The surge in investor focus on generative artificial intelligence (AI) has led to one of the most powerful rallies in technology stocks in recent memory.

In our view, generative AI has the potential to be a game changer not only in our everyday lives but also in the growth profiles of the infrastructure supporting it. We are currently seeing strong pricing power for data centre owners, accelerating load growth for public utilities, and increased demand for renewable developers and low-carbon portfolios to provide clean energy to support data centre assets.

This generative AI-related growth comes in addition to infrastructure’s broader secular underpinnings, which include the demands for global decarbonisation, energy security and modernised assets.

Infrastructure’s irreplaceable role in AI

Current data centre capacity, ramping power/cooling needs and access to power for new-build data centre assets are bottlenecks to generative AI-related growth. Today, high occupancies of data centres are already spurring pricing power and margin improvements for existing essential assets in those listed companies.

For example, vacancy rates are at a decade-low across North American markets, while 2023 data centre leasing activity is likely to have doubled 2022 levels and finish eight times above what was recorded in 2019.

Power use at existing facilities is also on the rise, as it is estimated that generative AI requires 20-100 times more power compared to data centre usage prior. For example, a generative AI purpose-built data centre requires a minimum of 250MW of capacity, compared to a historical data centre capacity size of circa 10MW.

While power use is increasing, transmission grids are unprepared and new investment is required to support generation connections. Generative AI-related demand in the power grid is expected to grow at a 30% compound annual growth rate (CAGR) over the next five years, with some estimates coming in as high as 70%.

In response to this phenomenon, major listed utilities are multiplying their forecasts for electricity demand growth. Industry-wide, current levels of anticipated power growth for the next five years double expectations as of 2022 and are more than 9 times the long-run average.

Increased load growth represents a paradigm shift for US utilities, with the potential to enhance earnings, increase required investment and further improve long-term earnings visibility.

In addition, the draw for low-carbon generation from generative AI and its data centres is immense; it is spurred by data centre developers prioritising green power to minimise carbon footprints in the face of unprecedented growth.

In fact, renewable power purchase agreements (PPAs) from Amazon, Google, Meta and Microsoft have ramped up by 6 times compared with 2018 levels, and the development backlog for leading listed renewable energy developers is currently dominated by data centre-related projects. By 2025, generative AI-led PPAs could reach levels equal to half of the current market.

Secular growth at a discount

Given the secular growth potential of infrastructure, valuations remain at a discount today. We expect high single-digit earnings growth in the future from the asset class, with the potential for upside should current trends accelerate.

Following a historic lag to large-cap tech and broader equities last year, as well as recent underperformance to private equity infrastructure indices, infrastructure’s price for its growth is compelling.

On a 2025 price/earnings to growth ratio (PEG ratio) we see listed infrastructure potentially trading at a 1.5x multiple for 2025, compared to 2x for the ‘Magnificent 7’.

On a relative valuation basis, infrastructure is at a 10% discount to global equities, compared to its history of a 10% premium. When we further consider the private market and analyse notable large-scale privatisations over the past five years, we see listed infrastructure trading at a 30% discount to private equity acquisitions.

Jeremy Anagnos is portfolio manager of Nordea’s Global Listed Infrastructure strategy. The views expressed above should not be taken as investment advice.

Investing in emerging markets has always meant taking on more risk, whether it be from geopolitics, different economies or currencies.

That’s also true for India, where perceived geopolitical risks include the outcome of the ongoing elections, its relationship with Russia and environmental, sustainability and governance (ESG) issues.

At the same time investors also need to think about currency, according to Gaurav Narain, manager of the India Capital Growth trust, who said they must be willing to take an average hit of 2% to 3% every year before they can break even.

The Indian Rupee has been volatile in recent years. Over 12 months it is 4% lower against the pound while over five years this rises to 17%.

Against the dollar the figures are comparable. Over one year the Rupee is just 0.7% weaker, but this climbs to 16.4% over five years and 29% over 10 years. And this depreciation might not be reversing any time soon, although it should slow down.

Rupee versus US dollar over the past 5 years

Source: FE Analytics

“Historically, the currency has depreciated between 3% to 3.5% on average every year over the past five, 10 and15 years against the dollar”, Narain said. “But my own sense is that now it will be slightly less, around 2% to 3%.”

There are three main reasons why the manager is expecting a lower depreciation trend going forward.

Firstly, the export of services is now worth $340bn and also growing at a much faster pace than before. Secondly, India is getting a lot of forex reserves in the form of remittances, last year that amounted to about $110bn. And thirdly, India is attracting a lot of foreign direct investment, almost $60-$70bn a year.

“In particular, the result of the forex reserves are very strong and provides a lot of cushion on the currency. In volatile times, the Reserve Bank of India has a lot of flexibility, so you shouldn’t see the big swings that have historically happened,” explained the manager.

“The currency has been remarkably stable against the dollar and the country is in a much better position. But if you're investing in India you must account for that 2%-3% hit.”

The other risk that has been very present on investors’ minds recently is the election, with results to be announced next week. The current prime minister Narendra Modi is expected to maintain his majority, which is good news for investors, as he is “very good for the market”, according to Narain.

“He is doing all the right things for the economy. He’s thinking long term, trying to eliminate corruption and is very strong on execution, so he's genuinely good for the economy,” he said.

On top of that, has been doing an “incredible balancing act” on the international arena, remaining friendly with the Western world while still purchasing oil from Russia.

“India is among the top-three oil purchasers in the world, mainly from the Middle East and the US, but also Russia. Imagine what would happen to oil prices if the country stopped buying from Russia,” Narain said.

While Modi is the favourite candidate, election results are hard to predict. If he loses his majority, the market will “definitely correct”, said Narain, at least in the short term, because of the uncertainty.

“But then it all boils down to what the new government does on policies,” he said. “India is a democracy and has policy continuity, you don't see someone come in and change policies completely. Which is why India over the last two decades has grown at 10% in nominal GDP in dollar terms.”

Another potential issue for investors is that the market is trading on particularly high multiples, given the substantial growth that’s recognised and already priced in by the market.

The average IA India fund has grown by 9.5% so far this year and the country has delivered strong returns for much of the past decade.

Performance of indices over the past 12 months and 10 years

Source: FE Analytics

The India Capital Growth fund has been tops amongst its IT India/Indian Subcontinent peers over the past 10 years. It mainly focuses on mid- and small-caps, which make up 38% and 50% of the portfolio, respectively.

Some investors have shunned the defence sector, considering it to be incompatible with their environmental, social and governance (ESG) principles. Yet it has been brought back to the fore following the outbreak of the war in Ukraine and conflict in the Middle East.

Purely from a stock market perspective, investors who ignored defence stocks have incurred a significant opportunity cost, as the sector has performed exceptionally well over the past three years, especially in Europe.

Performance of indices over 3 years

Source: FE Analytics  

After such a strong show of force, the question for investors now is whether defence stocks will continue to push forward.   

Graeme Bencke, co-manager of Amati Global Innovation, believes defence stocks have the potential to go higher from here, but said the initial wave is already behind us.

“Many of these companies traded on quite low valuations in the past as defence spending had stagnated, but multiples have expanded with the increase in demand as geopolitical tensions have increased,” he explained.

“This re-rating process drove the sharp rise in share prices, and price development from here will be more reliant on revenue and earnings growth.”

David Coombs, head of multi-asset at Rathbones, agreed and sees some additional tailwinds which could drive long-term returns in the years ahead.

He said: “The doctrine and needs of militaries are changing rapidly because of technological advances and the new fronts they open up. New threats require new solutions, and while large defence contractors are mostly known for the big machines they have produced in the past, a much more meaningful part of their business is now focused on cybersecurity and digital warfare.

“A kicker to this need for military investment is the potential for Donald Trump to win a second term as US President and the war in Ukraine, which both seem likely to push European members of NATO to spend more on defence.”

Alec Cutler, manager of Orbis Global Balanced, went a step further, as he believes that whoever wins the US election this autumn, the US protection guarantee is gone, which means Europe will need to ramp up its defence spending anyway.

How are managers playing the defence theme?

Defence is a broad industry made of a wide range of distinct segments. Therefore, Bencke stressed the importance of focusing on areas where spending is most likely to grow over the coming decades.

He said: “While military spending is somewhat opaque, most governments produce defence strategy-related papers outlining the direction of travel for investment.

“Outside of specific large programmes, like the US 30-year submarine fleet renewal or the 'Future Long Range Assault Aircraft' replacing the Blackhawk helicopter, there are some clear areas of attention. Most of these make intuitive sense when we think about the potential threats. Better anti-aircraft and missile defences, counter-drone weapons, improved battlefield communication and control, for example.

“However, some others are perhaps less obvious but also seeing considerable growth in funding. The nature of conflicts between powers has changed over the past decade with a much greater threat from cyber-espionage and cyber-attacks on military and civilian infrastructure. Improved intelligence gathering and secure communications means increased spending on space-based initiatives, although much of this is classified.”

As a result, Bencke holds MOOG – a provider of highly accurate electric actuators and bearing systems –  which he believes is poised to benefit from space, aircraft and missile-related spending.

He also pointed to Leonardo DRS, which should profit from mobile air defence spending through its M-SHORAD platform, as well as providing new electric propulsion systems for the navy.

Another stock Bencke highlighted is technology consultancy firm Booz Allen Hamilton, which is involved in cyber defence and also assists developments with US agencies such as the CIA and FBI.

Jacob de Tusch-Lec, co-manager of Artemis Global Income, finds European defence companies attractive in spite of their recent strong performance, as Europe still has plenty of catching up to do.

“Defence is like insurance. You don’t like paying it until you need to make a claim. Since 1992 and the collapse of the Soviet Union, the world has enjoyed a massive peace dividend and the benefits of globalisation. With that has come a huge under-investment in defence," he said.

“If you look at Europe today versus 30 years ago, we’ve got fewer than 4,500 tanks compared with nearly 19,000 then. You can’t build 15 thousand tanks in a few weeks. We’ve also got half the ground attack aircraft and submarines we once had. On top of this, a lot of materials have been sent to Ukraine.”

Therefore, de Tusch Lec is bullish on Düsseldorf-based Rheinmetall, which he expects will benefit from a big demand inflection that might last for a decade.

He added: “It’s currently sitting on an order backlog of €38bn, that is five times the size of what it sells in a year. Replenishing munitions inventory is not going to happen overnight.”

Closer to home, Cutler likes BAE Systems and Rolls Royce. The former is well-positioned in warships, has content in many of the leading weapon systems such as the US stealth fighter jet F-35 and has a large share of US research and development contracts.

As for Rolls Royce, he believes it should benefit from long-term contracts, such as the one to supply new engines for the US B-52 aircraft fleet, providing the UK company with non-cyclical cash flows.

He also mentioned some defence companies in Asia, such as Mitsubishi Heavy in Japan, Hanwha Aerospace in Korea and Hindustan Aeronautics in India, because tensions are also heating up in that part of the world.

Performance of stocks over 3yrs

Source: FE Analytics  

As for Coombs, he has long owned US-listed Lockheed Martin and French defence and aerospace company Thales to “mitigate the risks of a more stressed geopolitical age”.

 “Both Thales and Lockheed Martin have a comprehensive suite of cyber capabilities, supported by elements of artificial intelligence, machine learning and automation to deal with the complexities of today’s deployments,” he said.

“These technologies also have civil uses, beyond the military ones that drive their creation. For example, Lockheed Martin is using its artificial intelligence capabilities and hardware to support firefighters dealing with wildfires by connecting land, air and space-based sensor and monitoring, which help predict and mitigate the spread of wildfires.”

Are defence stocks compatible with ESG?

The rapid increase in geopolitical tensions and the ensuing need for higher military spending have sparked debate on whether defence stocks are compatible with ESG principles.

For Bencke, while warfare is “abhorrent and anachronistic”, it nevertheless remains a reality.

“Sadly, the words of the Roman general Vegetius are as true today as when uttered over 1600 years ago – ‘if you want peace, prepare for war’,” he said.

“We would not endorse or invest in weapons or practices which breach modern conventions on warfare, but sadly the industry remains important for the defence of our democratic way of life.”

De Tusch-Lec agreed, adding that the legacy of the war in Ukraine is that individual countries need to revisit their priorities.

He said: “Nations are having to think about those areas at the bottom of Maslow’s pyramid of needs – the essentials in life like food, water and security. From that perspective, defence stocks are compatible with ESG and as investors we obviously avoid those companies which have links to cluster bombs or land mines.”

However, Coombs does not believe defence stocks are compatible with ESG and Rathbones does not hold them in their sustainable multi-asset funds, in which ESG is more linked to values rather than financial risk.

Finally, Cutler believes that peace is an imperative starting point to implement ESG ideals, but that defence is a necessary evil to create those conditions.

He concluded: "Peace through strength is at the base level of a society's hierarchy of needs. Peace is a have-to-have, without which higher order desires relative to the environment, society and governance will never achieve sustained traction.”

BlackRock has announced the launch of a new global smaller companies strategy, offering UK investors the opportunity to “capitalise on the high alpha potential within the smaller companies universe”.

Co-managed by Matt Betts and Dan Whitestone from the BlackRock’s emerging companies team, the fund follows a fundamentals-driven approach and invests in companies with defensible market positions, competitive products and structural growth drivers. It is benchmarked against the MSCI World Small Cap index.

According to the press release, active management is “key” for small-cap funds, particularly as dispersion of returns can be high in this under-researched universe.

Whitestone said: “As active managers, we believe small-cap stocks can present us with the most attractive hunting ground as these companies tend to operate in an inefficient, under-researched area of the market and can offer the potential to generate returns for our clients over the long term.”

Another advantage of smaller companies are their cheap valuations, Betts said, with small-caps now trading at the all-time-high discount to large-caps of approximately 26%; additionally, they are expected to provide sustainable returns in the long term too.

“Alongside the attractive valuation opportunity right now, we believe that small-cap funds can provide excellent long-term investment due to their historic outperformance compared to large-caps,” Betts said.

Finally, the investment team said interest rates coming down in 2024 will “act as a potential catalyst for investors to reappraise the valuation opportunity in both absolute and relative terms”.

The Magnificent Seven have dominated headlines, so it may come as a surprise that a handful of British companies have delivered returns close to, or even exceeding several of the American tech behemoths over the past 18 months, whilst trading on far lower multiples.

Rolls-Royce has returned 385% over 18 months, beating six of the Magnificent Seven (Nvidia being the exception) and outperforming Meta Platforms’ 317% rise in sterling terms.

Marks & Spencer, 3i Group and Intermediate Capital Group all exceeded Amazon, whose shares rose 95% in sterling terms over 18 months.

Associated British Foods and BAE Systems performed in line with Alphabet, while Antofagasta wasn’t far behind Microsoft.

Dan Coatsworth, investment analyst at AJ Bell, said: “Some 41 FTSE 100 stocks have delivered a better return over the past year and a half than Apple and 79 have beaten Tesla. That is proof that the UK market is alive and well and that strong returns are not restricted to the go-go-growth segment of the US stock market.”

Returns for well-known US and UK stocks over the past 18 months

Sources: AJ Bell and SharePad, data for 18 months to 23 May 2024, total returns in sterling

Imran Sattar, portfolio manager of the Edinburgh Investment Trust, agreed. “There is a perception that the UK market is essentially made up of low growth and lower quality businesses; we strongly disagree. It is possible to build a well-diversified portfolio of advantaged UK businesses with high returns and good growth prospects at a discounted valuation.”

Below, Trustnet explores why the UK’s strongest performing companies have done so well, highlighting the stocks that have beaten five of the Magnificent Seven over the past 18 months.

Rolls Royce

Rolls Royce is a turnaround story and its new chief executive Tufan Erginbilgic, who joined on 1 January 2023, deserves much of the credit for cutting costs and maximising profits.

Rolls Royce has also benefitted from the post-pandemic recovery in air traffic, said Stephen Anness, head of global equities at Invesco. “The resumption of international travel, as well as the management turnaround story beginning to take shape, meant it produced a total shareholder return of 221.6% for 2023, matching Nvidia.”

Coatsworth added: “The engineer continued to issue bullish trading updates and that fired up the share price.”

Marks & Spencer

M&S has beaten expectations multiple times in the past year, Coatsworth said. Earlier this month, the retailer announced strong full-year results, with a 33.8% increase in adjusted operating profit and a 9.4% increase in total sales. It also introduced a 3p dividend.

James Henderson, co-manager of the Henderson Opportunities Trust, Lowland Investment Company and Law Debenture, was an early convert. “We began adding to M&S early in its recovery, which has helped our funds as the bears have turned slowly bullish. Marks’ recent results were very good – much better than the best estimates by analysts,” he said.

M&S has generated strong cash flow, which has enabled it to reduce debt and start paying a dividend again, but now the retailer is embarking on the “next stage of the story”, he continued.

“It is now spending half a billion pounds on improving the offer – upgrading its stores and investing in the online infrastructure. After a period of rationalisation and store closures, this is the next phase and is essential if M&S is to continue its growth,” said Henderson.

3i Group

Nick Shenton, co-manager of the Artemis Income fund, said 3i Group has been the best performing stock in his portfolio over the past year. The £28.5bn investment company produced a total return of 85.5% in 2023 and has been “a tremendous performer over the very long run”.

Anness attributed 3i’s rapid growth to its stake in Action, Europe’s fastest-growing non-food discount retailer, heralding it as “one of the brightest companies on the continent”.

“The cashflow generation of this underlying company has been incredible: the payback period for each newly-opened store is roughly one year. Action currently has more than 2,300 stores and plans to open 400 a year by 2026. We think it could have a 20-year runway for further expansion in Europe alone,” he said.

Intermediate Capital Group

Intermediate Capital Group (ICG), which manages private equity, private debt and real assets funds, has enjoyed a strong 18 months and is one of Jefferies’ “top picks”, said equity analyst Julian Roberts. “We view ICG as a quality compounder with plenty of long-term potential.”

ICG released its results yesterday for the year ended 31 March 2024, surprising on the upside. “We believe new guidance of $55bn of fundraising over the next four years is likely to be taken well, and $13bn of funds raised in the past 12 months compares with $12.4bn expected by analysts,” Roberts said. This included client commitments of almost $1.5bn across three first-time funds.

The firm announced an 11% increase in its fee-earning assets under management to $70bn and a 16% increase in third-party fee income to £578m, well ahead of consensus expectations of £540m.

Associated British Foods

Associated British Foods has performed strongly as inflation cooled, with share buybacks providing further support.

Primark’s owner benefited from its conglomerate structure, Coatsworth said. “Its interests across retail, agriculture, grocery and food ingredients means risks are spread across different industries. When one segment is not doing so well, other parts of its business are there to pick up the slack, and we’ve seen that dynamic at work in recent years.”

BAE Systems

The defence sector was thrust into the spotlight by Russia’s invasion of Ukraine. With geopolitical tensions on the rise, governments around the world have been increasing their defence spending, which has driven a rally in BAE Systems’ shares.

Defence projects tend to be highly complex, involving multiple companies in different countries, said Jason Hollands, managing director of Bestinvest. This means that BAE Systems benefits from global rather than just domestic military expenditure.

Defence order books are multi-year in nature and therefore relatively insensitive to the economic cycle, he continued, which “makes defence ‘defensive’ from an investment perspective”.

GQG Partners manages $140bn in global and regional equities and its flagship emerging markets fund is the best performer in its sector, yet the Florida-based firm is still relatively under the radar in the UK and Europe.

The $3bn GQG Partners Emerging Markets Equity fund is the top performing strategy in the IA Global Emerging Markets sector over one and five years and the sixth best performer over three years. It has left both its benchmark and sector in the dust since inception, as the chart below shows.

As such, its managers Rajiv Jain, Brian Kersmanc and Sudarshan Murthy have just won the FE fundinfo Alpha Manager of the Year award for Asia and emerging market equities. GQG’s global and US equity strategies were also nominated for awards.

Fund versus benchmark and sector since inception

Source: FE Analytics

One of the reasons for its stellar track record is GQG’s ability to spot risks, avoid the downside and, essentially, win by losing less. Here, GQG has a secret weapon: journalists, accountants and former private equity professionals.

The global equity manager has built a team of people with experience atypical of buyside analysts and charged them with identifying risks and patterns, and helping the firm to avoid groupthink. Their research dovetails with another team of more traditional stock-picking analysts.

Financial journalists were writing articles about issues in the US subprime mortgage market as early as 2006, which triggered GQG founder Jain’s interest in working with reporters and non-Wall Street professionals.

Chulantha De Silva, a client portfolio manager at GQG and former investment banker, said: “Wall Street does have a lot of smarts but it does have a herd mentality.”

Jain had a team of former journalists at his previous employer Vontobel, but expanded this function at GQG, which he established in June 2016, to include accountants, private equity specialists, technologists and healthcare experts.

“We have multiple different eyes from different vantage points on the same franchise,” De Silva said. He thinks following conventional wisdom is a huge problem in fund management and to outperform, managers need an “outside advantage”.

Accountants are adept at tracking patterns and can provide insights into the quality of companies’ management teams by studying corporate accounts. “Accounting is the language of business,” he observed.

Professionals with a background in private equity, meanwhile, can analyse the capital structures of companies.

“Tech folks double up as disruption specialists. The catalyst for that tool was to make sure none of our companies got ‘Amazoned’ out,” De Silva continued. With the advent of generative artificial intelligence (AI), “every stock in every sector is at risk of disruption”.

All of these “non-traditional folks” assist GQG with wealth preservation by identifying major risks to companies in the portfolio, so GQG can sell them before their share price tanks. “Every manager does a great job of buying stocks. Where most people falter is knowing when to get out,” he explained.

Another element of the firm’s sell discipline is that analysts and portfolio managers are afforded the flexibility to change their minds and challenge their own investment thesis. “At most firms you are frowned upon for changing your mind. At GQG you are incentivised to change your view on a stock,” he said. “We’d rather be found out wrong in a conference room at GQG than by the market.”

Another unconventional hiring strategy was to deliberately introduce a younger cohort three years ago – not junior analysts per se but young people specifically.

The Florida-based firm had always prided itself on its diversity (half of its staff were born outside the US and 40% are women) but one key area in which it was not diverse was age. As a result, no-one in the firm was using certain apps that have a younger audience. “How do you manage risk when you are not in the disruptive ecosystem?” he asked.

The new wave of recruits proved themselves invaluable when GQG re-entered the energy sector in 2021, De Silva recalled. He and his contemporaries had a jaded perspective on energy having burned their fingers previously but their new junior colleagues were able to look at energy with a fresh mindset.

The same teams of analysts, which GQG calls its ‘research mosaic’, cover emerging and developed markets simultaneously. “I think we’re better investors in Apple because we know China. We’re better investors in Meta because we know India,” De Silva said, adding that in India, 750 million people use WhatsApp. “Put another way, how can you invest in Apple if you don’t know China?”

Every investor with a passing knowledge of equities is likely to have heard of the ‘small-cap effect’: over the medium to long term, the returns from owning smaller companies have far exceeded those derived from owning larger ones. This is because smaller companies have more ‘white space’ to expand into, benefit from economies of scale as they grow and tend to be run by management teams with more ‘skin in the game’ in terms of share ownership.

Data from Deutsche Numis shows that £1,000 invested in UK small-caps for a new-born in 1955 would have grown to £9m by the time he or she reached retirement, aged 67, in 2022 – assuming all dividends were reinvested. The same amount invested in UK large-caps would have grown to just £1m.

Yet ever since the UK voted to leave the European Union in June 2016, the small-cap effect seems to have ground to a halt.

Data from Bloomberg shows the renamed Deutsche Numis Smaller Companies (ex-investment companies) index made a total return of 47% between the date of the referendum result and the end of March 2024 – well below the 65% made by the FTSE All-Share.

As international investors have shunned the UK and multiples have fallen, there has been a waning appetite among smaller companies to list on the domestic market. With merger and acquisition (M&A) activity at heightened levels, analysis from Peel Hunt shows the number of FTSE Smallcap constituents fell from 160 at the end of 2018 to 114 at the end of 2023. If the decline continues at its current rate, the FTSE Smallcap index will cease to exist by 2028.

Even though it may appear as if the direction of travel for UK smaller companies is only going one way, we disagree.

Brexit’s impact on business fundamentals

It is true that Brexit has caused small-caps to de-rate. Investors started pulling money out of the UK equity market on the day of the referendum result and the direction of flows is yet to reverse.

However, it is perhaps worth asking who the marginal seller is from here? Domestic pension funds are now all but out of the UK market. Momentum investors would have sold out long ago. International investors that remain have already weathered the threat of Jeremy Corbyn and the debacle surrounding Liz Truss. One would imagine they are here to stay. 

What of fundamentals? It is difficult to find much evidence that Brexit has affected listed small-caps’ day-to-day operations. We have 300 to 500 meetings a year with company management teams and few mention it as an issue.

At the same time, the UK economy, to which small-caps have a higher exposure than their larger counterparts, is improving. Consumer confidence and the Asda Income Tracker have both been rising for several months now. Government debt levels are low relative to other G7 countries. And, for all the scepticism towards the UK, its Purchasing Managers Index is currently top of the developed economy league table.

Outperformance not dependent on a re-rating

You are probably sick of hearing the argument that UK small-caps are cheap. Yet even if there is no re-rating, the valuation differential should be enough for UK small-caps to outperform from here.  

Take two theoretical companies: both grow at 7% a year and pay out 50% of their income. Company A trades on a price to earnings ratio (P/E) of 15x and Company B trades on 10x. Over a 10-year period, without a re-rating of Company B, it will make 17 percentage points more than Company A. Why? Because the benefit of reinvesting dividends at a lower valuation compounds over time.

In addition, many UK small-caps are turning depressed valuations to their advantage through the use of share buybacks. Eleven of our portfolio holdings bought back their own shares in 2023, with six more already announcing plans to do so this year.

When companies buy back shares, it increases potential dividends and earnings per share (EPS) for remaining investors. The lower the valuation, the greater the impact.

As an example, we recently spoke to Simon Emeny, the chief executive of pub operator Fuller’s, who pointed out that the company would have to spend twice as much buying a new pub as it would by buying back its own shares (effectively buying its own pubs at a discount).

And, as mentioned, small-caps remain the target of heightened M&A activity: 28 of our fund’s holdings have been taken over since 2019, at an average premium of 50%.

To Peel Hunt’s point about the FTSE Smallcap index eventually ceasing to exist: while it now only numbers 114 companies, there are more than 1,000 to choose from in the Deutsche Numis Smaller Companies index, including those quoted on the AIM market.

We believe a combination of low starting valuations, the growing use of buybacks and continued M&A activity should be enough to drive outperformance in the coming years. But if we are right, another factor is likely to come into play.

The point of maximum pessimism

The steady de-rating of the UK small-cap sector is like a piece of elastic that has become more and more stretched the further away it gets from the historical average. When small-caps start to outperform, investors that have reallocated to other areas will be harmed by their underweight and will likely re-evaluate their exposure. At this point, greed will come back into the market and the elastic that has been stretched over the past eight years will suddenly snap back.

It has happened before. The Numis Smaller Companies (ex ICs) index made 73% across 2003 and 2004, and 107% across 2009 and 2010. These two-year periods followed the bursting of the dotcom bubble and the end of the global financial crisis – periods when the point of maximum pessimism had been reached. Are we close to the point of maximum pessimism right now?

Mark Niznik is co-manager of the Artemis UK Smaller Companies fund. The views expressed above should not be taken as investment advice.

The Association of Investment Companies (AIC) is to reduce the number of venture capital trust (VCT) sectors from eight to just two following a sector view.

The trade body will divide VCTs into two sectors: VCT and the already existing VCT AIM Quoted.The changes will apply from 31 May 2024.

The VCT sector will contain 50 constituents, while VCT AIM Quoted will retain its current seven members. 

Richard Stone, chief executive of the AIC, said: “We regularly review our sectors to ensure they are as clear and useful as possible for investors.

“The newly streamlined VCT sectors do away with distinctions that had become less relevant over time, and will make it easier for investors to find and research VCTs.”

The VCT industry has combined total assets of £6.2bn.

The managers of Capital Gearing Trust have expressed concerns about the outlook for US equities, noting that they have rarely been so expensive.

The cyclically adjusted price-to-earnings ratio for the US equity market currently stands at 34x, which is close to the 38x valuation seen during the ‘everything bubble’ of 2021.

In the investment company’s latest annual report and financial statements for the year ended March 31, 2024, Peter Spiller, Alastair Laing and Chris Clothier warned against justifying these high prices with the outperformance of US earnings, both compared to the rest of the world and their own historical performance, as they believe that ‘American exceptionalism’ is only part of the explanation for this outperformance.

They said: “More significant in recent years has been the contribution from collapsing interest expenses and corporation tax rates. Having termed out their debt, it may be some years before interest expenses rise meaningfully, but it seems unlikely they can fall.

“With the US running ever larger fiscal deficits, we would not expect corporation tax to continue to fall. But with the possibility of a Trump presidency, nothing should be ruled out. In any event, it seems that this large tailwind to earnings will become a headwind.”

The managers of the investment company are also wary of the shrinking of the market breadth, as returns are increasingly concentrated in the ‘Magnificent Seven’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla).

Those seven stocks, viewed as beneficiaries of the artificial intelligence revolution, are currently trading at particularly high valuations. This has led several experts to believe that the only direction for these tech shares is downward.

Spiller, Laing and Clothier used Microsoft as an example to illustrate their concern. The US tech behemoth, which trades on a free cash flow yield of 1.7%, would need to grow its free cashflow between 8-10% per annum in perpetuity to deliver acceptable returns from its starting valuation, they said.

While their stance on US equities is bearish, the managers are bullish on investment trusts thanks to the wide discount across the market.

They said: “Discounts on investment trusts are the widest they have been since the global financial crisis. Furthermore, these discounts are broad based and include the larger, more liquid high quality trusts.

“In response we have added to our investment trust holdings, partly financed by sales of ETFs and partly from cash. We are optimistic that these holdings will provide better returns than broader equity markets.”

In addition to US equities, Spiller, Laing and Clothier are also bearish on the outlook for nominal bonds, as they believe the world will stay in a structurally more inflationary environment and are worried about the fiscal situation in developed countries.

They said: “The average budget deficit across the G8 is forecast to be 4.6% in 2025, so the supply of bonds will increase while central banks continue to reduce their balance sheets.

“Added to which there is no imminent sign of recession, nor any discernible term premium in longer dated bonds.”

Their outlook for index-linked bonds is more nuanced. Although the sustainable growth rate of the US economy has significantly increased, suggesting that US real yields above 2% across the length of the Treasury curve are close to fair value, they consider the fiscal position to be poor and set to deteriorate.

They said: “Real interest rates at these levels will not be sustainable if there is no prospect of bringing fiscal deficits under control.  Left unchecked, financial repression – characterised by negative real interest rates – will be necessary.

“What is less certain is the path. Index-linked bonds trade in sympathy with nominal bonds. If nominal bonds are weak, as seems plausible, index-linked will most likely suffer with them. Yet the long-term prospects look fair or, should financial repression be enacted, excellent.”

Performance of the trust over 1 year (to 31 March 2024)

Source: FE Analytics

Although the trust’s net asset value and total return appreciated over one year, they were both outpaced by the rise in the UK Consumer Price Index. As a result, Jean Matterson, chairman of Capital Gearing Trust, assessed the performance as “far from satisfactory”.

Although the trust paid an additional special dividend to shareholders in the previous year, Matterson highlighted that the company intends to continue to pay a single annual dividend in July of each year.

The company is proposing a dividend of 78p per share payable on 5 July 2024 to shareholders on the share register as at 6 June 2024, subject to approval at the investment company’s annual general meeting.

At the year end, the share price discount to net asset value per share reached 2.4%.

Prime minister Rishi Sunak has proposed an upgrade to the pensions system, changing the current ‘triple lock’ to a ‘quadruple lock’ or ‘triple-lock plus’, which would increase the personal allowance for those over the state pension age by either average earnings growth, inflation or 2.5% (whichever is higher).

This proposal would increase the amount people can earn before they pay tax but would not apply to those under the age of 65, potentially creating a tax gap between older and younger people.

Currently, the state pension is £221.20 per week or £11,502.40 per year, leaving around £1,000 of the personal allowance spare for other incomes.

Kirsty Anderson, retirement specialist at Quilter, said the present situation will “no doubt see a considerable number of pensioners who have additional retirement income dragged into paying tax”.

Indeed, the most recent set of figures from HMRC showed there were 6.7 million taxpayers of state pension age for the 2021/22 tax year, a rise of 4.3% compared to the year before, she noted.

“With this in mind both parties must act and while the Conservatives are dressing up their action as ‘triple-lock plus’, if Labour plans to maintain the triple lock they too will need to raise the personal allowance,” said Anderson.

The current system means the state pension already rises in line with the higher of inflation, the average wage growth or by 2.5%. In April it was upped by some 8.5%. The latest addition would mean pensioners can keep more of their earnings tax free.

Tom Selby, director of public policy at AJ Bell, said the policy was a “fairly naked grab for pensioner votes” by the Conservative party, which remains far behind Labour in the polls.

But he warned the policy would “drive a wedge between generations via the tax system”, adding that it was “hard to think of a good reason to increase the personal allowance for pensioners alone” other than “election tactics”.

Data from AJ Bell suggested the move would polarise the population. In a survey of 2,000 people, two-thirds of those aged 65 or older were less likely to vote for a party that proposed ditching the triple lock.

This flips for younger voters. Some 37% of those aged between 18 and 35 were more likely to vote for a party that proposed scrapping the triple lock.

“Older voters continue to hold the keys to Downing Street, so we should perhaps not be surprised that Sunak has moved to super-charge the triple-lock to win them over. However, there is a serious generational divide when it comes to the policy, with older people attracted to the pledge and younger voters much less keen,” said Selby.

“This likely reflects the vested interests of both cohorts, with those in receipt of the state pension keen to keep bolstering their incomes, while younger people are perhaps fearful of the impact hiking the state pension today could have on their future state pension entitlement or other areas of public spending.”

Anderson also noted the growing divide the policy could create. She highlighted frozen thresholds as causing an “ever-bigger tax burden” for people and said the latest proposal “further increases intergenerational inequality”.

One solution could be to link pensions more closely to average earnings, which would “create a more predictable and sustainable pension system”, she said.

“This approach would mitigate the financial unpredictability associated with the triple lock, creating an easier way to effectively budget and ensure that pension increases do not disproportionately benefit one demographic at the expense of another.

“However, the truth is, given older generations vote in much larger numbers than their younger peers it would be too politically damaging for either party to take a more long-term view of the triple lock.”

Investors’ flirtation with money market funds has started to abate as looming interest rate cuts prompt a look towards riskier assets, analysis of Trustnet fund research trends suggests.

With millions of pageviews a year, the research trends of the Trustnet audience can offer useful insights into what both professional and retail investors are interested in as well as an indicator of shifts in sentiment.

A look at the 10 most read fund factsheets on Trustnet over the past 90 days shows there continues to be plenty of interest in familiar names – Fundsmith Equity, Vanguard’s LifeStrategy range, Baillie Gifford Managed and Rathbone Global Opportunities consistently attract the most views.

Source: Trustnet

However, a more interesting exercise is to examine the changes in funds’ popularity over time. To do this, we have compared each fund’s share of pageviews over the past 90 days with a baseline of the preceding 12 months to determine which are garnering more or less interest among investors.

The fund with the biggest fall in research activity between the two periods is Royal London Short Term Money Market, which has the 25th most-viewed factsheet for the past 90 days – down from 16th place over the preceding 12 months.

This 16th place ranking was in itself a bit of anomaly as investors had largely ignored money market funds when interest rates were at record lows and only became interested in them when central banks started to hike rates.

More recently, investors have started to price in rate cuts from the world’s central banks – with the Bank of England among those expected to move first – which would reduce the appeal of cash while boosting the attractiveness of bonds and some parts of the stock market.

Source: Trustnet

Other signs that investors are looking further up the risk scale include a fall in research into more cautious strategies, such as Trojan, Vanguard LifeStrategy 20% Equity and Liontrust Sustainable Future Defensive Managed.

Meanwhile, investors seem to have been spending less time researching some of their favourite funds – such as Fundsmith Equity, Baillie Gifford Managed, Vanguard LifeStrategy 60% Equity and Baillie Gifford American – suggesting they are looking to other parts of the market.

This is backed up by examining the funds that have benefitted from the largest increase in Trustnet pageviews over the past 90 days.

At the top of the table is the £1.5bn Jupiter India fund, which has become the fifth most popular fund on Trustnet; over the previous 12 months, it held 15th place. This came as the Indian stock market surged to new highs, thanks to a business-friendly reforms and a robust economy.

The fund, which is managed by Avinash Vazirani, has been the IA India/Indian Subcontinent sector’s best performer over the past 12 months with a 58.8% total return (its average peer is up 29.7% while the MSCI India index gained 32.8%).

However, this is not the only Indian equity that has been getting researched more with Liontrust India, Ashoka WhiteOak India Opportunities, FSSA Indian Subcontinent All-Cap, Franklin FTSE India UCITS ETF, Nomura India Equity and Franklin India being among those attracting more interest (none to the extent of Jupiter India, however).

Source: Trustnet

A similar trend has been noticed over at interactive investor, with the platform reporting a 21-fold increase in trading volumes (by value) into India-centric funds, investment trusts and exchange traded funds over the past year.

Alex Watts, fund analyst at interactive investor, said: “India has cemented its status as one of the largest and fastest growing economies in the world, bolstered by a suite of business-friendly reforms enacted by president Narendra Modi from an investment standpoint.

“The re-election of president Modi, something the market believes is a forgone conclusion, could serve to strengthen the nation’s long-term investment story. His victory would mark one of the longest periods of political stability since the nation’s independence and his election pledges, including growing India’s GDP to $5trn (from $3.7trn) by 2027 and making further investment in infrastructure, bodes well from an investment standpoint.”

However, Watts noted that the strong recent returns of the Indian stock market mean some valuations are looking expensive. The 12-month price-earnings ratio for MSCI India are above the 10-year average and by far exceed valuations of other emerging market regions, he said.

A few other trends are apparent from the above table.

Global equities remain in favour. While investors might have been researching the likes of Fundsmith Equity and Lindsell Train Global Equity less, they have been looking more at the Trustnet factsheets of Fidelity Index World, GQG Partners Global Equity and Royal London Global Equity Diversified than they were.

The appearance of Artemis Income, Artemis Global Income, Royal London Global Equity Income, Aviva Investors Global Equity Income, Artemis Monthly Distribution, Man GLG Income and Fidelity Sustainable Global Equity Income shows investors continue to research income, as they seek ways to make their money work harder.

Meanwhile, value funds continue to attract more interest as evidenced by the rising pageviews of Man GLG Income, Ninety One UK Special Situations and Artemis UK Select.

Finally, BlackRock Gold & General and Jupiter Gold And Silver reflects high precious metal prices while Janus Henderson Global Technology Leaders and L&G Global Technology Index Trust show tech stocks remain attractive.

The main reason why investors choose active over passive funds is the hope of making more money than by investing in a simpler, cheaper index fund. This is particularly pertinent for thematic funds, where unfortunately, only a handful of active funds consistently beat their benchmarks.

In this series, we are looking at the funds with the highest (and lowest) average outperformance against their benchmarks to establish which packed more punch for investors.

We took each fund’s one-year rolling alpha every month for the past five years, accounting for 61 year-long rolling periods, and found the average. This time, we take a look at thematic funds, where the highest scores were in the IA Technology & Technology Innovation sector.

The only fund with an alpha score higher than 4 was Pictet Robotics, which achieved a 4.3 score against the MSCI All Country World index since 2018.

This $10.2bn strategy focuses on companies that contribute to, or profit from, developments in robotics and enabling technologies. The portfolio mainly includes stocks in the automation (52.4%), technology enabling (33.8%) and services (12.7%) sectors.

The largest holding is Alphabet (7.9%), followed by Salesforce (6.3%) and Taiwan Semiconductors (5.8%).

Source: Trustnet

The Fidelity Global Technology fund had the second-highest score of 3.76%. It is managed by FE fundinfo Alpha Manger Hyunho Sohn, whose bottom-up approach is designed to select companies either with growth prospects (focused on innovations or with disruptive technology), cyclical momentum (found in sub-sectors and typically with strong market positions) or special situations (mispriced businesses with recovery potential).

The funds’ top-10 holdings include industry favourites such as Taiwan Semiconductors, Microsoft, Apple and Alphabet, but also Texas Instruments, Swedish telecom Ericsson and US software company Autodesk.

Unfortunately, a sector as rewarding as technology can be, can also represent a challenge for active investors who are looking to make money beyond the established routes. In fact, every other fund in the peer group had a negative average alpha, meaning active decisions penalised returns.

Paying the highest price for trying to break away from the herd were T. Rowe Price Global Technology Equity (average alpha: -8), Liontrust Global Technology (-2.9) and AXA Framlington Global Technology (-2.2).

Next up is IA Financials and Financial Innovation, where the rewards weren’t as large but the pitfalls also not as deep.

The best alpha scorer here was the £2.2bn Polar Capital Global Insurance, with 3.

Managed by Dominic Evans and Nick Martin, this fund was highlighted by Square Mile analysts for its “sensible” strategy in a sub sector of markets that is not widely covered.

“Martin has built a deep pool of company knowledge and is well informed as to the intricacies of investing in these markets. We believe he should be able to achieve his objectives over the long term, but there will be times where he may struggle to meet these, such as during falling markets when stocks are sold off indiscriminately and irrespective of company fundamentals,” they said.

“Nonetheless, we like the clear performance objective on the fund to deliver investors an annualised 10% total return over the long term and pleasingly the fund's management team has, on an annualised basis, been able to consistently deliver returns in line with this.”

Source: Trustnet

Jupiter stands out for occupying two positions in the table with Jupiter Financial Opportunities and Jupiter Global Financial Innovation, both managed by Guy de Blonay, scoring well.

The manager screens for companies to best play out themes identified at the macro level, as explained by Rayner Spencer Mills Research analysts.

“By having a mix of companies with different opportunity sets and being flexible in his adherence to the benchmark, the manager seeks to maintain a portfolio that can perform across the full market cycle,” they said.

“This is quite a specialist mandate and therefore likely to appeal to only a limited investor base, however the manager has developed a clearly defined process and proved he can run the fund successfully through changing economic environments.”

On the negative side of alpha were AXA Framlington Fintech (-5.8), Guinness Global Money Managers (-3.7) and Polar Capital Financial Opportunities (-0.5).

Finally, there were more risks than rewards in the IA Healthcare sector, where only two funds achieved a positive average alpha, barely staying above the MSCI ACWI/Health Care index.

AB International Health Care Portfolio scored 1.4 by investing in companies that are expected to attract healthcare spending, generally through the introduction of new treatments and therapies or by offering customers cost reduction opportunities.

Its main holdings are pharmaceutical companies Eli Lilly (8.6%), Novo Nordisk (8.3%), Merck & Co (6.3%), GSK (4.7%) and Roche Holding (4.66).

Source: Trustnet

Just above zero was Fidelity Sustainable Health Care. Manager Alex Gold invests in companies that are set to benefit from long-term health care trends such the ageing of the population and increased health care needs – the average alpha was 0.1.

The worst alpha in the sector were those of Invesco Global Health Care Innovation, Wellington Global Health Care Equity and Polar Capital Healthcare Opportunities.

This was the final instalment in a series that previously covered: UK Equity Income, UK All Companies, Global, Global Equity Income, Sterling bonds, smaller companies, global bonds, cautious funds, balanced and adventurous funds, European funds, Asia funds, emerging markets.

US equities have been a shoot-the-lights-out growth market for the past 18 months or so, but for investors seeking diversification away from passive trackers’ heavy weightings to mega-cap technology names, value funds that focus on cheaper stocks in different sectors are a viable alternative.

Rosanna Burcheri, manager of the £633m Fidelity American Special Situations fund, has built a portfolio with a high active share that looks markedly different to the S&P 500. Her largest holdings are Alphabet, Wells Fargo, FedEx, Elevance Health and Salesforce, and her highest conviction position is Disney.

She believes that the US equity market offers a huge pool of opportunities, with many stocks delivering a return on invested cash flow above 25% (including Aon, Lowe’s and McKesson) and earnings per share growth for 2024-25 above 25% (such as Intel and Baker Hughes).

“The message is that there is life beyond the Magnificent Seven and there is an amazing amount of companies you can invest in,” she said.

Burcheri won the 2023 FE fundinfo Alpha Manager of the Year award for US equities, which was based on performance in 2022 – a year of rapidly rising interest rates that penalised growth stocks and played more to her fund’s strengths. She was nominated for the award again this year, having delivered strong risk-adjusted returns throughout her career.

Performance of fund vs sector over 3yrs

Source: FE Analytics

Below, Burcheri tells Trustnet about her investment process, her best and worst-performing holdings and why she has such high conviction in Disney.

What is your investment process?

The Fidelity American Special Situations fund is an unconstrained, concentrated US value strategy with a high active share, where the fund’s sector exposures are purely a result of a bottom-up investment process.

As co-portfolio managers, Ashish Bhardwaj and I invest in great companies that are mispriced, either because they are out of favour or their intrinsic asset value is misunderstood. Bottom-up stock picking is the core of our approach and is the main driver of risk and return, alongside our value-biased investment style.

We aim to identify quality businesses supported by long-term tailwinds that will make them stronger and more successful in the future.

We place a strong emphasis on asset-backed valuations and margin of safety and look for businesses trading below their intrinsic value or close to it. We also mitigate downside risk by avoiding dying industries.

Why should investors pick your fund?

It is a core value strategy providing exposure to the US market. American exceptionalism, supported by a strong industrial policy, deep capital markets and an innovative economy, creates an attractive stock picking pool. 

As a core value strategy with a mid-cap bias and high active share, the fund is differentiated from today’s more growth-biased US equity indices. An allocation to the Fidelity American Special Situations fund alongside an exchange-traded fund should enable investors to gain optimal exposure to the US market.

What’s your highest conviction stock pick?

The Walt Disney Company has an unrivalled catalogue of intellectual property (Disney characters, Pixar, Avatar, etc.) which drives the media business as well as parks, resorts and consumer products.

It is delivering on a media business model change to improve the long-term outcome for shareholders.  

Disney’s experiences segment is a highly valuable tangible asset that has grown to more than $25bn of revenue annually and represents over 55% of the company’s enterprise value. The business is guiding towards a long runway to grow the size and scope of the parks business over time. 

Disney also has intangible assets with franchise intellectual property in the form of Disney characters, Pixar characters and Marvel characters. In 2019 the company launched Disney+ to bring its storytelling around these characters directly to consumers for the first time.

The company’s direct to consumer business (DTC) has been in investment mode for the past five years and is a long-term area of growth in the entertainment industry. In its most recent quarterly results, Disney reported profitability in the DTC business for the first time, driven by cost controls and revenue growth. 

Performance of Disney shares over 1yr

Source: Google Finance

What was your best call over the past year?

The fund’s 1% position in Constellation Energy (0.9 percentage points overweight relative to the S&P 500 Index) was a strong contributor to relative performance. Over the year to 31 March 2024, Constellation Energy returned 136.5%.

The company produces carbon-free energy via nuclear, hydro, wind and solar energy solutions. Within its nuclear power generation business, the implementation of US Nuclear Production Tax Credits (PTC) via the Inflation Reduction Act (in place until 2032) provides a floor to power sales prices, supporting future revenue generation. 

In addition to this, the business is well positioned to sign large contracts with hyper-scalers building artificial intelligence data centres, to provide low carbon energy. 

Performance of Constellation Energy shares over 1yr

Source: Google Finance

Which stock has been your worst investment recently?

The fund’s 2.9% off-benchmark position in Cheniere Energy detracted from relative performance. In the 12 months to 31 March 2024, Cheniere returned 2.3%. 

The company is a liquified natural gas (LNG) business, owning and operating LNG terminals and pipelines. Its revenue generation comes from fixed-term export contracts over 20 years, with 95% of the business covered by these contracts. As a result, the business has a high-quality, repeatable revenue stream today, and expansion projects at its LNG terminals will deliver revenue growth in the future. 

The energy sector was weak during the year to 31 March, alongside energy commodity prices. Despite 95% of Cheniere’s revenue being covered by fixed-term contracts and not at risk of energy prices, performance returns were broadly aligned with the rest of the energy sector. 

The value of Cheniere’s 20-year contracts ending 2028 are $203 per share. As at end March 2024 its share price was $112.3, providing a strong margin of safety.

What do you enjoy doing outside of fund management?

I enjoy spending time with my family and I head to the ski slopes when I can.

So we’re heading back to the polls. This week Rishi Sunak announced there would be a general election, surprising some with the timing.

The under-pressure prime minister was expected by some to hold out for as long as possible in an effort to overturn the Conservative party’s flailing public image.

But inflation figures have come down markedly and are near the Bank of England’s target rate, GDP is growing (albeit mildly) and the economy appears in reasonable shape.

This may have given Sunak the confidence to press ahead with an election in which he will undoubtedly lean on his economic and financial achievements.

Myron Jobson, senior personal finance analyst at interactive investor said: “A general election could bring huge changes in economic policies, taxation and public spending that can reshape not only the nation’s economic landscape but also personal finances.”

For starters, a change in government could spell the end for a short-lived Great British ISA, which has many critics and may fall by the wayside under Labour – the bookies favourite to win in July.

The biggest topic in the financial sphere will be pensions. The ‘pot for life’ initiative outlined in the latest spring Budget would require an employer to contribute to a pension arrangement chosen by the employee, rather than one selected by the employer. Yet the scheme is in its infancy.

Alice Guy, head of pensions & savings at ii, said:  “The new pensions minister has a big opportunity here to excite people about their pensions, by allowing more choice about where to invest their workplace pension.”

Perhaps the most impactful difference of opinion will be the lifetime allowance. Recently scrapped by chancellor Jeremy Hunt, Labour has said it wants it reinstated.

That’s before looking at the state pension, where the triple lock remains a contentious issue. While both Labour and the Conservatives are supportive of it, the current system puts the onus on the younger generation to shoulder the cost and it will remain under review by both parties, whichever should win in July.

From a stock market perspective there is likely to be little impact. Most are pricing in a Labour win – a prospect far less impactful than a few years ago when there were real concerns about a left-wing government under Jeremy Corbyn. Keir Starmer is viewed more market-friendly.

Perhaps the biggest spanner in the political works would be a surprise Conservative victory. While this seems unlikely, this too could have minimal impact on markets as it would be viewed as a continuation of the status quo – something that investors have generally responded well to.

Of course, with more than 100 current Conservative MPs not standing at these elections, there may be a new-look government even if the incumbent party does win.

However, the thing markets hate above all is uncertainty. With an election called earlier than expected, this should remove this worry fairly quickly, even if there may be more volatility in the weeks before the event.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said a decisive victory by one side or the other will “tend to bring more settled markets than a close-run thing” but noted that, as always, “it’s worth taking a long-term view”.

Jobson agreed: “As is often the case, the ‘keep calm and carry on’ maxim is worth remembering here. Investors should avoid a knee-jerk reaction based on what could happen and concentrate on their long-term goals.”

For what it’s worth, so do I.

Aviva Investors has appointed Fraser Lundie as global head of fixed income. He was previously head of fixed income, public markets at Federated Hermes, where he served as the firm’s head of credit.

At Aviva Investors, he will be responsible for the global rates, investment grade, high yield, emerging market debt and global liquidity teams.

Lundie and his team managed around £5bn in credit strategies for Federated Hermes across pooled funds and segregated accounts. Lundie was the lead or co-manager for the firm’s multi-strategy credit, global high-yield credit, absolute return credit and unconstrained credit funds, the latter of which has £1bn in assets under management.

During the 14 years he spent at Federated Hermes, Lundie developed a strong focus on sustainable investing and he designed and launched sustainable credit strategies, including the $1.2bn Federated Hermes SDG Engagement High Yield Credit fund.

Lundie said: “I am incredibly proud and excited to be joining a firm with such a rich history and culture of embracing innovation, technology and sustainability.  The opportunity to contribute to Aviva Investors’ efforts in building a best-in-class fixed income franchise for our clients is something I relish being a part of.”

He will report to chief investment officer Daniel McHugh, who said: “Fraser has a very deep wealth of experience across all asset classes within the fixed income universe and a deep understanding of delivering sustainable solutions.”

At Federated Hermes, Mitch Reznick, global head of sustainable fixed income, has stepped up to become group head of fixed income. He joined the firm at the same time as Lundie in 2010 and they were joint heads of credit from 2012 until 2019, when Reznick took the lead on sustainability. Lundie then became the sole head of credit until his promotion in 2022 to lead the fixed income team.

Federated Hermes is not making any further changes to the portfolio management teams running its bond funds.

Stephen Bird is stepping down as the chief executive of abrdn after a four-year stint trying to revive the fortunes of the struggling asset management house.

A stock exchange statement from abrdn said Bird and the board “have together agreed that it is the right time for Stephen to hand over the reins”. Under Bird, the company has undergone a “significant strategic repositioning” although one of the most notable changes was the rebranding from Standard Life Aberdeen to abrdn.

However, he also restructured underperforming parts of the group – such as its private equity arm and joint venture with Virgin Money – and expanded its wealth management business and bought interactive investor, the UK’s second-largest retail platform.

Bird said: “I am immensely proud of the work we have done together to simplify abrdn and position the company for sustainable growth.

“Together with a refreshed leadership team and an incredibly committed group of colleagues at all levels, we have refocused our global Investments business as a specialist asset manager, working to address its cost base and build mutually beneficial linkages with our wealth businesses.”

Chief financial officer Jason Windsor has been appointed interim chief executive while the board searches for a permanent successor. Windsor joined abrdn in October, having previously been chief financial officer of UK housebuilder Persimmon.

Bird will work alongside Windsor until 30 June in order to ensure a smooth handover.

Douglas Flint, chairman of abrdn, said: “Stephen took time to assemble the talent needed to execute successfully on his strategic vision and he passes on to them, with confidence, the responsibility to execute the next stage of our transformation. We owe him a great debt of gratitude and wish him well in the next phase of his career.”

Investing during retirement is a different kettle of fish to picking funds for a growing pot of assets. Avoiding capital losses – especially in the early days when your pensions pot is largest – becomes more important than generating high returns.

Retired investors usually want a consistent income and downside protection. People’s risk appetite and financial resilience varies, but generally speaking, retired investors have a lower tolerance for risk than younger investors who are accumulating wealth.

As Rob Morgan, chief investment analyst at Charles Stanley, explained: “Managing a portfolio for income in retirement is a lot trickier than the ‘accumulation’ phase. Volatility becomes an enemy rather than a friend, and care must be taken not to drain a pot too quickly and leave the retiree short of income later.”

Lower tolerance for risk often translates into a higher fixed-income allocation but Dan Coatsworth, investment analyst at AJ Bell, argued that there is merit to keeping some equity exposure for capital growth and dividend income, particularly as people are living for longer.

Low risk multi-asset income and capital preservation funds can potentially provide the best of both worlds and as Morgan said, they “take much of the heavy lifting away from the investor in terms of asset allocation and investment selection”.

Trustnet asked fund selectors to suggest a range of multi-asset strategies that are suitable for retirees.

Troy Trojan and Personal Assets

Hal Cook, senior investment analyst at Hargreaves Lansdown, highlighted Troy Trojan and as one option for retirees to consider.

“Troy Trojan is a good choice for the more risk averse. While the income from this fund is limited, the conservative nature of the way the fund invests definitely has its merits for retirees who have limited capacity for loss,” Cook explained.

“The fund has a simple philosophy, looking to provide long-term growth and some income while limiting losses during weaker markets.”

Troy Trojan has outpaced inflation since launch in May 2001 and has been managed by FE fundinfo Alpha Manager Sebastian Lyon since inception and deputy manager Charlotte Yonge since 2013.

Performance of fund vs sector and benchmark over 20yrs

Source: FE Analytics

Morgan – like Cook – rates Troy Asset Management’s Lyon but prefers his Personal Assets Trust, which focuses on preserving capital.

“Lyon builds his portfolio using three ‘pillars’: solid global companies with strong cash flows, index-linked gilts and gold. He is also willing to hold a large amount of cash if he is cautious and wishes to guard against market volatility,” Morgan said.

“Performance can seem quite pedestrian when equity markets are strong, but the trust has historically fared relatively well in weak markets. It therefore might be worth considering as a defensive holding within the core of a portfolio.”

Royal London Sustainable Managed Growth

The Royal London Sustainable Managed Growth Trust, which sits in the top-quartile of the IA Mixed Investment 0-35% Shares sector, might also appeal to cautious investors, said Coatsworth.

“The fund invests mainly in sterling-denominated bonds with some equity exposure on the side, accounting for about one quarter of the portfolio. It has an ethical and sustainable investment tilt,” he said.

Performance of fund vs sector over 10yrs

Source: FE Analytics

It has been the best fund in its sector over 10 years, making more than double (58.5%) the average peer (27.2%), as well as over the past 12 months, while it is in second place over five years.

Waverton Multi-Asset Income

Alex Farlow, associate director, multi-asset research at Square Mile Investment Consulting and Research, chose Waverton Multi-Asset Income.

The fund is managed by James Mee and Matthew Parkinson, who have three goals: to grow capital in-line with or ahead of inflation, pay a consistent level of income and limit capital drawdown in falling markets. 

“It is a directly invested strategy, meaning that it is competitively priced relative to its peers and it has an impressive track record,” Farlow said.

The asset allocation is flexible, but tends to be roughly 50% equity, 20% bonds and 25% alternatives, with the remainder held in cash. “This cash weighting is used to protect capital when the managers’ outlook for markets is bearish,” he explained.

Performance of fund vs sector over 5yrs

Source: FE Analytics

It has been the fourth best fund in the 147-strong IA Mixed Investment 20-60% Shares sector over five years, making 35% – more than double the average return (17%) and since its launch in 2014, it is comfortably ahead of the sector and inflation.

Other options

Morgan also highlighted Ninety One Diversified Income, which he said “tries to balance returns with controlling volatility and offers the potential to capture market upside but cap the downside in times of stress, all while producing a decent income.” It currently yields 4.7%.

Farlow meanwhile suggested Ciaran Mallon’s Invesco Distribution, which has a neutral weighting of 60% to global bonds and 40% to equities, as well as Premier Miton Multi-Asset Distribution, which invests more widely across equities, bonds, property, alternatives and cash.

On the latter, he cautioned that “the team's investment approach and the fund’s income focus can mean that the portfolio is exposed to less liquid areas of the market and investments that can fall more sharply than the market when deeply distressed”.

For retired investors with a higher risk appetite or for those approaching retirement who are still looking for some investment growth, Cook proposed BNY Mellon Multi-Asset Balanced, which is predominantly invested in equities.

Baillie Gifford Sustainable Income is also an option for those looking to invest their money in a fund with an environmental, social and governance (ESG) framework.

As UK value managers, Man Group’s Henry Dixon and Jack Barrat have been pursuing an out of favour investment style in an unpopular region for the best part of a decade and yet they have managed to hold their own. As Barrat said: “We sometimes think of ourselves as the last value investors left standing.”

With the Man GLG Undervalued Assets fund, Barrat and Dixon have developed an investment process that works in today’s market conditions and is a far cry from traditional value investing.

“We've tried to build a process that we think is value for 2024, not value for 1980 – which was buying low price-to-book or low price-to-earnings (P/E) or buying things that were falling. That’s not what we do,” Barrat said.

“We hope that our process, through analysis of proper tangible assets, sensible cash generation and the real value you're paying for a company – the all-in enterprise value – attempts to circumnavigate a lot of the pitfalls of historical value investing. We try to be a modern value fund and I think that’s how we’ve managed to stay alive.”

It hasn’t been easy. Barrat said that he and Dixon designed their investment process during “an era where value hasn't worked”.

For instance, Man GLG Undervalued Assets’ portfolio has a tangible asset value three times greater than the wider market. “There was a moment when rates were zero that felt like we just weren't getting rewarded, because an extension of zero rates was that you could replicate anything you wanted, virtually for free,” Barrat recalled.

When central banks started hiking interest rates in 2022, “a slight compensation” was that higher rates focused attention on asset value.

Amidst that environment, Man GLG Undervalued Assets was one of the few funds to make a positive return in 2022, up 2.9%. The FTSE All Share was flat for 2022 but the average fund in the IA UK All Companies sector lost 9.1% that year.

Last year, Man GLG Undervalued Assets more than doubled its benchmark’s return, up 16.2% versus 7.9% for the FTSE All Share and 7.4% for the IA UK All Companies sector.

In recognition of their track record, Barrat and Dixon have won the FE fundinfo Alpha Manager of the Year award for UK equities, for the second year running.

Performance of fund vs sector and benchmark over 10yrs

Source: FE Analytics

A breakdown of the investment process

Barrat and Dixon analyse three key things: core tangible assets, the enterprise value of a business and one-year forward cash generation.

They calculate a ‘conservative baseline’ tangible book value – in other words, what it would cost to replicate the business and its assets.

Then they assess what returns a business is making from its assets and compare that to the enterprise value, i.e. the multiple of book value that investors are being asked to pay for those returns. 

Third, they check the business is generating cash flow. “Not only is there a record amount of adjustment to earnings in the UK market right now, the conversion of those earnings to cash flow is, in places, very poor. Indeed, there are businesses out there that may appear ostensibly cheap, but we believe they produce almost no cash at all,” Barrat pointed out.

Having put stocks through their three tests, Barrat and Dixon invest in two types of company, which they classify as ‘undervalued assets’ and ‘undervalued returns’.

‘Undervalued assets’ are companies trading below their tangible book value, in other words the share price is less than the replacement cost for the company’s assets.

“These are businesses that are typically in quite a distressed period of their own capital cycle. The market is almost explicitly calling into question the value of their assets. Ryanair at the height of the Covid pandemic was trading below the value of its planes, right on its balance sheet, because people thought they were never going to fly again,” Barrat explained.

“Now brick manufacturers in the UK are trading below the value of their factories, let alone the value of the clay in the ground. House builders have had a very difficult two years given the rise in interest rates and that has a knock-on effect on brick deliveries.”

An example of this is Whitbread, in which Man GLG Undervalued Assets invested in late 2022 and sold out at the end of 2023. Dixon said he bought the stock at a share price of £25 but the cost of replicating its assets was £34 per share; a target that the share price reached in December 2023.

Performance of Whitbread shares vs FTSE All Share in 2023

Source: FE Analytics

Whitbread has a hotel footprint of 85,000 rooms and Dixon said it would cost just over £100,000 per room to build a hotel. The replacement cost was 40% higher than the share price 18 months or so ago.

There were concerns about the cost of labour and utility bills, and worries about Covid variants and the possibility of further lockdowns. However, Whitbread was well positioned to take market share.

Whitbread did a rights issue after Covid so it had very little debt and was well financed. Its share price has recovered as travel trends have normalised.

“That's a poster child of a well-financed company with a competitive landscape getting easier,” Dixon concluded.

The second type of company, ‘undervalued returns’, generate a return on their assets that is not being appreciated by the wider market. The return stream is undervalued and the market is calling into question whether those returns are sustainable.

“Take a business that is trading on two times its tangible asset base, but we think it is generating say three or four times its return on capital employed,” Barrat explained.

Barrat and Dixon only invest in these businesses if they are delivering positive operating momentum, such as earnings upgrades, beating expectations and things getting better.

Earlier this year, the fund exited from CRH, a US and global aggregates business that performed strongly last year with its shares up 60%. Of that, 20 percentage points came from operational delivery and 40 percentage points represented the value disconnect from being listed in the UK then moving to the US.

Barrat said: “We believed, coming out of Covid, that this business could make a significant multiple of its cost of capital on its tangible asset base and that [its prospects] would be much, much better in an inflationary environment. CRH was trading at two times its tangible asset base and it was our contention that it could make three or four times the cost of capital.”

Consensus expectations were gloomy due to negative headwinds for the construction industry. However, aggregates businesses typically operate in a concentrated local market because infrastructure operators want to work with local suppliers. That gives them pricing power. CRH bid up its prices north of 30% cumulatively over two and a half years which fed into earnings.