks set to unleash a multi-year improvement in balance sheet management akin to what the United States went through in the 1970s”. Adding that higher levels of debt should be expected, along with ongoing improvements in profitability and shareholder rewards.
The opportunity is there. As Comgest Growth Japan manager Richard Kaye points out, it remains one of the most misperceived and under-researched markets in the world. He says the average stock in the Japan indices is only covered by seven analysts compared to 40 for companies in the US.
There is also the potential for significant upside on the income front. While global dividends fell 10.5 per cent on an underlying basis in 2020 (payouts dropped by 41 per cent in the UK) there was only a 5.6 per cent fall in Japan. Just one Japanese company in 30 cancelled dividends between April and December 2020 – while a third made cuts, fewer than in many other developed economies. This is because Japanese companies tend to hoard excessive amount of cash – something they have been criticised for over the years.
But that might well be a shrewd decision in hindsight given the strength of their balance sheets – creating opportunities for funds like the Baillie Gifford Japanese Income Growth, which specifically targets improving corporate governance in Japan.
At present we are marginally overweight to the region in our managed funds, but we would not rule out adding to it given this changing landscape. Although the nagging doubts remain – the combination of stable politics, improving corporate governance, net cash on balance sheets and new business models in modern sectors, like technology, means the future does look more positive for this unloved part of the investment world.
Darius McDermott is managing director of Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.
The Baillie Gifford Diversified Growth will re-open after being closed for capacity reasons, while cutting its management charge by 10 basis points.
The Baillie Gifford Diversified Growth fund is set to re-open to new investors next month, with an accompanying reduction in its annual management charge (AMC).
The multi-asset fund, which is managed by James Squires, David McIntyre, Scott Lothian, Felix Amoako and Nicoleta Dumitru, was closed in 2013 after it hit £3bn in assets under management. The reason behind this was capacity grounds relating to various asset classes such as insurance-linked securities.
Baillie Gifford Diversified Growth, which now has assets of £6.4bn, will open to new investors on 1 July. The firm said the significant growth in markets since the fund’s closure means its managers believe there is now “sufficient headroom” to re-open the fund.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund invests across a broad range of asset classes to deliver capital growth with low volatility. It resides in the IA Targeted Absolute Return sector and takes a fund-of-funds approach, with top holdings including Baillie Gifford Cyclical Recovery Equity, Baillie Gifford Global Alpha Growth and Baillie Gifford Global Income Growth.
In addition, the AMC on Baillie Gifford Diversified Growth’s B share class will be lowered from 0.65 per cent to 0.55 per cent.
This is the 13th time Baillie Gifford has reduced fees across one or more of its range of funds and investment trusts since 2013, with recent examples including the £732m Baillie Gifford Global Income Growth fund, the £241m Baillie Gifford Responsible Global Equity Income fund and the £879.6m Scottish American Investment Company.
James Budden, director of marketing and distribution at Baillie Gifford, said: “We aim to be competitive on fees as they are the only element of investment returns which can be guaranteed.
“We regularly review the costs associated with our funds to ensure they remain fair and reasonable. This latest fee reduction is part of our continued commitment to provide investors with value for money.”
After looking at the top-performing funds in the IA Global sector with the lowest ongoing charges figures, Trustnet now examines the three UK sectors.
UK equity funds managed by Nick Train, Paul Mumford and Colin Morton are among those that have made some of the highest returns of their peers while levying some of the lowest fees on investors, Trustnet research shows.
Fees are an important consideration for investors and a low-cost high-performing fund can be a valuable asset in any portfolio.
With that in mind, Trustnet looked across the IA UK All Companies, IA UK Smaller Companies and IA UK Equity Income sectors to find the active funds that have achieved both top-quartile performance over five years and are cheaper, in terms of the ongoing charges figure (OCF), relative to the average active member of the sector.
To find these funds, we narrowed it down by looking for those with a top-quartile total return over five years to the end of May and an OCF that is at least 20 basis points below that for the average active fund.
Source: FE Analytics
At the top of the list – which is ranked by total return – is the £133.8m Thesis Stonehage Fleming AIM fund, run by Paul Mumford and Nick Burchett. It was previously known as the TM Cavendish AIM fund.
With an OCF of 0.68, it is 0.30 percentage points cheaper than the 0.98 per cent IA UK Smaller Companies sector average. It has made a total return of 199.99 per cent over five years.
Mumford is an experienced stock picker who invests in equities on the UK Alternative Investment Market (AIM) as well as in other small-cap businesses.
Interest in AIM shares has grown soundly since the start of the year and an increasing number of companies are raising capital on the stock market.
Mumford said: “Hopefully, we will participate in some of these in coming months but we will be highly selective as the poor performance of Deliveroo on the market shows how investors can be fooled into losing money.”
Mumford and Burchett also run the £118.5m Thesis Stonehage Fleming Opportunities fund, which also makes this list.
Staying within the UK Smaller Companies sector, the £1.7bn Marlborough UK Micro Cap Growth fund is second, with a top-quartile return of 138.26 per cent over five years. With an OCF of 0.78, it is 0.20 percentage points cheaper than the sector average.
Run by Guy Field and Eustace Santa Barbara, the fund was one of the most purchased funds on Hargreaves Lansdown, according to Susannah Streeter, senior investment and markets analyst for the platform.
UK smaller companies have enjoyed a strong year since the March 2020 sell-off, buoyed by a Brexit deal and strong vaccine rollout and the sector as a whole has returned 103.53 per cent in that time.
Next, the £836.6m Schroder Institutional UK Smaller Companies fund, which has the joint-lowest OCF in the list of 0.52 per cent – nearly half the sector average.
It’s been a strong long-term performer too, making 114.41 per cent over the five-year period.
It is run by Andy Brough, who has managed the fund for over 30 years and was joined by co-manager Iain Staples in 2015.
Performance of fund over managers tenure
Source: FE Analytics
The fund has grown 2,736.41 per cent during his tenure, outstripping the 935.06 per cent return of the benchmark FTSE Small Cap (excluding investment trusts) index over the same period.
In fourth, Baillie Gifford UK Equity Alpha, run by Gerard Callahan, has made a total return of 82.12 per cent over five years, a top-quartile result in its IA UK All Companies sector.
For this sector, the average OCF is 0.88 per cent and the fund has an OCF of 0.56 per cent, 0.32 percentage points lower than the average active peer.
Running a high conviction approach, the top 10 names can account for nearly half of the fund.
According to Rayner Spencer Mills Research, Baillie Gifford’s Specialist UK Team are well informed generalists, rather than sector specialists.
Analysts said: “Baillie Gifford prefer to keep a format where the group discuss everything, as they believe this leads to better decision making, rather than just relying on one specialist on a stock within the team.
“The strength of the investment process and stock picking abilities have been demonstrated by an experienced and stable team.”
Staying with the IA UK All Companies sector and turning to one of the more famous names on this list - LF Lindsell Train UK Equity. Run by FE fundinfo Alpha Manager Nick Train, the £6.6bn fund runs a strict investment criteria with a concentrated portfolio of around 20-30 stocks.
Square Mile Investment Consulting & Research said of the manager: “In Nick Train, this fund benefits from a highly experienced, articulate and thoughtful manager who has proven to be a responsible steward of investors’ capital.
“Mr Train’s philosophy is based on the principle of investing in what he sees as strong businesses and holding them for the long term.”
Over five years, he has overseen a 66.15 per cent return, recovering well from the Covid-linked sell-off. The OCF is 0.65 per cent.
The last entry from the UK All Companies sector is the £580m Fidelity UK Opportunities fund, run by Alpha Manager Leigh Himsworth and Jac Jones.
The fund is a long-only multi-cap high conviction portfolio of around 40-60 stocks and Himsworth has over 20 years of experience managing UK equities.
The team at Rayner Spencer Mills added: “This is a dynamic fund combining both bottom up core growth holdings and a top-down thematic overlay in which the manager will tilt the sector positioning and holdings according to the market conditions.
“He will also take positions in short-term value opportunities and the fund is designed to generate superior risk adjusted returns over the cycle.”
The 0.67 per cent OCF is 0.21 percentage points cheaper than the average for the sector.
Finally, from the IA UK Equity Income sector, four funds that are less expensive than their peers. The sector average is 0.88 per cent and all fall comfortably below that.
With the highest performance amongst the IA UK Equity Income funds is the £68.6m Allianz UK Listed Equity Income fund, run by Simon Gergel and Richard Knight. The fund holds renowned dividend stocks, such as Royal Dutch Shell, BP and GlaxoSmithKline within the portfolio.
The joint-lowest OCF in the list of 0.52 per cent comes from the £872.5m Franklin UK Equity Income fund.
Speaking of manager Colin Morton, Rayner Spencer Mills Research analysts said: “We have known the manager and the team at Franklin Templeton for many years and in our opinion, they are one of the top UK equity teams.
“Over the years they have demonstrated their ability to outperform the market over varying economic cycles and over the long term the fund should increase in capital value as well as paying a healthy dividend.”
Trustnet asked James Baker, manager of the £1.5bn MI Chelverton UK Equity Growth fund, how he has managed to outperform all of his peers in the sector despite changing and challenging market conditions.
By actively trimming when valuations get too high and betting on quality cyclicals, one UK equity growth fund has managed to outperform all its peers in a market despite having to navigate Brexit, coronavirus and a major rotation towards value.
The £1.5bn MI Chelverton UK Equity Growth fund is the best performing strategy in the Investment Association’s UK All Companies sector since its launch in in October 2014. It is also the best performer over three and five years.
Perhaps the most impressive fact is that even in the last six months of a major value rotation, the small- and mid-cap focused fund is still ranked top three in the 250-strong peer group, despite operating in a market that has favoured the value trade.
This could be because, although it is a growth-orientated fund, manager James Baker (pictured) is very conscious of the valuations of the high performing stocks in his portfolio.
“We are probably more mindful of value than some fund managers,” he said. “We will try to curate a list of what we think are good quality companies by looking at growth, cash flow and capital intensity.
“But also, when a stock is looking very fairly valued, we are quite happy to take a few chips off the table and bring on a fresh pair of legs because we like to keep the whole portfolio working in our favour.”
While there are plenty of stocks that Baker would really like to add, they are just too expensive for him at the moment.
“We buy them when we think they offer reasonable value,” he said. “They can still be expensive, but relative to their cash generation and their growth prospects, we still find them attractive.”
One reason why MI Chelverton UK Equity Growth’s more recent performance has been strong is because Baker decided to add more “quality cyclical” stocks to the portfolio over the last year ahead of the value rotation.
One example of this was Volution Group, which has been a strong contributor to performance more recently.
Performance of Volution Group over 3yrs
Source: FE Analytics
“Any business making a building materials product which can kind of make an 18 to 20 per cent return on sales, that to us represents a quality business,” Baker explained.
“They’ve got high market share, they’re efficient manufacturers and they have attractive products.
“There's an element of growth in their market because building rates are driving people towards using their products, but it is still a cyclical business because it is exposed in the building industry.”
The fund has owned the company for years, but Baker started adding more shares when it was trading below £2. Fast-forward to today, shares currently trade at just below £4.
Looking ahead, although some of the UK market’s cyclical names have re-rated very positively in the last several months, Baker believes they still have room to run further.
Elsewhere, he is hopeful that the valuations of certain small- and mid-cap tech companies begin to come back a bit, so that he can start adding back to them.
He said: “We will use that opportunity if there’s any weakness in technology to build our holdings again.
“Because if you can provide something that has lots of recurring revenues, is highly cash generative, and has pretty decent growth, then in the long term that is a really good place to be.
“So selectively, we will try and pick up some of these tech names.”
In the last few months, the UK equity market has had mixed results for technology company IPOs (initial public offerings).
Whilst online food delivery platform Deliveroo and cybersecurity firm Darktrace have suffered from weak share price performance after going public, other companies such as Trustpilot and Auction Technology Group have done well after their IPOs.
“There are lots of other interesting quality businesses, but a lot of them have been a bit too expensive for us,” Baker said. “Auction Technology Group and Trustpilot look like very good businesses.
“But if we kill the golden goose with too much issuance of new paper, and the sector de-rates more, then I think that will throw up some interesting opportunities.
“We're not quite there yet but that’s what I'm hoping.”
That is not to say he has not been adding more names to the 168-strong portfolio. Some the latest purchases include small-cap companies like Best of the Best, Wickes Group and Travis Perkins.
Partly due to returns (the strategy is up 60 per cent over one year), but also due to large inflows from investors chasing performance, MI Chelverton UK Equity Growth has almost tripled in size from £600m to £1.5bn.
He admitted that he would prefer if the fund did not any bigger because he does not like taking more than a 5 per cent stake in any single company, which can be difficult in the small-cap universe when running large amounts of money.
“One has to admit that it gets to the size where there are some things which you’d like to do - which would be very additive - but will have a less of an effect on your performance,” he explained.
“We are bit risk averse. We don’t like holding very large percentages of companies.
“We’ll own a reasonably large percent if we are very high conviction, but as a rule we tend to prefer to be a bit more low profile.”
Performance of fund vs sector since launch
Source: FE Analytics
Since launch, MI Chelverton UK Equity Growth has delivered a total return of 284.81 per cent, compared to 137.92 per cent from the IA UK Smaller Companies sector.
The fund has an ongoing charges figure (OCF) of 0.87 per cent and an FE fundinfo Crown Rating of five.
Premier Miton’s David Jane highlights two relatively off-the-radar themes that he has recently been building exposure to in his multi-asset funds.
Investment themes such as the digital economy and renewable energy have been keenly followed for some time, but Premier Miton’s David Jane is more interested in the next wave of trends that investors are less aware of.
Jane, fund manager in the Premier Miton macro thematic multi-asset team, said recent weeks has seen him turn his attention to the period that will follow the Covid recovery. In particular, he is thinking about the likely pattern of economic growth in the post-pandemic world and which industries and sectors could benefit.
The Premier Miton macro thematic multi-asset team has been upping its exposure to areas such as energy, materials and financials, which are expected to perform strongly in the reflationary environment that is likely to come with the re-opening from the pandemic.
However, this is being balanced with positions in the thematic growth areas like tech and renewables.
Jane – who co-manage five funds, including the £612m Premier Miton Multi-Asset Growth & Income and £386m Premier Miton Cautious Multi Asset funds – said the team’s long-term thematic views sit broadly in two areas: technological change and demographic change.
“These have the advantage that they are fairly predictable: technology will always advance, and the world’s population pyramid is known for years to come,” he explained. “Within these themes, recently the strongest have been the digital economy and renewables.”
However, the manager added: “These trends are well known and well established now. Of more interest to us, are the potential new trends that might emerge in the coming decade.”
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
On trend that Jane is watching closely is how developments in big data and communications could change healthcare delivery.
He noted that several technology hardware and internet businesses have moved into the wearable market to launch health-related devices. There is still lots of growth potential in this area.
At the same time, point of delivery in primary care has shifted from a pure face-to-face model to a mixed model that promises to be much more efficient.
These two areas could overlap in a powerful investment trend.
“The big potential win comes from personalised healthcare. In the same way that big data can anticipate consumer needs and tailor advertising to match, big data will be able to anticipate healthcare needs, particularly when lifestyle data is combined with biometric and genomic data,” Jane said.
“This has some obvious ethical considerations, but the commercial potential is huge. We have been building exposure in this area cautiously.”
The second “huge potential theme”, according to the manager, is the changing nature of food supply.
“The combination of environmental and health pressures is creating market opportunities in industrially manufactured plant products such as meat substitutes,” he said.
“Another potential is the area of functional foods, piggy backing on the ‘superfood’ trend, businesses are manufacturing ‘functional’ foods to meet this consumer need.”
Food price inflation is expected to be feature of the years ahead as economic activity accelerates after the pandemic and this will benefit the entire food and agriculture industry. Jane has been building on his food and agriculture thematic basket to increase exposure to these trends.
“Other attractive growth areas are also certain to emerge to fill the gaps created by the recent recession,” he finished.“Having increased exposure to these two areas, the fund now has a greater diversity of themes complementing the macro reflationary baskets in materials, financials and energy.”
SVM Asset Management’s Colin McLean discusses the challenges and opportunities of Assessment of Value for funds.
Now, at the end of the second year of Assessment of Value for UK mutual funds, we can expect to see more comment on its strengths and weaknesses. Some of the professional and trade bodies and press that decided last year was too soon for an appraisal may now enter the fray.
The main challenge is to separate out what Assessment of Value actually adds to value for investors in the marketplace and whether it has improved competition.
The challenge in reviewing the results of Assessment of Value is to separate it out from a wide range of existing regulation and practice. There are already obligations on trustees, authorised corporate directors and others with key responsibilities in service delivery. Managers themselves have product governance, Treating Customers Fairly, conflicts of interest, a Senior Managers and Certification Regime and MiFID trading cost analysis.
Investors and their advisers already have to pour through a range of information from fund reports to key investor documents, analysis services, and ratings provided by the industry. No clear gap was identified in the information available to investors. A document that does not serve a need or gap is unlikely to be factored in with the additional work and cost that brings. It would be unusual for an additional cost and regulatory requirement to actually increase competition, rather than marginalise some players and discourage new entrants.
Of course, scale alone can lower costs to investors, but that may not improve service. It certainly makes regulation easier, except in a crisis when financial businesses can be too big to fail. The costs on society of greater scale and industry concentration are indeed a hidden burden. Most importantly, we know that active investment management tends not to increase returns with scale. Over time, returns tend to dwarf costs.
Regulated public markets have significantly underperformed many private markets in recent years. Yet, fair value is not a concept that is mandated within the Assessment of Value process. It is as if there is a race to the bottom; checking service is comparable, but then focusing largely on a period of historic returns that may not be a guide to the future and on costs which are viewed against the industry’s moving goalposts.
Looking at one part of the wealth management and investment chain in isolation risks missing unmonitored and sometimes unregulated cost elsewhere. This matters, as we are increasingly seeing industry mergers of wealth and fund management that bring vertical integration. There is also some evidence that switching costs are high. Closing or merging funds may have unintended consequences for investors and switching between funds should not be taken as a measure of success for either Assessment of Value or the industry as a whole. Why is this degree of churn not measured and factored into the regulatory framework?
Only investors know their own time horizon and tolerance for risk and volatility – these are not always the same thing. That means they may be using a fund in different ways than other investors, in combination with other assets to deliver a different risk reward profile. Assessment of Value assesses funds but each fund serves a heterogeneous range of investors.
Should active and passive funds be combined in the same comparison? Certainly, passive funds tend to have lower costs, but arguably do not provide the same role. Active managers are better placed to contribute to responsible corporate behaviour, sustainability, price formation in the stock market and trading liquidity, and have key roles in signalling value and bringing non-financial factors into price formation. Certainly passives can vote and may have stewardship policies, but in general they cannot sell the stocks that constitute the benchmark they track. And the price at which they do trade when money flows in or out of an index fund, or index constituents change, is set by the analysis and research of active investors.
It seems strange that at a time when there is more public interest in responsible investing and stewardship of businesses - recognising their broad responsibilities to society and a range of stakeholders - for Assessment of Value to ignore this. Responsible investing is not costless. Integrating it with financial analysis in a holistic approach to investing - with long time horizons and actively engaging with corporate issuers and their boards - costs money to do well. It is anomalous that it gets no attention in Assessment of Value.
It would be surprising if regulation created competition. Insofar as this might drive scale and churn, it may have some unfortunate unintended consequences. In last year’s reports some funds in the industry were criticised because of cost arising from small scale. Yet many of those smaller funds focused on smaller companies or less liquid opportunities. As they are able to concentrate portfolios, with more active share and alpha, many did in fact deliver some of the strongest performances for investors in 2020 and early 2021. Should Assessment of Value give so much attention for the potential for scale to cut costs if that scale also comes with the risk of diminishing investor returns?
These challenges point to the core problem: lack of remedy. Performance variations between funds tend to be much larger than cost differences and past performance within an individual fund is usually not reliable – as the risk disclosures warn. Reducing charges or closing funds sounds like effective remedial action, but may not be the change investors really want. Investors can end up bearing fund merger costs or otherwise adversely impacted by closures. There is a risk that money can be out the market for a period or that an unhelpful tax event is created.
Regulation may no more be able to create consistent performance than it can foster competition. Increased competition often stems from pricing flexibility and disruptive models. Prescription can stifle innovation and longer-term competitive forces. We need to think about the consequences of what may is undoubtedly well-intentioned legislation.
Colin McLean is founder and director of SVM Asset Management. The views expressed above are his own and should not be taken as investment advice.
Whether it’s a theme or a future trend, investors could turn to these ETFs for a useful satellite option within their portfolio.
Exchange traded funds, or ETFs, have grown in popularity over the last few years to reflect changes in the market and investor preferences.
Their popularity grew rapidly during the pandemic and the US ETF market currently stands at over $4tn.
Popular ETFs track indices giving exposure to a host of companies within an area of interest. While an S&P 500 ETF would likely be the most common, more specialist securities allow for investment in niche areas of the market.
These low-cost, tax efficient and easily traded funds can be a useful option for investors in making up a small portion, or satellite option within their portfolio.
Below, two market commentators each pick a satellite ETF to complement an existing portfolio.
Andy Merricks, manager of the EF 8am Focussed fund, opted for the £200m Rize Sustainable Future of Food UCITS ETF.
“I’m suggesting this despite being a devotee to T-bones and pork chops,” he said.
“But there is undoubtedly a movement towards the changing habits of the world’s population and, as a longer-term investment, I think that there is more to this sector than simply the ‘it’s good for the environment’ lip service that is heard so often today.”
He added that while the pandemic’s legacy is still to be played out, the delivery of food in its many forms is one that will develop further.
Exposure to this ETF gives access to dozens of companies that are, according to the factsheet, “favourably positioned to ride the tailwinds of the sustainable future of food theme”.
The ETF invests in nine subsectors: plant-based and organic foods; ingredients, flavours and fragrances; food safety and testing; precision farming; agricultural science; land-based aquaculture; water technology; supply chain technology; and sustainable packaging.
“It’s clear to see that it’s not just about whether we eat less meat or not,” said Merricks.
“A number of these areas are in their early days, so investing through an ETF makes sense as some companies will move on to become industry giants while others will not make it.
“An index-driven approach can be said to soften the blow to a portfolio of the latter group whilst allowing participation in the former.”
Performance of ETF vs sector since launch
Source: FE Analytics
Rize Sustainable Future of Food launched in August of last year and has since returned 16.61 per cent, compared to 20.04 per cent for the average fund in the Gbl ETF Equity – Other Specialist sector.
“Performance to date has been pleasing, if unspectacular,” Merricks added. “To take a relatively early stake in a forward-looking sector could be a rewarding one over the longer term.”
It has an ongoing charges figure (OCF) of 0.45 per cent.
Tom Bailey, ETF specialist at interactive investor, has gone for the $316m EMQQ Emerging Markets Internet & Ecommerce ETF.
This thematic ETF is focused on ecommerce and other internet platform companies within emerging markets.
Bailey said: “Simply, it aims to give you exposure to the Ubers, Deliveroos, Amazons and Etsys of the world’s developing economies.
“This is a play on both the rise of the middle class in emerging markets, with their increased spending power, alongside the growth of digital companies within the region.”
He said that this does lend itself to being heavily dominated by China.
“It now has a weighting to China of over 65 per cent,” he added. “It also has hefty weightings to the big China tech companies such as Tencent, Alibaba and Meituan.
“These companies are also dominant in many emerging market funds, both active and passive, so investors should watch out about overlap here.”
Having said that, he outlined that the ETF’s index is regularly updated with new eligible companies.
Performance of ETF vs sector since launch
Source: FE Analytics
Since EMQQ Emerging Markets Internet & Ecommerce ETF launched in 2018, it has made a total return of 80.93 per cent, while the Gbl ETF Equity – Tech Media & Telecom sector as a whole made 54.52 per cent. It also has an OCF of 0.45 per cent.
However, year-to-date, the fund has made a loss of 7.11 per cent.
“The dominance of Chinese tech stocks has been a bit of drag on the ETF this year,” said Bailey. “It’s been a tough year for Chinese tech, hurt by both the rotation from growth/tech to value/cyclical, as well as the newly arisen risk of a so-called crackdown on tech companies in China.
“Of course, what this means in practice is anyone’s guess and perhaps there will be more short-term pain. But over the long term, the broader ecommerce and digital platform themes both within China and emerging markets seems unlikely to go away.”