The veteran explains why he is building his position in Fever-Tree despite a recent drop in share price performance.
FE fundinfo Alpha Manager Nick Train has said it is “critical” that companies producing real assets have a long-standing loyalty with their customers if they want to pass on increased costs associated with inflation.
It comes as his £6.5bn LF Lindsell Train UK Equity fund suffered a small loss (-0.05%) in August compared with a 3.2% gain for the average IA UK All Companies peer and 2.7% gain for the FTSE All Share index.
In the fund's August factsheet, released today, the manager said there were two developments that had hit the portfolio during the month.
“First was investors’ reaction to proclamations by the Chinese authorities against conspicuous consumption,” he said.
Shares in luxury brands fell, including fashion brand Burberry and drinks firm Remy Cointreau, which are both held in the fund and lost around 10% each during the month.
For Burberry, it followed the announcement in July that chief executive Marco Gobbetti is stepping down at the end of the year. “The company just can’t catch a break at the moment,” Train said.
Performance of Burberry shares over the past three months
Source: FE Analytics
However, he noted that these companies can participate in global growth and would protect investors from inflation, as both have been able to pass on price increases to the consumer so far this year.
“The above has become an important credential for successful equity investment in the second half of 2021 because the other macro factor that has emerged through July and August is a spike in commodity and logistics costs,” Train added, which has led to higher inflation.
Although this increase could be a result of Covid-disruption – and therefore temporary – it could also be due to the “monetary experiment” undertaken by central banks over the past decade, he said.
All of the fund’s consumer stocks fell in August as a result, with drinks maker Fever-Tree and consumer brands company Unilever down 7% and 5% respectively.
“Longer term, whatever the outcome on inflation, we are sure it is critical for our investments in companies that produce ‘real’ stuff – as opposed to digital services – to be producing products customers actually aspire to consume or really can’t do without,” said Train.
The manager said that he has been building his holding in Fever-Tree, as he wanted more pricing power in the portfolio through premium brands.
“It is also why Diageo is so important for the fund – currently the second largest holding, just behind RELX. With each passing year more of Diageo’s growth and value is accounted for by its super-premium and premium brands,” he said.
Lindsell Train UK Equity has been a top-performing UK fund, despite the recent poor performance. The fund has been the third-worst in the IA UK All Companies sector over the past year as investors moved towards unloved value stocks, rarely invested in by Train. However, over the past decade it has returned 260.4%, a top-quartile performance among its peers.
Total return of the fund vs sector and benchmark over 10yrs
Source: FE Analytics
The manager employs a buy-and-hold approach, picking a small number of companies that have built up brands that cannot be replicated by rivals, or have similar intellectual property. The fund currently has a yield of 1.6% and has a clean ongoing charges figure (OCF) of 0.65%.
The bounce from a surprise drop in July is the biggest increase in inflation since records began.
The UK’s rate of inflation rose to a higher to 3.2% in August compared to the same month last year, data from the Office for National Statistics (ONS) revealed.
The Consumer Price Index (CPI) rose from 2% in July, the biggest month-on-month increase in annual inflation since records began in 1997.
Derrick Dunne, CEO of YOU Asset Management, said the spike should remind investors that a 4% rise by the end of the year “is still on the table.”
Dunne described UK inflation as “back with a vengeance,” following the dip in July.
However, the increase in inflation wasn’t totally unexpected given the low base from last year and Dunne said that this leap will not be enough to shift the Bank of England’s monetary policy immediately.
But, he added that “the current rate of quantitative easing can’t last forever and savers and investors should continue to anticipate a rise in interest rates at some point next year, if not before.”
One of the big questions is when this interest rate hike will materialise.
Hugh Gimber, global market strategist at J.P. Morgan Asset Management, said that the central bank will be “reluctant” to make changes until its confident that the economy has successfully managed the end of its furlough scheme, which ends this month.
The employment picture is positive with the number of people on payroll now back to pre-pandemic levels, ONS data found.
“With inflation running hot and wages on the rise, the Bank looks quite likely to be one of the first major central banks to hike rates next year.
“In this context, the historically low level of UK gilt yields appears inconsistent with the inflationary pressures building in the economy,” Gimber said.
Several factors contributed to rising prices in August. The biggest driver was once again from hospitality due to restaurants, bars and hotels prices being lower last year because of the government’s ‘Eat Out to Help Out’ scheme discounting food and reducing VAT for the sector.
There was also a boost from the second-hand car market. Supply chain issues and a global shortage of semiconductors has caused the manufacturing of new vehicles to be delayed and consumers have turned towards second-hand options. Prices for second hand cars have risen 18.4% since April this year compared with a 1.4% increase during the same period last year.
The ONS called these rising prices “temporary” especially in the hospitality sector. But Laura Suter, head of personal finance at AJ Bell, pointed out that the Bank of England has predicted prices will rise further from here before the end of the year, “so we shouldn’t bank on this being a flash in the pan”.
Trustnet continues its series into funds that have delivered consistently high returns while enduring some of their sector’s biggest maximum drawdowns, this time looking at Asia focused sectors in the IA universe.
Only three funds out of five Asia equity sectors delivered top-quartile returns over the past decade while undergoing the biggest losses in their sectors.
In this series, Trustnet looks at which funds have been top-quartile for both returns and number of positive months over 10 years but have the biggest largest maximum drawdowns in its sector.
Down periods and times where returns lag are a daily risk for investors but, as this data shows, for those willing to see out the wobbles there can high rewards.
Trustnet previously looked at the major UK equity and global sectors. This time the study is focused on Asian sectors, specifically: IA Asia Pacific ex Japan, IA Asia Pacific inc Japan, IA China/Greater China, IA Japan and IA Japanese Smaller Companies.
Source: FE Analytics
*Nikkei 225 is used as a comparison for all funds on the list
Darius McDermott, managing director of FundCalibre, explained that the Japanese market in particular tends to be very stylistic with strong rotations between growth and value which can result in “very severe drawdowns” for funds which have a very strongly defined style.
McDermott said: “It is not unusual to find a value style fund up 20% in one year whilst the growth fund is down 20% or vice versa.”
All three have a small-cap bias, which according to McDermott is expected given that small-caps can generate higher returns, although they are more risky during periods of market stress.
Looking at FTF Martin Currie Japan Equity first, it had the most positive months in the study, 74 out of a possible 120. Its maximum drawdown was 23.1%.
The fund was previously called Legg Mason IF Japan Equity Fund but underwent a name change following Franklin Templeton’s acquisition of Legg Mason earlier this year.
FTF Martin Currie Japan Equity is “famously volatile,” according to McDermott, with 22.6% volatility over 10 years. “It is probably the most volatile unlevered UCITs equity fund available to buy.”
“It's an ultra aggressive growth fund with a clear emphasis on the future and heavy bias to smaller companies,” McDermott said.
This overweight to growth has contributed to the “massive drawdowns” the fund has undergone when the Japanese market has rotated out of growth and into value.
“Following the tech bubble the fund lost over 66% over the next three years. Then between 2006 and the end of 2008 the fund suffered a 79% drawdown,” McDermott said. And after the Great Financial Crisis it “did not recover quickly”.
But, despite the massive amounts of volatility “patient investors who have been able to stomach the roller coaster ride have achieved some exceptional returns,” McDermott said.
Its returns over 10 years were 587.8%, the highest in the entire IA Japan sector.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund’s focus on the ‘future’ refers to FE fundinfo Alpha Manager Hideo Shiozumi’s investment in the structural and social themes causing change in Japan, creating what he calls a ‘New Japan’. These include: an aging population, changing consumer lifestyles and internet empowerment.
As a result the £1.4bn fund has a high exposure to industrials, healthcare, telecom, media and technology, with gaming company Nintendo, healthcare services company M3 inc and photograph supply company, Fujifilm, all featuring in the top 10 holdings.
Coming out of the pandemic, Shiozumi added another layer focusing on domestic-oriented sectors he thinks will majorly benefit from ‘workstyle reforms’ which have appeared during Covid.
Next is Fidelity Japan Smaller Companies, which had 73 positive periods and a maximum drawdown of 20.2%.
Over 10 years it made 197.3%, a top 10 performer in the sector during that time. Its 10-year cumulative volatility was 14%.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The Fidelity International fund group has a strong grounding in Japan and manager, Jun Tano, is able to take advantage of that support. The £98m fund also invests in small-caps, but can take some mid-cap exposure.
Tano’s focus on bottom-up stock picking is underlined by a ‘blended’ approach, not focusing on just growth or value specifically, rather companies that can build and sustain profit growth long-term.
The fund has an FE fundinfo Crown rating of four.
Last up is AXA Framlington Japan, which like the previous fund had 73 out of a possible 120 positive months, but with a maximum drawdown of 18.7%, the best in the study. Its total return over 10 years was 224.4%, the sixth best during that timeframe.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Although it can invest across the market-cap space it focuses more on risky small-caps, which consequently increases its volatility, McDermott said. Its volatility over 10 years was 14.3%.
FundCalibre said, that lead manager Chisako Hardie and deputy manager Tom Riley typically favoured growth, but they had a valuation discipline in their process meaning that the fund’s style bias was less extreme than some of its peers.
A consequence of this valuation discipline is that the managers sell out of companies when they become ‘fully valued’.
As part of this process the fund looks for long-term structural growth companies within thematic trends, such as the globalisation of Japanese food, ageing populations, automation and the increased use of electronics in cars.
Several UK stocks have beaten the popular S&P 500 over the past year, but a new study shows investors still don’t consider the FTSE is the best place to invest.
Royal Mail, the best performing stock in the UK over the past year, would have beaten most of the US’ tech behemoths but investors are still unsure if the domestic market is the best place for their cash.
The letter and parcel carrier made 112.7%, putting it ahead of US tech giants such as Apple (28%), Microsoft (41%), Google parent Alphabet (82%) and Netflix (14%) over the past year, data from trading platform eToro found.
Performance of Royal Mail vs S&P 500 and FTSE 100 over 1yr
Source: FE Analytics
The company was one of several UK brands to beat the returns of the top US stocks. Ladbrokes, Gala Bingo owner Entain, and NatWest also surpassed some of the S&P 500’s biggest names.
But this outperformance from UK names during the past 12 months doesn’t mean investors are backing the UK market.
In a recent eToro survey of 6,000 investors, only 14% said the UK was the best place to invest, only ahead of Japan, which received 12% of the vote.
In contrast 39% said the US was the best buying opportunity for the remainder of 2021, closely followed by Europe on 38%. China was third with 24% of the vote, with investors seemingly undeterred by the recent wave of government legislation on education and tech stocks, which has derailed market returns.
Ben Laidler, global markets strategist at eToro, said that it was interesting but not very surprising that UK stocks rank so low on investors’ preferences.
He said that while the FTSE 100 lacked the “glitzy tech stocks” that have made the S&P 500 incredibly popular over the past few years it does hold companies that are “likely to perform well as economies recover from coronavirus”.
This mainly refers to the products and services of miners, banks and oil companies, sectors making up a big part of the UK large-cap market.
Laidler said there will be a demand for these types of companies “as the shackles are released from major economies,” post Covid-19.
This could lead to a “reversal of fortune,” for the FTSE 100 over the coming months, Laidler said, with investors attitudes subverting the “unloved” sentiment they’ve held since the 2016 Brexit Referendum.
Indeed, the UK market has lagged its international peers since that Brexit vote, however there could be a change, he added, as UK firms “can offer returns equal to – and better than – even the fast-growing firms in the US and other high-growth markets”.
Performance of S&P 500 and FTSE 100 since Brexit vote 23/6/2016
Source: FE Analytics
The strategist said that investors should avoid using a “broad brush approach” when it comes to stock picking, and not “discount” a company just because it’s domiciled in the UK.
“This increases the chance that you’ll miss out on companies offering the best returns,” he added.
Indian equities look expensive but can make huge gains over the long term.
I’m not sure many of us would’ve expected India to be one of the better performing markets so far in 2021.
With a slow vaccine rollout and overwhelmed health infrastructure, it seemed the country was ill-prepared to meet the challenge of a second Covid wave. At one point India was responsible for more than half of the world’s daily Covid-19 cases at around 400,000 a day.
While the rate of infection has slowed, the general belief is the recovery would take a significant amount of time. I recently read a Deloitte publication on the damage successive waves would have on the economy – it was entitled “The tunnel just got longer, but you can still see the light”, which seemed very apt.
Nevertheless, the Indian economy has been resilient throughout 2021. To the end of August, the MSCI India index was up almost 25%. The rally is due to a number of reasons, most notably the ultra-easy monetary policy by the country’s central bank and the injection of a significant amount of extra liquidity to stimulate the economy following the pandemic.
India is also expected to have a favourable post-monsoon outlook – with the majority of the country receiving adequate rainfall. Falling between June and September, the monsoon season is a crucial time for agriculture-related sectors, which account for 20% of India's GDP. Besides industries directly linked to farming, such as fertilisers and seeds, agricultural output impacts consumer goods, automobiles, and finance.
But challenges do remain, such as subdued consumer spending, with health and financial anxieties prominent. Figures from the Centre for Monitoring the Indian economy show spending has tailed off markedly due to the second wave.
Workers are also facing challenges – an April 2021 poll from Bank of America found 57% of Indian workers had their salaries cut and 20% were laid off. That’s led to some commentators pointing to a clear disconnect between the macro and market outlook.
Credit Suisse said the medium-term outlook for Indian equities is attractive as it remains one of the world’s fastest growing economies – adding that foreign portfolio investment flows into India have remained very resilient, with net equity inflows of $7.6bn in the first six months of 2021.
In a recent market update, FSSA Investment Managers said India tends to respond well to crisis – citing the previous corruption scams, a banking and a financial crisis since 2010. With a population of 1.4 billion, FSSA points to the long-term story, stating there is “massive under-penetration across sectors, which fuel growth across different categories”.
One thing we cannot ignore is that Indian equities look slightly expensive, both relative to their own history and other emerging economies. Credit Suisse has highlighted that the MSCI India index currently commands a valuation premium of 62% compared to the MSCI Emerging Markets index (versus the 10-year average of 40%) - something it expects to persist as “fundamentals have improved significantly”.
We have to consider two specific factors when it comes to Indian equities. The first, as mentioned, is that it is a growing economy – for example it has the largest education system in the world with over 250 million students – more than any other country. It is also a vast country, with poor infrastructure, which will have to be developed at a fast pace to keep up with the growing demands of urbanisation.
Prime Minister Narendra Modi is now into his second term and has made a number of progressive steps through the likes of the goods and services tax, inflation targeting and the Indian Bankruptcy code. But we are still at an early stage of growth, meaning there will be times we want to invest in domestic companies or some of the global businesses the country has to offer.
We continue to hold an overweight to Indian equities in our managed portfolios as we cannot understate the strength of the long-term story. More than 50% of the population is under 25 years of age, with 1 million new people entering the workforce each month – those demographics are impossible to ignore in terms of future growth. Add in improving infrastructure, the rise of the middle-class, digital transformation (mobiles etc) and the fact it has reasonably good corporate governance and higher returns on capital businesses; and we feel it has the potential to make huge gains in the long term.
Those looking for a pure India play may want to consider the likes of the Goldman Sachs India Equity Portfolio as an “all weather” offering, with manager Hiren Dasani and his team having a long-term time horizon and low portfolio turnover. Those preferring a regional approach may want to consider the Stewart Investors Asia Pacific Leaders Sustainability, FSSA Global Emerging Markets Focus, or Federated Hermes Global Emerging Markets SMID Equity funds which have a 42 per cent, 27 per cent and 20% allocation to India respectively.
Darius McDermott, managing director, Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.
Manager Hugh Cuthbert reveals why Europe is no longer ‘the poor man of global equities’.
The coronavirus pandemic has levelled the playing field for Europe and meant that, for the first time since the sovereign debt crisis, it is no longer at a disadvantage to the rest of the world, according to SVM Asset Management’s Hugh Cuthbert.
Cuthbert, who runs the SVM Continental Europe fund, said: “There are always risks lurking under the surface, but I think what is particularly interesting about Europe right now is it is not the only one in difficulty.”
The manager’s £29.9m fund could be described as the best Europe portfolio that investors have never heard of. It has returned 309.3% over the past decade, the eighth-best figure in the IA Europe ex UK sector, but is the only fund with less than £100m in assets under management.
Total return of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The manager claimed the global pandemic has put Europe on an even keel with the rest of the world. Previously, it had been one of the few regions where the central bank was supporting the bond market, the banks and the economy through low interest rates and asset purchases.
“This was something unique to Europe or seen as a European problem, but now they all have to decide what to do about it,” he said.
Both the Federal Reserve and Bank of England have been forced to reduce rates to near-historic lows while increasing their bond buying programmes.
The next issue facing markets will be inflation, but Cuthbert noted that this is a global problem, not one solely facing Europe.
He also said the pandemic had taken the focus away from other issues, such as Brexit and the political issues in Italy, which had raised question marks at the end of 2019.
“But then, hey presto, we had a global pandemic, everybody ramped up their public sector deficits, everybody supported the economy in general and we are all in the same position together,” said Cuthbert.
Unlike other markets, where the winners of 2020 differed from the winners of 2021, in Europe, funds that did well last year have continued to succeed year-to-date.
There was a big shift in leadership at the start of the pandemic, but this was “severe and rapid”. All investors needed to do was hang on and separate their portfolios into those stocks that would survive and those that would not, Cuthbert said.
“We rid ourselves of anything that we thought had the tiniest of chance not to get through, but those were few and far between, and bought good business models that could get through the pandemic but that had been ridiculously hit,” he added.
However, unlike other parts of the world where value stocks were the best performers in the economic turnaround, in Europe it has been a mixture of both unloved stocks and growth names.
One example is Hexatronic in Sweden, a company Cuthbert bought last year. It sells everything required to roll out a broadband or cable service, something that has grown in significance as governments spend billions of dollars on better internet.
On the value side, Ringkøbing Landbobank is a Danish bank that only focuses on businesses that are growing, such as those building second holiday homes or windmill financing.
“I have held the stock for years and it has outperformed year after year. It has none of the attributes that people dislike in banks. The regulator has even told it off for having too much capital in reserve and it has also been told off for exaggerating the bad loans. It is a great opportunity,” said Cuthbert.
Although these stocks have done well, he added that there was “still a lot left to run” in Europe, as share price increases have been matched by earnings upgrades.
“It is not that everything has become expensive. Some have, but a lot have been supported by underlying earnings. Now is not the time to run for the hills again,” he said.
The highly regarded fund has experienced outflows of more than £1bn over the past 12 months, but this has been a mistake by departing investors and those remaining should allocate more, experts say.
More than £1bn has been withdrawn from the Trojan Income fund in the past year but remaining investors should treat it as a buying opportunity in the fund, market commentators have said.
There are two main reasons behind investors leaving the fund. First, performance has slipped in the past year as it has not been a favourable market environment for the Trojan Income process.
FE fundinfo Alpha Manager Francis Brooke, Hugo Ure and Blake Hutchins, run the fund in a more cautious mindset, focused on protecting capital rather than shooting the lights out with returns or sacrificing capital to chase a higher yield.
Brooke, who launched the fund in 2004, therefore buys companies with reliable and growing income from the ‘growth’ part of the market.
Square Mile Research called this a “sound investment process” and should protect investors in downturns, but added that the fund’s “low risk” characteristics meant it could lag during more “aggressive upswings”.
This was the case during the past 12 months where the combination of a more conservative approach and underexposure to cyclicals – which have led markets since November – meant the fund has underperformed significantly. Over one year it is the worst performing fund in the IA UK Equity Income sector.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Despite heavy outflows during the past year and the weaker performance, Trojan Income remains one of the biggest funds in the IA UK Equity Income sector, at £2.7bn.
Ryan Hughes, head of active portfolios at AJ Bell, said that this underperformance was expected.
“It was no surprise to see the fund lagging significantly, in fact, I would have been worried if it had done anything else given its style bias,” Hughes said.
“As a result, short-term performance seems to have shaken some investors out of the fund resulting in reasonably large outflows.”
The second reason was the announcement that founding manager, Brooke, would be steeping down at the end of this year, transferring lead management of the fund to Hutchins.
Hughes said that while this transition has been well-communicated ahead of time “it may have caused some investors to look elsewhere.”
Sometimes a change in management can create some concern for investors who may associate the manager with the style and therefore performance of the fund, even if there is continuity in the process.
Adrian Lowcock, independent fund commentator, said that Hutchins’ management takeover has been “well planned” and noted that Brooke’s skills won’t be completely absent post 2021, as he’ll take on a more background role. This should be reassuring for investors.
Lowcock added that Trojan group generally have a “strong culture and clear process” which isn’t likely to change in any significant way with a change in manager. Neither of the two factors raised were a concern, he noted.
Overall, Lowcock recommended that remaining investors in the fund should stay put, while Hughes labeld the fund a 'Buy'.
The fund in currently soft closed new institutional and pension investors but it is still available to new retail investors with no minimum investment amounts or charges. A 5% charge does apply to new institutional and pension investors, “with the intention of preventing burdensome marketing requirements on the managers time,” Square Mile said.
Hughes said that the fund was an “excellent option” for investors wanting exposure to high quality UK companies. He added that it remains a “core part” of AJ Bell’s own portfolios because it is still performing as expected, but said “it’s important to recognise that it will have periods of underperformance given it focuses on quality.”
Looking at the fund’s long-term performance, it has beaten its sector and benchmark over the past decade.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Tom Sparke, GDIM investment manager, was also bullish on Trojan Income, particularly because the fund has below average volatility versus its peers, “which is important in uncertain times.”
Indeed the fund’s 10-year cumulative volatility is the best in the sector, a product of the team’s more cautious, approach.
This was “impressive” according to Sparke, given that the fund has a concentrated portfolio of 45 names, meaning a dip in just a handful of companies would be more closely felt.
Another ‘Buy’ argument for Sparke was that Trojan Income was that the UK market is also an attractive place to invest at the moment.
He said that the domestic market offered good value relative to other regions and from an income perspective was already returning decent yields after last year’s dividend crisis.
Trojan Income holds an FE fundinfo Crown Rating of four and has an ongoing charges figure (OCF) of 1.01%.
While value stocks had surged as the world opened up from the coronavirus lockdown, growth stocks have been catching up over the summer months.
Growth stocks are now outperforming the value style over 2021 so far, as doubts over the robustness of the global economy sent investors back into more defensive areas of the market.
Value stocks – which investors had been avoiding for much of the past decade – rallied hard when effective Covid-19 vaccines were first announced in November 2020 and had been outperforming growth for much of this year as well.
However, as the chart below makes clear, the growth style has been much stronger than value over recent months. Indeed, at the time of writing (10 September), the MSCI AC World Growth index was just outpacing its value counterpart with a total return of 15.7% versus 15.2%.
Performance of growth and value stocks over 2021
Source: FE Analytics
Investors have returned to growth stocks – which tend to be more defensive and hold up better when the economy is weaker – over the summer months. FE Analytics shows the MSCI AC World Growth index is up 12.1% since 1 June while the MSCI AC World Value made just 2.4%.
The following chart shows how this rotation back into defensive areas of the market has looked at a sector level, with tech stocks jumping 16%, healthcare 10.8% and utilities 7.3% since 1 June. More cyclical areas, such as value-heavy sectors like energy and materials, failed to make any ground over the summer.
Performance of global equity sectors since 1 June 2021
This preference for more defensive stocks over cyclicals is down to investors expecting economic growth to moderate from the very high levels seen at the start of the year, when lockdown restrictions were eased and countries such as the US and the UK began to move back to normality.
The August edition of the Bank of America Global Fund Manager Survey found “global growth expectations have fallen drastically” among asset allocators, with a balance of just 27% of fund managers expecting the global economy to improve over the coming 12 months.
Concerns that growth has peaked have come at the same time as the rise of the Delta coronavirus variant, slowing growth in China and disruptions to the global supply chain, which all add to worries about the health of the global economy,
John Surplice, head of European equities at Invesco, said: “We are not entirely surprised by the market’s reaction, as it was only natural that the very high rates of growth coming out of the pandemic would begin to lose altitude. However, where we may differ most is that we don’t believe growth rates will inevitably slow to the anaemic levels of the past decade.
“Many actions taken during the pandemic will remain with us for a long time, underpinning growth for years ahead. Some crisis related stimulus, such as furlough schemes, will end but others have a long way to go. The EU recovery fund, for example, will provide grants and loans until 2026.”
Surplice’s portfolios – such as the £2.3bn Invesco European Equity fund – tend to have more exposure towards cyclical and value stocks over growth and quality names. He believes the recovery trade has much further to run.
Some of the reasons for this include the fact that recovery in the services sector (which is much larger than manufacturing) is only just starting its own rebound, an improving earnings recovery and opportunities in long-term structural themes like climate change and digitalisation
“If we are right, this should be the start of a prolonged period of earnings growth – even more so for shorter duration assets like value. This is something we haven’t seen since the 2003-2007 period, which translated into very strong returns for these types of stocks.”
Not all are convinced, though, as evidenced by the recent pull-back from value.
David Coombs, head of multi-asset investments at Rathbones and manager of the £1.5bn Rathbone Strategic Growth Portfolio, continues to focus on growth stocks despite the high valuations that many trade on, especially in the tech space. He does not have too much interest in shopping around in the very cheap end of the market.
“We know the best-quality companies are expensive right now. I’m not going to try to defend this. No new paradigm chat. However, they could remain expensive and increase in price with greater sales and smarter cost cutting for another couple of years or more,” he said.
“I don’t want to sell these sorts of companies to replace them with lower-quality or low-growth names. We are long-term investors. We aren’t buying highly indebted or unprofitable businesses valued on a price-to-sales basis. That tends to end badly when sentiment shifts.”
But alongside growth stocks, the manager has been adding to cash in recent months as it seems to be “the only safe option” as well as holding put options on stocks as a form of insurance.
“It’s not the time to go all in,” he finished.
Tackling climate change multi-decade growth opportunity for investors
The threat of climate change has never been greater or more clear. The latest Intergovernmental Panel on Climate Change (IPCC) report laid out in the starkest of terms the monumental challenge that we are facing in overcoming this global issue. Yet we do believe that there are reasons for optimism.
In the past few years we have seen a clear shift among both corporates and consumers in their collective attitude towards greener production and consumption habits. This has fuelled the rise of companies providing innovative solutions that can support the energy transition and reduction of greenhouse gas (GHG) emissions, and play a key role in solving the growing climate challenge.
Against this backdrop, we see three key tailwinds that are driving this transition and make this a multi-decade growth opportunity for investors.
Strong regulatory support
Countries with net zero targets together represent around 61% of global emissions, 68% of global GDP and 52% of the global population. Clearly there is much further to go but COP 26 later this year should help drive further progress.
Moreover, the recent IPCC report should support the drive towards the use of cleaner energy solutions, highlighting the need to transition from fossil-based fuel reliance towards greener, renewable alternatives to limit global warming to 1.5 degrees Celsius by 2030. Their report marked a significant milestone as the first scientific study on climate change since 2013, solidifying the importance of addressing the climate transition.
Policy momentum continues to be positive across all major regions. In Europe, there is a strong commitment towards a green recovery, with the €750bn EU Green Deal setting the ambitious objective of reaching net zero GHG emissions by 2050. In July 2021, the EU released its ‘Fit for 55’ package, a key component of the EU Green Deal, referring to a minimum 55% emission reduction target which the EU has set for 2030. This could mean more stringent environmental targets in existing areas of legislation and covering additional industries such as construction/building operations and aviation falling within the scope of policy.
China has recently committed towards achieving net zero emissions by 2060 as part of its 14th five-year plan. To reach carbon neutrality, China will need to continue its rapid development of clean technologies – already considered world-leading – and shift away from its reliance on fossil fuels.
In the US, following his election and coupled with the Senate win, Joe Biden reaffirmed his plans to build out clean energy infrastructure as part of a broader effort to curb climate change. The $1.2trn framework describes their proposed investment in electric vehicles (EVs) as the largest in history and will include $15bn to be spent across EV infrastructure – such as building 500,000 EV chargers – and electric buses.
This positive momentum from governments around the world is paramount to the energy transition. Crucially, it is estimated that annual investments in renewable energy will need to increase 3-4 fold over the next three decades to fulfil key global decarbonisation and climate goals.
Greener consumption habits
Consumers are swiftly changing their consumption habits and are playing a more active role in reducing GHG emissions – from the provenance of ingredients and raw materials to the environmental impact of finished products and packaging.
One area that has seen considerable pick-up is annual EV sales – in Europe, this figure more than doubled in 2020, with the penetration rate having reached 15% of total European new car sales over the first quarter of 2021. Elsewhere, on a three-month rolling basis to April 2021, around 157,000 units were sold in China, representing a 346% year-on-year increase.
The Tokyo Olympics is another good illustration of the growing greener consumption trend – with Toyota e-palettes and self-driving electric shuttles used to transport athletes and staff around the Olympic site. In addition, the Olympic medals were made using recycled materials from smartphones and laptops donated by the public, while the Olympic Flame was switched on and sustained using hydrogen.
Moreover, consumer interest in clean and sustainable diets is accelerating with a focus on a broad range of issues including food waste, air miles, clean labels, lab-grown meat and organic foods. Flexitarian and vegan diets are also on the rise, illustrated by the 580,000 people in the UK who signed up to the Veganuary challenge in 2021, an increase of 132% since 2019.
Acceleration in climate-driven investment by corporates
Most mainstream companies such as Amazon, Microsoft and Coca-Cola have pledged ambitious targets in order to reach net-zero carbon emissions, which is translating into increased capex towards clean technologies, including energy storage and energy efficiency services. This follows increasingly stringent regulation around environmental standards and rising consumer demand for more environmentally friendly products and services.
For example, Amazon, which has pledged to operate with 100% renewable energy by 2025, became the world’s largest corporate purchaser of renewable energy in 2020, reaching 65% across the business. This has been achieved by investing in wind and solar projects worldwide, which includes a 350MW wind farm off the coast of Scotland. The energy generated from these projects is used to power Amazon’s corporate offices, fulfilment centres and the data centres used to host Amazon Web Services’ (AWS) public cloud platform. Furthermore, AWS runs multiple initiatives to use water more efficiently and use less drinking water to cool their data centres.
Corporates such as Amazon need innovative clean technology companies which provide products and services to support their energy transition.
Nevertheless, there is still a long way to go and more investments in clean technologies will be necessary in order to begin making a difference to the environment. In fact, it is estimated that governments and companies will need to invest at least $92trn by 2050 to reduce emissions fast enough to prevent the worst effects of climate change.
However, the momentum is there to see this happen.
We believe the combination of all the above factors is driving increased innovation for companies operating within the clean economy. This will not just help in providing innovative solutions to the energy transition and the finite amount of natural resources, but should also create compelling investment opportunities to take advantage of.
Amanda O'Toole is a portfolio manager at AXA Investment Managers.The views expressed above are her own and should not be taken as investment advice.
The Lowland Investment Company manager explains why even value stocks need to be growing before he buys them.
Running a UK equity fund over the past year has been a rollercoaster ride. In 2020, the value stocks that dominate the domestic market were hit harder than other areas, such as the US, where giant tech companies continued to grow at pace.
Towards the end of the year, that trend reversed, something that continued into 2021 up until recently.
Lowland Investment Company was a beneficiary of that switch. Over the past year, the trust has been the third-best performer in the IT UK Equity Income sector, returning 58.4%, more than double the returns of the FTSE All Share.
Below, James Henderson (pictured), who has managed the £376m trust since 1990, tells Trustnet about his biggest wins and mistakes in recent years, how his trust is built for the future and why he won’t invest in tobacco.
What is your process for picking stocks?
Companies either go forwards or backwards, they rarely stand still. So, over the medium term, we have to believe a business will be a bigger company than it is today.
We are contrarian and value-orientated, but we buy companies that are growing. Yes, valuation matters, but you need to have a growth overlay.
I think some income funds are focusing too much on income and are bleeding their capital. We are focused on growing the capital as well, which will throw off more income over time.
Which is better, growth or value?
It is about having a mix of companies. There is no hard or fast way of knowing if it is value or if it is growth. There will be stocks in both areas that come through and there will be failures in both areas.
The UK economy is very mixed. Some areas are strong and some companies are even trying to keep profit expectations down. We have come out of the lockdown and many consumers have paid down debt, kept their jobs, and pay is going up. They are keen to consume again and that is coming through.
However, there are other areas that have absolutely suffered, where debt levels have gone up and they have been shaken.
It would be wrong to generalise. What we are trying to do is pick the companies that are long-term investments, but that have the wind behind them with the changes in the economy.
Why should investors pick your trust?
Records over time show the approach is a robust one and the risk is moderated by a relatively long list of stocks.
Now is an exciting time to invest in the UK, watching a new generation of companies come through. There is a lot of change happening, but some value managers are a bit blinkered to that change and it is throwing up real opportunities.
One that we bought last year for the first time in my 31 years on the trust was Marks & Spencer. People think it is going nowhere, but the tie-up with Ocado means it has an online presence in food and also the difficult period last year meant tough cost-cutting decisions were taken.
It is reinventing itself. The food operation is growing fast and the clothing part is being looked at. We think it will return to good growth when we are through the pandemic.
There will be plenty of companies that don’t reinvent themselves, however.
Total return of trust vs sector and benchmark over 10yrs
Source: FE Analytics
What has been your best call over the past year?
The best has been the alternative energy companies of late. I invested in Ceres Power, which is a spin-out of IP Group around five years ago when there was a fund raise at 75p. We sold some stock at the back end of last year, because it was becoming too big a part of the portfolio, at £13 per share.
And what has been the worst?
My biggest mistake was slightly more than a year ago. I had too much in contractors such as Carillion which went bust. I also held Interserve. It was, in hindsight, obvious that they were companies that were taking on projects with a very low margin, but this was not reflected in the way that they were pricing them. I kick myself frequently for getting involved.
I had been invested for some time and they paid dividends along the way and the yields were quite high, but the way they were tendering for work was flawed and I should have realised that.
Which stock in the trust are you most excited about?
ITM Power and a holding in AFC Energy – both in the hydrogen area. To produce green hydrogen commercially is the Holy Grail and they have different approaches to it.
ITM tied up with Linde, the great German gas company, at the back end of 2019 and the great part of that is the ability to deliver projects as Linde has the know-how in manufacturing. But one area that is taking up a lot of my time at the moment is whether or not it has the best technology.
AFC is making alkaline electrolysers so there are alternative ways of doing it. It doesn’t have a big partner like ITM but its technology is working and producing good results. As such, I own both.
Are there any sectors you won’t invest in?
We haven’t got anything in tobacco. Not because I am against it, but every time I look at the stocks, the fall in sales is larger than predicted.
Yes, they can shove up the price so the profit number is alright, but the actual volume of cigarettes smoked is in decline and the smoking alternatives are not making up for that fall.
So about 18 months ago we thought “why bother any longer as we are always disappointed”. Yes, they generate a lot of cash and pay good dividends, but companies either go forwards or backwards and if it can’t grow, then it will eventually dwindle away.
What do you do outside of fund management?
I am a real enthusiast for horse racing, particularly jump racing, which is one of my main interests. I often read The Financial Times in the morning and then later in the day will read The Racing Post.
The UK economy flatlined in July, growing at just 0.1%, but market commentators say it is too early to pump the brakes.
The UK economy failed to grow by even the most cautious of expectations in July due to supply chain issues, rising Covid cases and workers isolating due to the ‘pingdemic’, but investors should not lose faith, according to market commentators.
In July, GDP rose 0.1% month-on-month and remains 2.1% below its pre-pandemic level, data from the Office for National Statistics (ONS) has revealed. This is a marked come down from June, when GDP grew by 1% month-on-month.
It was the sixth consecutive month of growth, but the latest figure fell well short of investors’ expectations and has left some concerned over the fragility of the recovery.
Derrick Dunne, chief executive of YOU Asset Management, said: “UK GDP almost flatlined in July, confirming even more abruptly than expected that the economic rebound has lost its momentum.”
Indeed, it was the slowest monthly growth since the UK was plunged back into lockdown in January 2021.
There were pockets of success. Arts, recreation & entertainment was up 9% month-on-month after ‘Freedom Day’ allowed for the return of live events, while production output rose 1.2% – the main driver of growth for the month.
However, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said there was a particular concern around supply chain issues, which have worsened since July.
“Companies in industries right across the board are warning of problems. If fewer cars roll off production lines, if drivers aren’t available to deliver goods and if shelves go bare, then the only way for output to go is down,” she said.
This can already be seen in the numbers, with a 0.3% contraction in consumer-facing services in July due to a fall in retail sales. Construction was also a weak spot, with negative growth for the fourth month in a row.
August figures are expected to be better but September could be an issue as furlough ends, with some workers expected to lose their jobs at the conclusion of the scheme.
Streeter said: “The ongoing struggle to hire staff isn’t going away any time soon, with post-Brexit rules making hiring many workers from Europe difficult. These are not just temporary bottle necks, with a skills gap looming for so many industries, driving up staff wages and inflation.”
Despite the recent figures, now is not the time to give up on the UK, however, according to Dunne, who said that the recovery is still underway.
“Continue to embrace the opportunities, but don’t lose sight of the spectre of inflation and its possible consequences in the months ahead,” he said.
AJ Bell financial analyst Danni Hewson agreed. She said that the recovery was always likely to be filled with potholes, but that many issues that hampered the growth in July has now been overcome.
“Isolation rules have been relaxed, much to the relief of employers up and down the country, the vaccination roll out has continued apace and Delta variants appear to have been kept at bay,” she noted.
“The engine may have come close to stalling in July, but the economy is still ticking over and should continue to do so as long as there’s no need to slam the brakes back on.”
Paul Craig, portfolio manager at Quilter Investors, said investors should focus on quality businesses, as these are the type that will thrive if the economy continues to wobble.
“Those with pricing advantages and strong competitive positions will benefit from an uptick in inflation, while those with established and resilient supply chains should overcome the current issues. Investors will want to pay attention to these businesses as the recovery plays out as that is ultimately where the value will lie,” he said.
Correlation risk is especially important when investing for income in the UK, where just five stocks account for about one-third of all dividends.
There are just four funds in the IA UK Equity Income sector with a Crown Rating of four or above and a low correlation to at least one of their highly rated peers.
Correlation of top-rated funds
Source: FE Analytics
Last year was the perfect example of why diversification is so important when it comes to income.
In 2019, five firms paid out £27.2bn, or 34%, of total UK dividends, and the top 15 paid out 64%, but last year it got worse. In 2020, after a swathe of dividend cuts, that £27.2bn from the top five fell to about £23bn, but the concentration increased to 37.5%.
In the previous article in the series, we looked at the IA UK All Companies funds with the maximum Crown Rating and a correlation of less than 0.7 (where 1 = a perfect correlation and 0 = no correlation) with at least one of their highly rated peers.
This time around, there were just four funds in the IA UK Equity Income sector with five Crowns and these all had a high correlation to one another. As a result, we adjusted our parameters for this study.
RWC Enhanced Income is the only fund that has a low correlation with each of the other three funds that made the list.
It is managed by John Teahan, Ian Lance and Nick Purves, who describe themselves as long-term intrinsic value investors who aim to take advantage of short-term sentiment which causes investors to overreact to news that is often irrelevant.
“This overreaction causes share prices to diverge from the intrinsic value of the underlying business and provides an opportunity for long-term investors to purchase shares at less than their true value,” they said.
The managers target a yield of 7%, which is ‘enhanced’ through covered call options.
In a recent note to shareholders, Lance expressed confusion at why investors were so hesitant to exploit value, considering the size of the opportunity in this area of the market. For example, he pointed out the gap in valuations versus growth stocks is wider now than in 2000, adding that value sectors should offer the greatest earnings growth in the next two years and represent one of the best hedges against inflation and rising bond yields.
“Despite this, we are repeatedly told that most investors have no appetite for value stocks and are willing to stick with high quality and growth stocks, despite the latter’s lacklustre performance over the past year,” the manager said.
“Many investors are hence making a deliberate choice to own expensive stocks with slow earnings growth over cheaper stocks with faster earnings growth – something that on the face of it seems hard to explain.”
Data from FE Analytics shows RWC Enhanced Income has made 74% over the past decade, compared with 117.4% from its sector and 111.6% from the FTSE All Share. Although the fund has underperformed over this time, Crown Ratings focus on three years, during which time it has performed in line with its peers, but with lower volatility.
While LF Gresham House UK Multi Cap Income has a smaller-companies focus, it has the ability to invest across the market cap spectrum.
Head manager Ken Wotton and deputy manager Brendan Gulston aim to find businesses with long-term sustainable and defensive income streams. They avoid cyclical companies whose fortunes depend on external factors that are outside of the controls of the management team, such as commodity prices.
In their latest note to investors, Wotton and Gulston said that volatility is likely to persist, limiting short-term visibility on the direction of individual companies.
“However, we believe that volatility, while creating some challenges, will provide an attractive environment for long-term investors to back quality companies with attractive, sustainable income streams at reasonable valuations,” they said.
Performance of fund vs sector and index since launch
Source: FE Analytics
Data from FE Analytics shows LF Gresham House UK Multi Cap Income has made 63.7% since launch in June 2017, compared with 16.2% from its sector and 19.2% from the FTSE All Share.
Another multi-cap fund, LF Montanaro UK Income, is up next. The strategy used by all funds at Montanaro is based on buying the highest-quality companies in the small- and midcap space that can grow sustainably, then holding them for the long term.
As this is an income fund, the managers Charles Montanaro and Guido Dacie-Lombardo also look for companies with a yield of at least 1.5%, the ability to grow dividends, and a reasonable liquidity profile.
Square Mile Investment Consulting & Research said: “With Charles Montanaro and Guido Dacie-Lombardo at the helm, this fund is run by a pair of sensible managers who appear to successfully blend youth and experience, as well as genuine humility and a passion for investing.”
It said the fund differs from many of its dividend-paying peers not only through its bias to small- and medium-sized companies, but also through the application of ethical exclusions and an environmental, social and governance (ESG) checklist.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
LF Montanaro UK Income has made 231.3% over the past decade.
Last up is Trojan Income, managed by Francis Brooke, Hugo Ure and Blake Hutchins. The managers invest in stable, predictable and cash-generative businesses that can hold up well through all market cycles, while avoiding those that rely on high levels of capital investment and debt.
The team at FE Investments said: “It should protect well in down markets but will unlikely be an outperformer when equities rally. That said, given Troy’s roots in wealth management, where preservation of clients’ capital is prioritised, the fund should outperform over the long term and deliver stable real returns with lower volatility.
“Long-term income growth has been evident in consistently growing dividend distributions, despite the 2020 setbacks.”
Blake Hutchins will become the sole manager of the fund by the end of 2021 as Francis Brooke and Hugo Ure step back. Data from FE Analytics shows Trojan Income has made 117.6% over the past decade.
|Name||Sector||Fund Size (m)||Fund Manager||Yield (%)||OCF|
|LF Gresham House UK Multi Cap Income||IA UK Equity Income||125.9||Ken Wotton, Brendan Gulston||3.41||0.86|
|LF Montanaro UK Income||IA UK Equity Income||46.5||Charles Montanaro, Guido Dacie-Lombardo||1.97||0.8|
|RWC Enhanced Income||IA UK Equity Income||97.7||John Teahan, Ian Lance, Nick Purves||4.6||1.15|
|Trojan Income||IA UK Equity Income||2737.6||Francis Brooke, Hugo Ure, Blake Hutchins||2.42||1.01|