As the global bond sell-off continues, AJ Bell’s Laith Khalaf questions how much protection bonds can give investors in their current state.
The global bond sell-off could have further to run as investors continue to prepare for the post-pandemic future, warns AJ Bell’s Laith Khalaf, so now is the time to question what role fixed income is playing in portfolios.
Recent days have seen investors dump bonds, as eyes turn towards stronger economic growth as the world recovers from the coronavirus crisis. The moves in government bonds have been especially prominent in the US, where the 10-year Treasury yield has exceeded 1.5 per cent for the first time in a year.
In the UK, the 10-year gilt yield has more than tripled from 0.2 per cent to 0.75 per cent since 2021 began, putting it above pre-pandemic levels.
Khalaf, financial analyst at AJ Bell, said: “Bond investors have had a pretty rocky start to 2021 and if the global vaccine roll-out prompts a sharp economic recovery, price falls clocked up this year could be just the beginning.
“Yields have fallen to such record low levels that the bond market is like a coiled spring, ready to twitch into action at the first sign of inflation or interest rate rises.”
Indeed, bond prices across the board have been falling and all the major bond sectors have suffered from significant losses so far in 2021.
Bond sector performance year-to-date
Source: FE Analytics
Khalaf said lot of this move could be investors anticipating stronger economic growth and the risk of inflation down the line as vaccines are rolled out globally.
“Vaccines are literally a lifesaver, but for the bond market they spell trouble,” he said. “A recovering economy means central banks don’t have to offer as much stimulus and at some point this year they might even start gently whispering about when to withdraw QE [quantitative easing] or raise rates.
“Given how much the bond market has been propped up by central bank activity, kicking away this crutch will inevitably lead to a fall in prices. Markets will look to pre-empt central bankers and that’s probably why we’re seeing yields rising now.”
Khalaf said one issue is that investors will be less likely to buy bonds because they anticipate prices will fall, making the yield pickup in the future more than what can be bought today.
Institutions such as pension funds and insurance companies with regulatory or legal obligations may still buy these bonds, but they often hedge the risk to the downside.
“But there is one area where savers themselves are heavily exposed to bond market falls, just as they are about to retire,” Khalaf said.
“Many old company pension plans use a process called lifestyling, which automatically shifts pension savers out of equities and into bonds just as they are about to retire.
“This strategy has worked a treat as loose monetary policy has led to rocketing bond prices, but if that trend goes into reverse, pension savers will see big falls in their retirement pots, just as they are about to draw on them.”
He pointed out that so far in 2021, the average lifestyle fund has fallen by 8 per cent in under two months.
“For many savers, the decision to default their money into these funds was made by someone else, a long time ago,” Khalaf added. “Few probably appreciate the risks that have been assumed on their behalf.”
He said the moves being seen in the government bond market are “a reminder of the price falls that bond investors might face when the QE music stops, and the low yields currently on offer don’t offer a great deal of compensation for that risk”.
Despite the sell-off bond markets are seeing, Khalaf believes the asset class still offers diversification in the event the re-opening of global economies fails to meet expectations.
He said investors should consider one of the three potential reasons why they have an allocation to bonds – but keep in mind that there may be alternatives to pure fixed income funds.
The first reason he outlined is diversification. “Bonds still offer diversification from equities and if risk appetite wanes, bonds funds can be expected to do well when equities fall,” he explained.
“This still holds true today, though with bond prices already so high the upside is much more limited than the downside.
“The benefit of holding both bonds and equities together is these assets minimise portfolio volatility, though this may come at the cost of longer-term returns.”
He said: “These funds won’t shoot the lights out when risk appetite is high, but they are run by managers with experience in making allocation calls between shares, bonds, and other assets like gold, and who run their funds pretty conservatively.”
The second reason investors may want bonds is for the income. “The income produced by a bond portfolio has fallen in line with loose monetary policy and has already pushed many income seekers out of the bond space,” Khalaf explained.
For long-term income investors who aren’t phased by market volatility, he highlighted the £1.5bn City of London investment trust which currently yields 5.25 per cent.
“The investment trust structure means manager Job Curtis can hold back some of the portfolio’s dividends in good years to pay out in fallow years, providing a smoother income stream for investors,” he said.
“Those who prefer to hunt for income in the bond world might consider higher yield bond funds like Baillie Gifford High Yield Bond fund, but these come with added equity-like risk.”
The third reason investors may want bonds is for some market protection. “Some investors choose bonds because they have low volatility and are generally considered safe,” Khalaf said.
“However, one has to question whether a high allocation to bonds right now is actually an accident waiting to happen; pension lifestyle fund investors fall into this bracket.
“For those who are thinking about buying an annuity with their pension, a lifestyling approach using bonds still hedges their bets on annuity rates, so might not need to be tinkered with.
“For those who are looking to just draw their pension as cash, gradually switching into cash rather than bonds might be a better idea.”
For investors who plan to continue to add to their pension and receive income, Khalaf said investors could consider switching to a portfolio of income funds such as City of London Investment Trust, Evenlode Global Income or Man GLG UK Income
“A mix and match approach to cash, annuities and investment income requires a combination of strategies,” he finished.
Church House’s Fred Mahon explains why is looking past the UK’s recent value rally to continue investing in high-quality businesses.
“Quality is the best business plan”- John Lasseter, Pixar
The market rally in the wake of the Covid-19 vaccines announcement was led by more cyclical businesses and, quite frankly, a number of companies that we consider to be low quality.
In the excitement of this ‘rotation into value’, many higher quality companies – and ones that we happen to favour (and have been reliable performers over many years) – were left behind.
Regardless, the best place to be in this current, coronavirus-dominated environment is in companies with high quality characteristics and benefitting from structural growth, regardless of their market capitalisation.
We define companies with high quality as those with high barriers to entry, strong cash flows and recurring revenue generation. These main characteristics set the quality companies apart from their value and momentum-screened peers.
These ‘best-in-class’ characteristics have performed strongly over the past decade, where the value in their IP, brands and core specialisms have driven earnings over the long-term but have also offered protection during periods of significant market volatility.
One such company is Halma, which we had a rare opportunity to add to on price weakness in late-2020. Halma has been a top 10 position in our portfolio for many years and we are more than happy to have topped-up our investment.
Another long-term holding that has had a challenging year is Shaftesbury, the owner of West End ‘villages’, including Chinatown, Carnaby Street and Seven Dials. Why? Their prime London assets are unique and irreplaceable. The business raised just shy of £300m to pay off its revolving credit facility in 2020, leaving it well capitalised to continue in its operations as the heart and soul of West End London’s nightlife.
It is remarkable how much emphasis is placed on short-term results by investors and (especially) market commentators and we believe we are nearing a period in which the short-term headlines for most businesses are going to look a whole lot better moving deeper into 2021. In our opinion, businesses like Trainline, Greggs, Beazley and Shaftesbury are far too good to be depressed for long.
London pub company, Young & Co. is another that falls into this category. Sales are predicted to have fallen a whopping 57 per cent in 2020, comfortably their worst year ever for sales decline. There is, of course, no timeline set out as to when we might return to some normality as yet, but even if in 2021 they returned to two thirds of their 2019 level, it would represent around 84% growth in 2021 alone. Broker consensus actually places this a lot higher at over 130 per cent - maybe optimistically for some, but when bars and restaurants do open, I can hardly envisage a quiet, orderly, trickle of serene customers ambling through the doors of their local, once vaccinated.
‘Short-termists’ should beware in the current environment. Quality, as Aristotle once succinctly put it, ‘is not an act, it’s a habit’ and many quality businesses will quickly return to previous levels of trading once we are on the downward slopes of the pandemic. When that comes, we expect to see some exceptional results and a more supportive backdrop for markets more widely.
Whilst many international stocks have performed strongly post the March 2020-lows, their UK competitors and peers have lagged. In some sectors, UK-listed names are now starting to gather momentum and catch up, but we believe that there is scope for plenty more recovery in UK equities. We are optimistic for UK equities in 2021 and are confident that quality UK companies will shine over the long term. As the old adage goes: the cream always rises to the top.
Fred Mahon is co-manager of the SVS Church House UK Equity Growth fund. The views expressed above are his own and should not be taken as investment advice.
The Majedie International Equity fund is run by an ex-Baillie Gifford manager Tom Record with a unique approach to investing in global equities.
A unique approach to investing combined with a business model similar to that of industry giant Baillie Gifford has helped the recently launched $33m Majedie International Equity fund towards the top of the competitive IA Global sector.
Performance of fund versus sector & benchmark since launch
Source: FE Analytics
Since launch, Majedie International Equity has returned 45.54 per cent versus 17.54 per cent from the average peer in the IA Global sector and 9.64 per cent from the MSCI ACWI ex USA benchmark. This puts it in the top decile of its peer group.
Manager Tom Record argued that one reason behind the fund’s initial success was the structure at Majedie Asset Management. Much like Baillie Gifford’s partnership structure, Majedie’s business is built around being owned by employees and partners at the firm.
“We're all focused on getting the long-term best results for our clients which I think is really important in fund management, and quite rare,” Record said.
“There's been too much risk-managed asset management that is managed to the risk of fund managers, rather than to think about the risks of the clients. The risk to the fund managers is to underperform the benchmark, whereas actually the risk to the clients is that over the long term you don't make the returns that you need for your pension.”
In addition to having a stake in Majedie, Record said most of his pension is invested in the firm’s global strategies.
Indeed, the firm’s flagship unconstrained $149m Majedie Global Equity fund - where Record is also a co-manager - has an impressive track record.
It has delivered a 152.56 per cent total return since it launched in 2014 versus 104.29 per cent from the average IA Global peer and 116.19 per cent from the MSCI ACWI benchmark.
Performance of fund versus sector & benchmark
Source: FE Analytics
The smaller $33m Majedie International Equity fund was born out of the flagship fund in 2019 to allow investors to get more exposure to the unconstrained element of the strategy, which Record believes has quite a different and unknown approach to the rest of the industry.
“When I think about investing, I think about change,” he said. “Now change creates uncertainty, and uncertainty is usually something that investors run away from. I'm quite the opposite.
“I think uncertainty - if you back your ability to do really good analysis - is a great opportunity. If everything is certain, there's very little value add for your analysis to bring in.
“If there are variables that you can analyse that you believe you have an edge on, that's when you can add value through holding your investment.”
This idea of investing in change over the long run is a core tenet of the way Record invests.
“I think it’s a very different way of thinking about investing,” he said. “If you do back yourself, then you want uncertainty. If you think you're rubbish at analysis, then you don't want any uncertainty.
“We back ourselves – and that's why I have my pension invested in the funds.”
Much of the change that occurs across industries is inevitable, in Record’s opinion. When Majedie International Equity bought into South Korean battery manufacturer Samsung SDI several years ago, the team believed it was the best way to get exposure to this inevitable change.
Record said: “We've been saying that the EVs are a much better solution than combustion engine cars and we've been thinking this for years.”
“For us, it was a question of identifying the potential for a huge market to come out, and where a business like Samsung has a track record of being willing to invest and to keep on investing until it becomes the dominant or an industry leader in technology.
“We've seen that in the DRAM memory chip industry where they continue to invest, invest, invest. When everyone else was cutting back their investments in R&D during downturns, Samsung carried on and they now have over 50 per cent market share and are a generation technology ahead of everyone else in DRAM and have superior margins.”
Record at the time believed that Samsung’s approach to business could be applied at the battery side as well and become very valuable.
Since then, Samsung SDI is now one of the world’s leading energy battery technology manufactures in the world, boasting the likes of Volkswagen, BMW and Fiat as some of its customers.
Share price performance of Samsung SDI over 5 yrs
Source: Google Finance
One other thing Majedie International Equity does differently to most its global peers is take a large relative underweight position to the US equity market.
When investors are considering a global fund to diversify their equity exposure, Record said most who consider an MSCI World index tracker fund aren’t getting a truly global exposure.
“The MSCI world is almost two-thirds US and over 20 per cent of that US exposure is in six companies,” he said. “You're not diversifying your exposure, you are basically buying a US fund in disguise, with a little bit tacked on the edge.”
“We felt that if you want a truly diverse exposure, then limiting the US exposure was a really good way of doing that.”
The fund has a specific mandate where it is not allowed more than 10 per cent of assets invested into US equities.
“We have quite a lot in terms of geographical diversity and we have quite a lot in emerging markets as well,” Record added.
Before he joined Majedie’s global equity team, Record previously managed various emerging markets funds at Baillie Gifford.
Whilst many global managers take a long-term approach to global equities, Record said it is less common in emerging markets (EM): “Some of these businesses aren't necessarily EM-exposed things like TSMC and Samsung in terms of end-demand, but the analysis that's often done on them is by people who are very short-term minded.
“Which is a great opportunity for someone like myself to use that to bring an extra way of making money to the fund.”
He also said the managers are more careful and cautious about identifying which risks he is exposing the fund to than a typical manager.
“When we think about risk, we always think about opportunity and we want to take risks that are thought out understood and where the opportunity more than offsets those risks,” he said.
“With that, we think you have the potential to outperform over pretty much most market conditions, and that's what we've been able to do over the last six and a half years.”
He believes the fund provides exceptional value for investors especially given its 40 per cent exposure to emerging markets and noted the fees of some passive emerging market exchange-traded funds (ETFs) that charge up to 0.5 per cent.
The ongoing charges figure (OCF) for the Majedie International Equity strategy is currently 0.25 per cent.
Nomura Japan High Conviction’s Shintaro Harada explains the long-term themes and stocks his fund is exposed to and how the new prime minister is faring.
With a positive outlook on Japan’s Covid-19 recovery, FE fundinfo Alpha Manager Shintaro Harada said he is focusing on five key themes for the long term in his Nomura Japan High Conviction fund.
The £695m Nomura Japan High Conviction fund was the best performing IA Japan fund last year, making a total return of 42.80 per cent.
Performance of fund vs sector and benchmark during 2020
Source: FE Analytics
The fund has a benchmark agnostic approach, focusing on a concentrated portfolio of Japanese equities that Harada believes have strong, sustainable characteristics and can sustain a high return on equity.
Harada (pictured) explained that Nomura Japan High Conviction is focused on five themes that had been expedited by the pandemic, but he thinks will continue to provide opportunities over the long term.
These themes are factory automation, digitalisation, energy saving technology, ageing population and consumption growth in Asia.
The manager said several of the stocks within these five trends had proved to be “consistent winners in the coronavirus era”.
Harada highlighted Keyence Corporation as a play on first theme of factory automation .
The company specialises in developing products and facilities used in factory assembly lines, such as automation sensors, vision systems, barcode readers and laser markers.
With social distancing measures looking to remain enforced in the workplace indefinitely, this will drive the demand for higher levels of automation providing solutions to this, Harada said.
“The pandemic has given impetus for greater automation in many industries, as a post-lockdown world may require a reduction of human contact,” he added.
Energy saving technology
Within the energy saving technology trend, Harada highlighted Daikin, the Nomura Japan High Conviction fund’s biggest holding.
Daikin is a global company that develops air conditioners and air ventilation products. The air ventilation side of the business is the part Harada focused on more and thinks that this will become especially important in a post-pandemic world.
As more people work from home and a greater awareness of disease control is normalised, Harada said the air quality in indoors spaces will take on renewed importance.
He said: “Daikin has identified opportunities in providing antibacterial ventilation equipment for pharmaceutical production facilities and hospitals, air-conditioners that can automatically clean and disinfect, as well as expanding their sales of air purifiers.”
Another play on the energy saving technology theme is Nidec, which manufacture electric motors.
Harada explained that the demand for more energy efficient motor options looks set to continue in tandem with the heightened demand for more robotics, energy-efficient appliances, data centres and electric vehicles beyond the pandemic.
Consumption growth in Asia
Investing in the consumption growth in Asia theme, Harada holds Fast Retailing, which owns global brands such as Uniqlo.
Harada said Fast Retailing focuses on Asian markets in particular, which was beneficial during the pandemic as Covid-19 cases were more subdued there than other parts of the world.
“Fast Retailing appears to be better positioned compared to its global peers. While revenues declined in the first half of 2020, a recovery kicked in driven by a robust recovery in China and Japan. Uniqlo has shown resilience in the pandemic as workers choose to wear practical, affordable and comfortable casual wear that are suitable for working from home,” he said.
Harada’s final stock pick is within the digitalisation theme.
M3 Inc is a medical web portal that has five main elements to the business, one of which is marketing for pharmaceutical companies. This allows medical firms to communicate with healthcare professionals virtually instead of face-to-face meetings.
Looking back at when Japan was in the midst of the Covid-19 pandemic, its experience was markedly different to other parts of the world, with notably lower cases and deaths while avoiding a full-scale lockdown.
Harada explained that despite the densely populated cities and ageing population, Japan’s ‘hybrid’ system of public and private healthcare managed to contain the virus. He said a lot of this was due to the general public’s willingness to follow stay at home and social distancing orders.
Harada said: “Many Japanese companies have shown their resilience in the face of the pandemic, staging a recovery with determination to maintain operations as safely as possible amid the pandemic.”
He added that when it comes to the recovery “Japan has the added advantage of its close proximity to China and other Asian countries where Covid-19 cases have been relatively subdued. These economies are also enjoying the earliest recoveries from the pandemic induced slowdown, which is also supportive for Japan.”
Discussing his outlook for Japan, Harada expects a return to some level of normalisation but added “the path to economic recovery is beset with uncertainty.”
“The recovery of China, Japan’s largest trading partner, highlights the advantages of global manufacturers that can rely on exports for growth,” he added.
“Since taking the helm, [Yoshihide] Suga’s government has pledged to cut greenhouse gas emissions to net zero by 2050, vowing to transform Japan's policy on coal-fired power generation, and boost innovation in renewable energy.”
Yoshihide Suga succeeded longstanding prime minister Shinzo Abe last year. Since coming into office Suga has already pledged significant economic stimulus worth $700bn to support the Japanese recovery.
As Harada mentioned the stimulus looks to promote new green and digital technology within Japan.
Harada said: “Faced with difficulties in responding to the pandemic, prime minister Suga has seen his approval rating fall over the recent months. However, I do agree with his policies to tackle inefficiencies in Japan, as they are vital to the future of the economy.
“These include reforming the inefficiencies within the government, establishing a national digital agency to push for the digital transformation of SMEs, as well as promoting digital transformation and work style reforms to increase white-collar productivity.”
Over the past five years Nomura Japan High Conviction has outperformed both its IA Japan sector and the Topix benchmark, with a total return of 153.14 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The FE fundinfo Five Crown rated fund has an ongoing charges figure (OCF) of 0.83 per cent.
Chelsea Financial Services’ Darius McDermott argues that infrastructure could start be a more attractive addition to portfolios and highlights several funds in the space that he rates highly.
There’s always something comforting about investing in a structural trend that goes beyond any political rhetoric.
Take Asia, for example. The long-term trends are only going to go one way, as the population, and the middle-class within it, continues to grow, making it an attractive story for investors. The same is true for infrastructure - whether it is roads, airports, hospitals or schools, it is an essential element of modern society and the economy.
As a low beta, defensive asset class, the attractions of infrastructure investing are not new to retail investors. It also has a link to inflation – a big buzzword in markets at the moment – in that it has a number of regulatory, concession and contractual agreements that offer a degree of protection should it rise. Think of the likes of utilities, mobile towers and oil pipelines as examples.
But it is the income element which has stolen the show. In a world of low interest rates, this asset class has fed a lot of yield hungry investors. Performance has not been too shabby either. In the past 10 years the FTSE Global Core Infrastructure sector has returned 161.2 per cent (vs. 191.4 per cent for the MSCI World)* – that’s not bad at all for a low beta, defensive asset class. A closer look tells us infrastructure was actually outperforming global equities until the recent bounce back in markets in 2020.
However, I believe there are a number of elements which are starting to make infrastructure even more attractive, particularly on the back of Covid-19. For example, governments across the globe are not revisiting the austerity route they chose following the global financial crisis, preferring to spend their way out of trouble, offering jobs to stabilise their respective economies through infrastructure projects.
We are also seeing a widening of the asset class, particularly with the growth of green infrastructure and carbon neutrality – a trend even the Chinese have committed to. The election of Joe Biden in the US should also boost infrastructure spending, with areas like renewable power generation and electric vehicles in the utilities sector, particular targets.
Let’s take the UK as an example to cover both of those points. I recently read a note from Aviva managing director of infrastructure Darryl Murphy which highlights the focus on infrastructure investment as a key part of the economic recovery, such as prime minister Boris Johnson’s 10-point plan for a green industrial revolution. Events driving growth in 2021 in the UK include the launch of the National Infrastructure Bank (NIB); the start of the UK’s legally binding target of net zero carbon emissions by 2050; while the fibre-to-the home drive will also continue – particularly as the government has a target of 85 per cent gigabit-capable coverage across the UK by 2025.
The growth of green infrastructure has been a big driver in broadening the asset class out. Gone are the days when you could consider infrastructure investing as one entity – you now have to dig deeper in the respective sub-sectors. There are parts like toll roads and airports which have struggled courtesy of the pandemic, by contrast rail travel could benefit in the more immediate future.
ClearBridge portfolio manager Nick Langley points to governments looking to use the “new normal” brought about by the pandemic to change consumer behaviour when it comes to travel – he says Europe is incentivising rail over air travel, promoting 2021 as “the year of rail” - to reduce transport sector emissions. Don’t expect that idea to go away when Covid is finally put behind us.
Utilities is another area Langley is bullish on, citing the impact of the pandemic on this area as being negligible due to their “service nature, supportive regulation, importance in leading the decarbonisation of economies and their social importance as major employers”.
The final point I wanted to make is that all of these steps are being made not only to innovate but to renovate. In 2015, consultants McKinsey said that between 2017 to 2035 there would be a $69.4trn required investment spend into global infrastructure, of which Asia would account for more than half of the demand for investment**. Research from Oxford Economics says it is the Americas where the figures are most concerning, as they found there is a 47 per cent gap between the expected infrastructure investment spend and what is actually needed^.
The principal reason for this shortfall is the cost burden on governments to fund these projects. The result is a shift away from the public sector dominating the market – as it did in the 1980s – to more private companies becoming involved and carrying the risk, although in the case of sectors like renewables and hospitals, they have been supported by governments globally.
Those wishing to access the asset class may want to consider the First Sentier Global Listed Infrastructure fund, managed by Peter Meany and Andrew Greenup.
The managers build a 40-strong portfolio which specifically targets economically sensitive assets with barriers to entry and pricing power. Largest exposures at present include electric and multi utilities (41 per cent) and highways and rail tracks (11 per cent)^^. The fund has returned 197 per cent since its launch in 2007^^^ and has an historic yield of 2.9 per cent^^.
Investing in 40-50 companies, the M&G Global Listed Infrastructure fund, managed by Alex Araujo, is another alternative.
Another option is the VT Gravis UK Infrastructure Income fund, which invests mainly in investment trusts exposed to different types of UK infrastructure. The fund has an income target of 5 per cent which is distributed quarterly and can invest in both infrastructure debt and equities. It has a minimum of 22 holdings but will have exposure to around 1,000 separate underlying projects.
Darius McDermott is managing director at Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.
*Source: FE fundinfo, total returns in sterling, 18 February 2011 to 18 February 2021.
**McKinsey, Bridging Infrastructure Gaps: Has the world made progress? October 2017
^Source: Oxford Economics, Global Infrastructure outlook (July 2017)
^^Source: Fund factsheet, 31 January 2021
^^^Source: FE fundinfo, total returns in sterling 8 October 2007 to 18 February 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.
Dividends in Japan fell by 2.1 per cent last year, compared with 38.1 per cent in the UK.
One of Japan’s biggest “flaws” is what helped it sail through 2020’s dividend crisis unscathed, according to Richard Aston, manager of the CC Japan Income & Growth Trust.
The Janus Henderson Global Dividend Index showed global dividends fell 10.5 per cent on an underlying basis (excluding special dividends) in 2020. The UK was one of the worst-hit markets, with the Link UK Dividend Monitor showing domestic payouts dropped 38.1 per cent to £61.1bn.
However, Japanese dividends slipped just 2.1 per cent last year, with just one company in 30 cancelling payouts between April and December, while only a third made cuts.
Aston said the reason for Japan’s resilience is the tendency for its companies to hoard excessive amounts of cash that could be put to better use elsewhere.
“Balance sheets are extremely strong in Japan – that’s one of the criticisms,” he said. “They are not run in the same manner as US companies, for example.
“When we have spoken to companies in the past, they often referred to the fact Japan has faced a good number of crises in the last 20 to 30 years: first its own financial crisis, then it was right on the doorstep of the Asian financial crisis. Next it was affected by the tech crash and on top of those it has had natural disasters as well, with the earthquake and the nuclear accident 10 years ago a prime example.
“As a result of that, they want to be in a position to maintain their business operations and pay their employees, so they feel to some extent justified in maintaining a degree of liquid assets on their balance sheets.”
Data from Coupland Cardiff shows 56.79 per cent of companies in the Topix have net cash positions, compared with 25.32 per cent for the S&P 500 and just 15.67 per cent for MSCI Europe.
Source: Coupland Cardiff
Yet Aston said this hoarding culture has begun to change. One of the motivations behind the launch of his trust in 2015 was Abenomics, then prime minister Shinzo Abe’s eponymous programme of structural reforms. This was based around ‘three arrows’, the third of which was encouraging investment, including through a greater focus on dividend payments.
The Janus Henderson Global Dividend Index shows Japanese payouts have grown faster than all other regions except North America since 2009, up 124 per cent. However, Aston said there is still plenty of room for improvement.
“One aspect that we didn't know was how companies would react to the first test [the coronavirus crisis] that they'd faced over the last few years,” he continued.
“On the whole, companies have delivered in that respect. A number are either maintaining or even increasing their dividends year on year, despite the fact that their reported earnings might be down. There are one or two companies that have cut their dividends and some of those are quite interesting as ultimately they were enforced cuts.
“It's been a tough situation, but overall we see this very, very robust profile for dividends in Japan, which gives us great encouragement. It is becoming quite an institutionalised concept, companies are paying very significant attention to shareholders, particularly how they treat them on an annual basis and also expectations going forward.”
Investors may feel justified in treating Aston’s talk of change in Japan with a hint of scepticism. Someone who bought into the Topix at its pre-crisis peak at the end of 1989 would still have been in negative territory in July 2016. However, Aston said it is important to note the reasons for Japan’s “lost decades” and remember that its companies have not always been so keen on hoarding money.
Performance of index 1990 - 2006
Source: FE Analytics
“There was a period in Japan through the 60s, 70s and 80s, and even most of the 90s, where corporates were basically reinvesting all the cash flows that were generated. It wasn't until around about the Asian crisis or the tech crash that companies in Japan really began to address the issues that had been created by this extended period of overinvesting, which ultimately resulted in the crash,” he explained.
“But as a result of that, back in around 1999 to 2000, it started to reflect on those problems. This included the nationalisation of a number of large banks and the write-down of over-inflated assets. But also some surplus cash flow started to come back to shareholders in the form of dividends and share buybacks for the first time. There wasn't really any dividend culture or any shareholder-return culture in Japan up to that point.”
Aston said that the greater focus on shareholders was not the only way in which the mid-2000s marked a turning point for investors in Japan: the region also became attractive from a valuation perspective. He pointed out that up until the financial crisis of 2008, Japan had maintained a “mythical valuation premium” where its companies were always more expensive than their global peers. It was only in the chaos that followed the collapse of Lehman Brothers that it finally de-rated.
“That was very interesting to us because we were Japan specialists, but from a global perspective that was the first time we were able to identify companies in Japan as cheap, or at least comparable to their international peer group,” he said.
“And it was really the valuation, in combination with the confidence we had that companies were more focused on shareholder returns and dividends, that gave us the opportunity to focus on this particular strategy. Then we received quite a strong tailwind in this with prime minister Abe.”
He added: “But in many respects, the opportunity set is greater now than it was even in 2013. The number of companies are in a healthier position and there is this recognition within Japan that corporate governance and shareholder return is important: it's become quite institutionalised.
“We feel as if this strategy has to some extent been verified by the behaviour of Japanese companies, particularly over the last 12 months.”
Data from FE Analytics shows CC Japan Income & Growth has made 52.37 per cent since launch in November 2015, compared with 96.5 per cent from the IT Japan sector and 67.11 per cent from the Topix index.
Performance of trust since launch vs sector and index
Source: FE Analytics
The trust is on a discount of 13.66 per cent compared with 9.75 and 2.91 per cent from its one- and three-year averages.
It is yielding 3.46 per cent and has ongoing charges of 1.06 per cent.
Barings’ Matthias Siller reveals where he is cutting positions and allocating cash to after the formerly named Baring Emerging Europe trust expanded their remit to invest in the Middle East & Africa.
Matthias Siller has revealed where the £100m Barings EMEA Emerging Opportunities trust is allocating to after expanding its investment mandate to beyond just emerging Europe.
The emerging European market is dominated by Russia, Turkey and Poland, which account for 90 per cent of the investment universe.
The index also has a strong bias towards the energy sector, which is dominated by Russia’s large oil and gas producers. The declining role that hydrocarbon producers have in the future economy was one of the reasons Siller and the board of the trust decided to expand the trust’s mandate.
In order to reduce the portfolio’s exposure to hydrocarbons, not being constrained by the emerging Europe index and an ability to increase access to markets with a wider investment universe would help .
Thus, the trust broadened its investment policy of the company to focus on the whole of emerging Europe, the Middle East and Africa. The name was changed from Barings Emerging Europe to Barings Emerging EMEA Opportunities to reflect this.
Within its existing portfolio, one company the fund completely exited from was Russian oil & gas firm Tatneft. “That's a stock that the world doesn't need from our perspective now,” Siller (pictured) said.
Whilst it has reduced its overall holdings in Russian energy stocks, the trust still has a stake in Gazprom. “We are much more constructive on gas,” Siller added. “We are much more constructive on the hydrogen optionality that could become interesting, and we like their infrastructure and pipes.
“It is not necessarily an exodus of Russian stocks, it is an exodus of hydrocarbons. We're not selling Russia, we're selling predominantly hydrocarbons.”
Matthias believes that the previous outperformance of Russian oil companies relative to global oil companies has reached a point where it has been largely discounted by markets.
Over the next the next five years, he doesn’t think Russian hydrocarbon companies will shown anything like relative outperformance of the past.
That said, he argued that the investment case for the wider EMEA region remains strong despite Covid-19 and the prevalence of oil & gas players.
“Underlying dividends have been impacted less by Covid-19 than within developed Europe,” he explained. “EMEA countries generally have low debt at government, corporate and household levels and are therefore less correlated with global currency and interest rate movements.
“Their economies are also predominantly domestically focused and relatively uncorrelated with each other.”
Given its new widened investment universe, the managers of the Barings Emerging EMEA Opportunities trust revealed three examples of new companies it has invested into.
The first such company was South African-listed financial services firm Discovery Limited.
“This is an insurance company that came up with a completely new model of valuing insurance risk,” explained Maria Szczesna, co-manager of the trust.
“They came up with this concept where they get you engaged into certain activities, like healthy activities which allows them to know your risk profile much better. It's pretty straightforward, the more you exercise, the more you are healthy, the less you will cost insurance company in the future.
“It was very innovative solution and it is actually being applied now globally.”
Szczesna said one successful market for the company has been China, where it has a joint venture with one of the largest insurance companies in China Ping An Insurance.
Elsewhere in the world the company has franchised the idea, where in each market it pairs up with a major insurance company and apply the same concept.
Share price of Discovery over 1yr
Source: Google Finance
Another area of interest for the trust is PGM miners, or companies that mine palladium, platinum and rhodium.
Szczesna pointed out: “Generally in the world four companies are responsible for mining 80 per cent of PGM.”
With the widened investment mandate, the trust now has access to these South African PGM mining companies.
One such company Barings Emerging EMEA Opportunities invested into is South Africa-listed Anglo American Platinum, the largest primary producer of platinum in the world.
“Palladium, platinum and rhodium play a very prominent role in the green economy transition globally,” Szczesna said. “These are the metals that are required in catalysts for EV-passenger cars.
“So we have an opportunity to really get more exposure with the new portfolio to this space.”
Share price of Anglo American Platinum over 1yr
Source: Google Finance
The last stock the managers revealed they are adding to is Saudi Arabian-listed Al-Rajhi Bank.
“I wasn't very keen on the Saudi Arabian banking sector and thought there was no differentiation,” Siller admitted.
“What I didn't see is that even though Al-Rajhi is dominating banking in Saudi, they have been and are still able to forge out pockets of very, very profitable business lines.
“Al-Rajhi is the go-to place with regards to asset management and high net worth individuals in Saudi and general stock market investing.”
The bank has benefited from a surge in individual retail investors participating in the stock market and Siller said the market has recently taken notice of it.
Share price of Al-Rajhi over 1yr
Source: Google Finance
“That is why Al-Rajhi is outperforming the Saudi index by head and shoulders so far,” he said.
Siller believes the future for dividends will look very different to that of the past: “It was relatively easy and a great differentiator in the past to easily generate 7 to 8 per cent by buying declining companies with high yields.
“We don't think you can differentiate yourself any longer having the approach that you had over the last five years.
“This portfolio is not in secular decline. We think that this is a growing dividend, and we also think the overall portfolio will outgrow the dividend.”
Performance of the trust versus sector & benchmark over 5yrs
Source: FE Analytics
Over the last five years, Barings Emerging EMEA Opportunities has delivered a total return of 92.93 per cent, compared to 68.03 per cent from the average IT Global Emerging Markets peer and 61.09 per cent from the MSCI Emerging Markets Europe benchmark.
The trust is trading at a 11.2 per cent discount to net asset value (NAV) and currently yields a 3.4 per cent. It is not geared and has an ongoing charge of 1.54 per cent.
In this annual series, Trustnet finds out which IA Global funds have been outpacing their peers over the past five years on a spread of risk and return measures.
A specialist fund that focuses on three powerful trends has outperformed well-known IA Global funds such as Fundsmith Equity on a broad spread of risk and return measures in recent years, Trustnet research has found.
In this is annual series, we review the various Investment Association (IA) sectors on 10 different metrics to identify those that have tended to outperform their peers on multiple fronts (a more detailed methodology can be seen in the box to the right).
In this article, we examine the IA Global sector – which has been one of the major destinations of investor cash in recent years.
Over the five years in question, the average IA Global fund has posted an 86.34 total return – underperforming the 91.67 per cent made by the MSCI World. In addition, the average fund’s underperformance has come with similar levels of volatility and maximum drawdown to the index.
But when we ran the numbers, the fund that has put in the best relative performance on the 10 metrics examined was Robeco Global Consumer Trends Equities.
Performance of fund vs sector and index over 5yrs to end-2020
Source: FE Analytics
The £6.7bn fund, which is managed by Jack Neele and Richard Speetjens, made 184.72 per cent of the past five years, which is the sixth highest return of the IA Global sector. It was also one of the best in the sector for metrics like alpha generation, Sharpe ratio, upside capture and downside capture.
The portfolio is built around consumer-exposed companies in both developed and emerging markets, such as leading digital platforms, media companies, online travel agencies, luxury manufacturers and strong consumer brands. Top holdings at present include Paypal, Netflix and Microsoft.
Robeco Global Consumer Trends Equities focuses on three structural growth trends in consumer spending: the ‘digital transformation of consumption’, the growth in the ‘emerging middle class’ and the increasing importance of ‘health & wellbeing’.
In a recent update, Neele and Speetjens said: “Given the uncertain future and the current backdrop of very low global interest rates, we believe investors should focus on high-quality business with valuable intangible assets, low capital intensity, high margins and superior returns on capital.
“Companies with these traits have historically delivered above-average returns while offering downside protection in volatile market environments. Firms that exhibit these characteristics are poised to deliver healthy revenue and earnings growth. We therefore expect them to continue to generate attractive long-term returns.”
Source: FE Analytics
In second place in this research with an average percentile ranking of 13.3 is the £121m Nomura American Century Concentrated Global Growth Equity fund. It has made 147.89 per cent over the past five years, with strong results for alpha and Sharpe ratio.
The fund, which is run by American Century’s Keith Creveling, Brent Puff and Ted Harlan, looks for companies that are showing accelerating growth in earnings and revenue, rather than just those with a high level of absolute growth. E-commerce companies Amazon and Alibaba, scientific and technical instruments firm Avantor and automotive technology business Aptiv are some of its top holdings.
Peter Michaelis, Simon Clements and Chris Foster’s £1.2bn Liontrust Sustainable Future Global Growth fund comes in third place with a score of 13.6 and a five-year total return of 141.65 per cent.
The process behind the fund identifies growth themes that will shape the global economy then looks for companies that benefits from these changes. The three headline themes in the portfolio (under which are a number of sub-themes) are ‘better resource efficiency’, ‘improved health’ and ‘greater safety & resilience’.
Fundsmith Equity – one of the largest funds in the business – came in fourth place in the research. Its average percentile ranking is 13.6, which is the same as the Liontrust fund, but the five-year return is slightly lower at 137.39 per cent. Manager Terry Smith looks for companies with sustainable characteristics and where growth is organic, tending to lead to companies in the consumer staples, technology and healthcare sectors.
The FE Investments team, which has Fundsmith Equity on its Approved List, said: “The areas the fund is invested in have been in high demand since the financial crisis, which is partially why the fund has returned so much in absolute terms; however, Smith’s superior stock selection can’t be denied as this has supported the fund in times when his style has been out of favour. In relative terms, the fund remains impressive, only being challenged by a few other funds with similar investment strategies.”
Source: FE Analytics
At the bottom of the research is the Guinness Global Energy fund, with an average percentile ranking of 97.6 and a loss of 21.7 per cent over the five years under consideration.
This fund – and similar specialist offerings that focus on the energy sector – have been hit hard in recent years by falls in the price of oil. Last year was particularly bad for this, with the Russia/Saudi Arabia price war pushing the cost of the commodity down at the start of 2020, before the coronavirus crisis caused a slump in demand.
Several value funds can also be seen on the list of the IA Global sector’s worst performers, reflecting the challenges that the investment style has faced in recent years as growth investing has led the market.
Baillie Gifford’s Dave Bujnowski says the decline in fundamentals is often overlooked when discussing the dotcom bubble.
It would be wrong to compare last year’s surge in US tech stocks to the dotcom bubble, according to Dave Bujnowski of the Baillie Gifford American fund – but that is not to say there won’t be a “downdraft” ahead.
Bujnowski said it is important to make a distinction between the two, pointing out that a “downdraft”, or correction, is an inevitable part of stock market investing. However, while he said it is highly likely we will experience a “painful and acute” correction in the next few years, it is doubtful we will see a repeat of what took place in 2000 when the Nasdaq fell by 75 per cent over a period of three years.
Performance of index over 3yrs
Source: FE Analytics
And the manager said the difference is fundamentals.
“That's really the point I want to drive home,” he said. “Downdrafts can be emotional and fleeting, something I'm inclined to look through.
“A bubble bursting has an element where fundamentals come to a screeching halt and it can result in more lasting damage.”
The rally of the late 1990s is often regarded as a triumph of hype over reality, with share prices driven higher by a fear of missing out rather than any structural change at the business level. However, Bujnowski pointed out that in reality, there was a significant change in fundamentals as we entered the new millennium – they went backwards.
“In 2000, for instance, sales of PC units in the US fell 12 per cent,” he said. “That was the first ever year-over-year decline. Similarly, the compound annual growth rate for mobile phones was 60 per cent from 1996 to 2000, but in 2001 it fell by 3 per cent – again, the first decline ever.
“Networking equipment – Cisco grew robustly for 40 straight quarters. But in the third quarter of 2001, sales fell 30 per cent year on year.
He added: “Bring it forward to today. What we do as a group is focus on fundamentals on a stock-by-stock case. Every company in the portfolio has a forward-looking hypothesis, that 2.5x upside case. We'll take a look at a forward-looking hypothesis that we believe in, map out the valuation needed to make 2.5x upside over five years, then make an honest assessment as to whether there is a likelihood that that 2.5x case can happen. And if not, it's a sell trigger.
“It's less about the market, a bubble or high valuations for tech stocks, and more about case-by-case, are fundamentals intact, do we have high confidence in them, and is there still room for upside over a five-year period?”
Rather than declining as they did in the early 2000s, Bujnowski believes the fundamentals of many stocks in the US market can improve from here. The manager wrote a paper in Q3 2019 titled ‘A Case for Growth’ in which he rubbished the idea that a value rally was imminent following a decade of outperformance by growth stocks.
At the time, he accepted that swings from growth to value and vice versa were common to ‘normal’ economic cycles, but said that in a period of enormous disruption and upheaval, the idea of a reversion to some notion of intrinsic value was misguided.
The growth stocks in Baillie Gifford American have surged since then, with the fund up 121.84 per cent in 2020. Yet despite the elevated share prices, Bujnowski said his conviction in his original thesis has strengthened.
Performance of fund vs sector and index in 2020
Source: FE Analytics
“That's because the force that's behind the run has nowhere near played itself out,” he explained. “In fact, it's intensified. And that force is disruption. We are living in an era of unprecedented disruption.
“Of course, the idea of disruption has become well publicised over the years and it's hardly a novel narrative. However, we believe the entire dynamic is still tremendously underappreciated, specifically just how many disruptive forces are happening in unison and how potent and early they still are.”
To illustrate his point, he highlighted two disruptive forces that have already had an enormous impact on the way we live and work, but that are still in their infancy.
The first of these is what he calls “infrastructure changeouts”. The premise here is that when infrastructure changes, the businesses and industries that rely on it weaken and there is an opportunity for innovators to enter and build on the new way of doing things.
“The thing is, infrastructure doesn't change often,” Bujnowski continued. “But today we're in the midst of two massive infrastructure changes: the internet, upon which commerce, media and information flow; and the cloud, upon which it is stored, powered and distributed.
“Between the two, we're talking about virtually every corner of the economy and society. I know what you're thinking: ‘The internet and the cloud, haven't we heard this all before?’
“It might seem like old news, but I'd highlight two things. First, it's still early. E-commerce is still just 15 per cent of all retail in the US, with some large categories far less penetrated. As for the cloud, only 15 to 20 per cent of all apps or workloads have migrated there so far.”
The second is the knock-on effect – or to put it another way, how disruption leads to more disruption – and Bujnowski said this is an even more powerful force than the change in infrastructure.
“The knock-on effect in this case involves the topography of these new infrastructures,” he continued.
“The internet and the cloud are hyper-connected networks. The magic here is that when a system transitions from being not so networked to hyper-connected, it plants the seeds for network effects: winner-takes-most dynamics and increased returns to scale.
“Now of course, we've seen this play out with companies like Amazon, Google and Facebook and their respective markets over the years. These companies are often thought of as anomalies, outliers. And to some degree, they are the result of extraordinary vision, powerful strategies and superior business models all coming together. But I'd argue that the extreme nature of their success could simply not have happened if not for the network nature of the systems in which they now participate.
“And here's the punchline: That system, that hyper-connected network isn't confined to the so called FAANG stocks, it's everywhere. It sets the table for more outliers to emerge.
“And we suspect some are still just germinating.”
Data from FE Analytics shows Baillie Gifford American has made 945.58 per cent over the past 10 years, compared with 291.86 per cent from the S&P 500 index and 244.37 per cent from the IA North America sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £7.8bn fund has ongoing charges of 0.51 per cent.
Mirabaud Asset Management head of fixed income Andrew Lake offers an overview of the bond market, after 2021’s first couple of months.
February has been impressive for a number of things (so far). Vaccine distribution being one, increased fears of more aggressive variants being two, surprisingly robust economic data and Q4 results being three and four, and a continuation of the rally being five.
The sell-off at the end of January really was very transitory and, despite increased talk about bubbles everywhere, the overall market sentiment has remained resilient. The new issue pipeline has been smaller than expected, which has helped the technical picture, and every new issue has been over-subscribed, usually the result of reverse enquiry and being aggressively priced.
High yield spreads have dropped below 4 per cent for the first time and any issue with a good coupon has been snapped up. Even Carnival Cruises issued another deal, upsized by $1bn, which was at the higher price range. The company now has liquidity into 2023.
Are we in a bubble?
US equity markets hit all-time highs, with volatility falling again, WTI (Western Texas Intermediate) oil close to $60 per barrel, and increased expectations of another massive stimulus package from the new US administration.
Not only is the word ‘bubble’ appearing more often in news reports, so too is the dreaded word ‘inflation’. Not perhaps scary in itself, but certainly when linked to tapering or rising interest rates. Even speculation around this would be enough to temper some of the animal spirits we are seeing at play.
Treasuries have reacted and we saw the 30-year close at 2 per cent on Friday 12 February, with the 10 year at 1.20 per cent – both recent highs. There is also a lot of data coming next week – Empire State Manufacturing, jobless claims, flash PMIs (purchasing managers index) and home builders index so we may be in for further Treasury pressure if the numbers are solid*.
Too early to worry about inflation
I think that it is too early to be even having a debate around inflation and rising interest rates in the US or anywhere else for that matter. The likelihood is that we begin to see a phased re-opening of society in most of the developed world over the next several weeks as vaccine distribution gains pace.
The economic boost we are all expecting – driven by very high savings rates – will be somewhat offset by high debt levels, unemployment, and therefore limited wage pressure. This list is not exclusive.
As I have said before, the debate will gain more traction once we head into the second half of 2021 and we begin to look to increasing societal normalisation. Do not forget, interest rates do not have to do anything for government bonds to react and it is likely that there will be upward pressure on yield curves – led by the US – irrespective of what US Federal Reserve policy actually is.
Yield curve management will mitigate this, as there is no desire for government bond yields to go to high or for curves to steepen too much. There will also be natural buyers coming in at some point, again limiting the upward trajectory. At present, the inflation story is very much still in vogue.
US dollar and the impact on emerging markets
The dollar continues to be fairly resilient in the short term, so we will have to wait to see whether the downward trajectory continues as the months unfold. For emerging markets, we have yet to see any significant effect from rising Treasury yields. We are likely to see a tightening of spreads before that happens. The average risk premium on emerging market local currency is 306bps**, so significantly above levels that precipitated volatility in 2009 and 2018. The real concern for emerging market investors would still seem to be unsustainable debt levels in some of the weaker sovereign bonds.
It still feels like financial markets are over extended and a pullback would not be a surprise. Having said that, with more quantitative easing, vaccine rollouts and the likelihood of a real boost to growth as economies re-open, perhaps valuations in the short term are irrelevant.
Things always revert to the mean eventually, the big risk remains a significant delay to the economic re-opening and recovery we are all expecting, however unlikely that might seem now. We continue to be disciplined and I remain positive on fallen angels and good quality companies that will do well as economies normalise.
Andrew Lake is head of fixed income at Mirabaud Asset Management. The views expressed above are his own and should not be taken as investment advice.
*Source: Mirabaud Asset Management as at 12 February 2021
**Source: Bloomberg, 12 February 2021
Some well-known value managers reveal which stocks they are picking to benefit from a continued value rally.
As value stocks continue to rally and growth stocks extend their decline, managers of several value investment trusts reveal what stocks they favour in what could be a moment of truth for the value investment style.
Growth stocks have been outpacing the value style for much of the last decade, but the ever-widening divergence between growth and value could be finally reverting to the mean.
Rising risks of inflation is one of the major drivers of a broader rotation from growth stocks into value stocks, according to some managers.
James de Uphaugh, manager of the £1bn Edinburgh Investment Trust, explained: “A global risk we are concerned about is that the economy accelerates so strongly in late 2021 that it puts upward pressure on inflation and bond yields forcing central bankers’ hands.
“Then, just as declining bond yields were so important in powering stocks in 2020, the reverse could happen, as policymakers cut back on liquidity. This would put pressure on equity valuations.”
This view on inflation is why Edinburgh Investment Trust holds banks such as NatWest and commodity firms like Anglo American.
Share price performance of NatWest and Anglo American year-to-date
Source: FE Analytics
Anglo American is pivoting its businesses towards commodities such as copper, which de Uphaugh highlighted as “crucial for the electrification necessary if the world is to achieve environmentally sustainable growth”.
The trust has also supported equity raises in the likes of Polypipe, a manufacturer of plastic piping systems needed for underfloor heating and energy-efficient ventilation. De Uphaugh said Polypipe sits within “the sweet spot of sustainability”.
Alasdair McKinnon, manager of the £558m Scottish Investment Trust, is also placing emphasis on stocks that can pass on price raises due to inflation.
“Even better, these ‘value’ stocks are severely out of favour,” he said. “Banks (Santander, Lloyds), energy (BP, Shell) and miners could all be beneficiaries of this.
“We have also added to some of the most impacted industries like the high street, where we find some restaurants and clothing retailers with good brands and balance sheets that we think will allow them to re-emerge from the pandemic as long-term winners.”
Scottish Investment Trust’s largest two holdings, however, are in gold miners Newmont and Barrick Gold. “You can’t print gold and we expect its value to increase in line with the ballooning money supply,” McKinnon said.
Alex Wright, manager of the £720m Fidelity Special Values trust, pointed out that although the rotation into value started in late 2020, the dispersion in returns between growth and value stocks still remains unprecedented.
“We are particularly optimistic on the medium-term outlook not only due to the number of investment opportunities on offer and their upside potential, but also because we are not having to compromise on quality,” he said.
As such, the trust has significantly increased its exposure to specialist retailers (Halfords), car distributors (Inchcape), DIY stocks (Kingfisher) as well as housebuilders (Redrow and Vistry).
Share price performance of Inchcape, Kingfisher, Redrow and Vistry year-to-date
Source: FE Analytics
“These are all areas that are seeing increased demand as households reassess their priorities and, importantly, where we believe the changing dynamics caused by the virus are likely to be longer lasting than currently factored in,” Wright explained.
“We continue to favour life insurers, which are well regulated companies with good risk management and which are seeing strong demand for bulk annuities and pension de-risking.”
Fidelity Special Values’ two largest holdings are a 5.5 per cent stake in Legal & General and a 4.5 per cent stake in Aviva. Wright continued: “The sector offers an attractive combination of cheap valuations, strong demand/supply fundamentals and growing earnings.”
Elsewhere in the broader financial sector he is less optimistic. The trust holds an underweight stake in mainstream banks: “While cheap, they lack a medium-term catalyst to re-rate given the low interest rate environment,” Wright said.
“Instead, we have bought into UK-listed emerging market financials Bank of Georgia, TBC Bank and Kaspi, which are able to generate strong returns in the current interest rate environment but have been overlooked or lumped in with the mainstream banks.”
Wright is also underweight energy having sold down his exposure to UK oil majors Shell and BP, which have cut their dividends and are embarking on a “complex” and “high-risk” transition towards a more diverse energy mix.
Gary Moglione, manager of the £64m Seneca Global Income and Growth Trust, also revealed one stock that he thinks will do well in a value rally: UK Mortgages (UKML).
“UKML had a difficult start after launch as market conditions meant they did not invest the initial capital very quickly which led to an uncovered dividend and a declining NAV,” he said.
“They took a new strategic direction last year and are now focusing on the higher yielding mortgage books whilst selling the lower yielding.
“They essentially buy or initiate mortgages and when the number of loans reaches a reasonable size they will securitise them, locking in returns and freeing up capital to initiate more mortgages.”
A second value play Moglione highlighted was Ediston Property Investment Company (EPIC), which focuses on out-of-town retail parks.
He said: “The property market has been ravaged by Covid as many retailers struggle and some use company voluntary arrangements to force landlords to accept lower rents.”
Mark Heslop and Mark Nichols started selling down the payments processor when they took charge of Jupiter European in October 2019, receiving an average price of €130 a share.
Jupiter European is one of four funds to share the top spot in the IA Europe ex UK consistent-performance table, beating the MSCI Europe ex UK index, the most common benchmark in the sector, in nine of the past 10 calendar years.
Performance of funds vs sector and index
Source: FE Analytics
Of the 79 funds with a track record long enough to be included in the study, another seven funds beat the index in eight of the past 10 calendar years.
Jupiter European is run using bottom-up analysis, with the aim of identifying high-quality, high-return businesses whose equity is mispriced or undervalued by markets.
However, while Jupiter European was dropped from many buy-lists when Darwall left, investors quickly received a major boost from the new management team. Heslop and Nichols began to sell out of Wirecard, one of the largest holdings in the fund, upon taking over and received an average price of €130 a share.
Last year, Wirecard announced €1.9bn was missing from its accounts and was declared insolvent. It now trades at €0.69 a share. The company made up 17 per cent Darwall’s European Opportunities Trust at one point.
Jupiter European returned 218.18 per cent over the 10-year period in question, compared with 118.38 per cent from the IA Europe ex UK sector and 106.67 per cent from the MSCI Europe ex UK index.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £4.4bn fund has ongoing charges of 0.99 per cent.
As well as beating the MSCI Europe ex UK index in nine of the past 10 calendar years, Jupiter European also beat the sector in eight of these, a feat it shares with T. Rowe Price Continental European Equity.
T. Rowe Price Continental European Equity is a high-conviction, style-agnostic portfolio of around 40 to 70 mid-to-large European stocks. Manager Tobias Mueller analyses both businesses and industry dynamics in a bid to unearth quality companies that are characterised by a high return on capital employed and have the potential to deliver consistent returns.
“A disciplined approach to valuation is central to our approach,” said a statement from the group.
T. Rowe Price Continental European Equity made 161.85 per cent over the 10-year period in question.
The UK version of the fund is £3.3m in size and has ongoing charges of 0.82 per cent.
It is worth noting that current manager Mueller has only been in charge of the fund since July last year and the majority of the 10-year outperformance came under former manager Dean Tenerelli.
Next up is Schroder European, headed up by Martin Skanberg, which has beaten the sector in seven of the past 10 years. The manager is not tied to a particular style – he said the market has not priced in the enormous growth opportunities in semiconductors and healthcare and partly attributed the fund’s outperformance last year to his tech exposure. However, he said the combination of stimulus measures and economic recovery will likely cause inflation, which tends to favour more lowly valued parts of the market.
“We could see a rotation into these kinds of stocks, particularly those in the materials sector that are aligned to the commodity cycle,” he explained.
“The Q4 earnings season has so far been very strong, especially in cyclical stocks. We are starting to see dividends and share buybacks reinstated in some sectors, such as industrials, though they remain suspended for eurozone banks.”
He added: “Europe looks attractively valued compared with other regions and this is supported by the now-rising dividend yield.”
Data from FE Analytics shows Schroder European made 137.27 per cent over the 10-year period.
The £1.3bn fund has ongoing charges of 0.91 per cent.
Although Vanguard FTSE Developed Europe ex-UK Equity Index is a passive fund, it was able to outperform the MSCI Europe ex UK as it focuses on a slightly different benchmark, the FTSE Developed Europe ex UK.
There is little to choose between the two indices in terms of their focus – both hold large- and mid-cap stocks in developed Europe, excluding the UK. However, the FTSE index holds more stocks: 446 compared with 344. These 102 extra stocks are from further down the market-cap spectrum, where there tends to be more opportunity for higher growth.
Vanguard FTSE Developed Europe ex-UK Equity Index made 114.69 per cent over the 10-year period in question.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £2.7bn fund has ongoing charges of 0.12 per cent.
Trustnet asked several fund pickers what investors could consider if they plan on selling out of the M&G Optimal Income fund.
If investors are planning to sell out of the of the M&G Optimal Income fund, what should they consider buying in its place?
The M&G Optimal Income fund is one of the best known strategic bond strategies, both for its size and flexible investment process. But more recently consistent outflows and near-term underperformance have brought the fund a different kind of attention.
Having looked at whether investors should sell out or remain in the M&G portfolio, fund pickers highlighted some alternative options.
M&G Global Macro Bond
When looking for an alternative to M&G Optimal Income, AJ Bell analyst Laith Khalaf said investors should be asking why they held it in the first place - whether for total return, income or more of a multi-asset choice.
“If you’re after a total return vehicle as a diversifier against the equities in your portfolio, I’d suggest considering another from M&G, the Global Macro Bond fund,” Khalaf said.
“The fund has a go-anywhere approach, which gives it the flexibility to seek out returns and protect investors if interest rates start to rise in developed bond markets.”
The five FE fundinfo Crown-rated fund invests across a range of different markets and issuers based on in-depth analysis on global, regional and country-specific macroeconomic factors.
Over the past five years the fund has outperformed the IA Global Bonds sector, with a total return of 29.16 per cent versus 25.55 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.63 per cent.
Baillie Gifford High Yield Bond
But if an investor held M&G Optimal Income for income then an alternative could be the Baillie Gifford High Yield Bond fund, according to Khalaf.
However, Khalaf pointed out that this portfolio will be “more highly correlated to equity markets”.
Over five years Baillie Gifford High Yield Bond has outperformed the IA Sterling High Yield sector, making a total return of 40.50 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The £915.3m fund has a yield of 4.20 per cent and an OCF of 0.37 per cent.
Personal Assets Trust
Finally, if an investor is seeking out a multi-asset alternative Khalaf recommends Personal Assets Trust, which is managed by Troy Asset Management.
Run by FE fundinfo Alpha Manager Sebastian Lyon, the £1.4bn trust – which like all of Troy’s funds puts capital preservation at its core – invests in quality blue-chip equities, index-linked bonds, gold and cash.
Khalaf said that the trust’s ability to invest outside of just bonds is a positive in the current low interest rate environment.
He said: “Given where interest rates are, I’d be very wary of over-reliance in bonds in a portfolio simply because they are less volatile than equities, there’s still a large amount of risk baked into sky high prices.”
Compared to its sector and benchmark, Personal Assets Trust’s defensive positioning means it has underperformed over the past five years, shown in the graph below.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The trust holds an FE fundinfo Crown rating of five and has ongoing charges of 0.86 per cent. It is running at a 1.1 per cent premium with currently no gearing and a dividend yield of 1.3 per cent.
Ninety One Global Total Return Credit
Picking something from the same sector as the M&G fund, Ben Yearsley, co-founder and director of Fairview Investing, highlighted the Ninety One Global Total Return Credit fund.
Although it also resides in the IA Sterling Strategic Bond sector, the Ninety One fund “is a very different position,” according to Yearsley, as unlike M&G Optimal Income it only invests in corporate bonds. It also approaches investment opportunities in a very different way to the M&G fund.
Yearsley said: “A key difference between this fund and the M&G one is this is driven by bottom-up factors, whereas Optimal Income is more of a top-down play.
“Only investing in corporate bonds sounds narrow, but the managers will look at a full spectrum globally and end up with 120 or so any one time. Each bond is considered on its own merits and has to be able to contribute towards the return target.”
Since the fund launched in mid-2018 it has made a total return of 14.17 per cent, outperforming the IA Sterling Strategic Bond sector (14.11 per cent) and the LIBOR GBP 3m+4% benchmark (13.31 per cent).
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It has a yield of 3.46 per cent and an OCF of 0.77 per cent.
Jupiter Strategic Bond
The final fund pick comes from Teodor Dilov, fund analyst at interactive investor, who chose the £4.3bn Jupiter Strategic Bond fund.
Dilov said that he liked the Jupiter Strategic Bond especially for investors with a lower risk profile.
He said that similarly to the M&G option the Jupiter fund “has the freedom to invest across the bond market, including high-yield bonds, investment-grade bonds, government bonds and convertibles, along with the use of derivatives to mitigate the risk of falling bond prices”.
The investment process is grounded in FE fundinfo Alpha Manager Ariel Bezalel’s views of the global economy.
Dilov said Bezalel uses this to determine how much risk is appropriate and which sector and countries present the best investment opportunities, while considering factors such as inflation, interest rates and economic growth.
“As avoiding losses is the strategy’s top priority, when investing in high-yield bonds the manager prefers the most senior bonds in a company’s capital structure – typically secured on the company’s assets. Companies that are paying down their debts over time and improve their credit worthiness are preferred,” he added.
Compared to its average IA Sterling Strategic Bond peer, Jupiter Strategic Bond has outperformed over five years, returning 29.15 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It has a yield of 3.70 per cent and an OCF of 0.73 per cent.
After a terrible year for UK dividends, Trustnet finds out how the coronavirus pandemic affected payouts from the UK equity income funds.
The average UK equity income fund had to cut its dividend by close to 30 per cent during 2020, analysis by Trustnet shows, as the coronavirus crisis caused companies to slash or cancel their payouts.
That said, a handful of strategies appear to have side-stepped the worst of the pandemic’s fallout, although Liontrust’s Robin Geffen believes that most UK equity income funds went into 2020 with too much exposure to companies that were already looking stretched.
According to Link Group’s UK Dividend Monitor, headline payouts from UK companies dropped 44 per cent in 2020 to £61.9bn – the lowest annual total since 2011.
UK dividends were hit harder than many of their international peers because the market is concentrated around a handful of large companies, mainly those in the oil, mining and banking sectors – which had to cut payouts heavily in 2020.
Source: UK Dividend Monitor
With this in mind, Trustnet ran the dividend payments made during 2020 from the IA UK Equity Income sector and compared them with 2019’s figures to see how badly it was hit by the coronavirus crisis.
One positive sign is that the average UK equity income fund appears to have held up better than the market. While Link Group has headline dividends as falling by 44 per cent last year, the average IA UK Equity Income fund’s calendar-year payout was ‘only’ down 29.3 per cent.
In addition, the average fund slightly edged ahead of the market when it comes to capital growth last year, falling 12.04 per cent in price performance terms compared with 12.46 per cent for the FTSE All Share.
There were 76 funds (out of a total of 84) that cut their payouts by less than the market’s 44 per cent, with nine cutting by less than 10 per cent. The 26 best performers – which all cut their 2020 payout by 22 per cent or less, below half of the market’s cut – can be seen in the below table.
Source: FinXL, Trustnet
Schroder Income is at the top of the table after lowering its dividend by just 0.3 per cent in the calendar year of 2020, although this is largely down to exactly when in the year it made its payouts.
The fund pays its final dividend in February, so in 2020 this was distributed before companies started slashing payouts. The full impact of last year won’t be clear until the final payment for fund’s 2020/21 year is made.
FE fundinfo data shows Schroder Income’s Q1 2020 payment was 24 per cent higher than the one a year before, but the interim in August – in the midst of the crisis – was almost 64 per cent lower than the previous year, one of the worst cuts of the sector for this period.
Looking at the first quarter versus the other three quarters of 2020 highlights just how much of a difference this timing could have made to calendar year payouts. The average fund in the sector grew its Q1 payment by 3.5 per cent, but the payments for Q2, Q3 and Q4 were down 39.2 per cent on average.
That said, the majority of the other 25 funds in the above table do seem to have held up relatively well during the worst part of the coronavirus crisis, with our data showing their cut to Q2, Q3 and Q4 dividends was better than average at 23.3 per cent.
Source: FinXL, Trustnet
Liontrust Income, in second place overall after reducing its dividend by just 2.4 per cent for the full calendar year, is one of those that outperformed in 2020’s last three quarters. It cut its payout by just 1.32 per cent during this period, the best result of the sector.
Manager Robin Geffen said: “There was complacency early in 2020 about the ability of many companies to maintain their levels of dividends. The spread of Covid-19, the lockdown and the consequential economic impact accelerated a trend that we had been warning clients and investors about for the previous year.
“This was the fact that some very high yielding companies in the UK did not have the earnings capacity, dividend cover or strong enough balance sheet to support their levels of income. This included many of the traditional income stocks.”
Geffen has been vocal for some time about the concentration risk found in many UK equity income portfolios, arguing that UK companies would struggle to maintain their dividends unless their operational performance improved, which would require very strong global economic growth as well as significant capital expenditure
“This is what happened in 2020, with the pandemic quickening the pace and the market experiencing three years of dividend cuts in six months,” he finished.
“Over the course of 2020, 40 FTSE 100 index companies cut, cancelled or suspended their dividends, amounting to £34.8bn in reduced payments to investors. Of the FTSE 250 index, 92 companies cut, cancelled or suspended dividends, accounting for £4bn in lost payments.
All 33 of Liontrust Income’s holdings paid a dividend last year. Geffen said this was a result of the fund’s focus on companies with strong balance sheets, high dividend cover and sustainable payout ratios (the percentage of earnings that are paid out as dividends).
The fund’s historic dividend cover is 2.12 times the level of earnings of the stocks within its portfolio, compared with an IA UK Equity Income sector average of 1.90 times and the FTSE All Share’s 1.76 times. Geffen added that it’s forward-looking dividend cover is 2.57 times, against the sector’s 2.17 times and 2.08 for the FTSE All Share.
Other well-known funds that made some of 2020’s lowest dividend cuts include M&G Dividend, AXA Framlington UK Equity Income, Fidelity Moneybuilder Dividend, BlackRock UK Income, Man GLG Income and Trojan Income.
What’s more, this was not down to them distributing the bulk of their payouts ahead of the crisis, with all of the above funds cutting their dividends by less than 20 per cent over the final three quarters of 2020.
A total return of 2,400 per cent since first investing in a trust might seem like the best of results, but as Church House’s James Johnsen explains, dealing with such success can be a two-edged sword.
As ‘big tech’ hits some regulatory and tax headwinds (a Biden presidency and US anti-trust legislation, adverse tax regulation in Europe, political clampdowns in China), many are asking whether funds like Scottish Mortgage have seen their best growth days and have only downside risks to contemplate.
We first started adding Scottish Mortgage to Church House portfolios in the aftermath of the dotcom crash in the early noughties. Scottish Mortgage was then a circa £1.5bn fund, regularly trading at around 20 per cent discount to net assets. This provided what, only in retrospect, can be seen as a unique entry point.
Side-stepping the crowded debates over valuations in the tech space, ‘new normals’ or the rotation from ‘growth’ into ‘value’; our main preoccupation relates to where a massive outperformer like Scottish Mortgage has significantly skewed preferred asset allocations, or where CGT issues have clouded essential risk management disciplines. A recent case study illustrates the issue.
A real-life Scottish Mortgage holder
Our client, Mr. F, had built up significant capital over his working life developing and eventually selling an engineering company. To this was added the proceeds from one or two property deals.
Having taken significant risks with his ‘working’ capital during his years in employment, Mr. F’s main priority was capital preservation. However, having significant wealth (including property assets) he felt comfortable exposing one of his main portfolios (which included a ‘joint’ £1m ISA pot) to a long-term, moderate risk mandate. He therefore chose to be invested at Risk Level 5 on the Church House scale of 1 – 10, (with 1 traditionally consisting of a portfolio of gilts and 10 being highly speculative. Most Church House clients are invested at Risk Scales 2 - 8).
In 2003, along with all other clients on this scale, 3 per cent of the then-total 18 per cent overseas equity allocation was switched to Scottish Mortgage. This fund had originally attracted our CIO’s attention because it was run by a manager, James Anderson, with a broader world view, a differentiated approach and a healthy disdain for benchmarks – all attributes that reflected our own approach and which we knew would resonate with our clients.
Scottish Mortgage’s growth record has been nothing short of stellar since, producing a total return of 2,400 per cent since 2003. But, as the graph below shows, not always in a straight line. As ever, the key has been to stick with the fund and its strategy; the manager has never wavered from it so nor should long-term investors.
There have been some notable opportunities where the fund has traded at a premium to net assets and in these instances a bit of judicious ‘top-slicing’ of profits has been undertaken, although this has often been constrained by CGT allowances. We have also added the fund continuously in newer portfolios over the years, especially when the discount opened up.
In the case of Mr. F, despite the occasional profit taking to re-balance weightings, such was the growth of the fund that his 3 per cent allocation had by 2020 grown to nearly 20 per cent of his total portfolio. This was clearly too weighty a risk for a moderate, balanced portfolio.
When Tesla accounted for 14 per cent of the fund in the summer of last year, it became time to take radical action and so a planned programme of disposal of over half the holding was made, with the resultant CGT being provisioned for within the portfolio. The tax hit is substantial (£200k+), but as the client ruefully agreed, it is only a reflection of the extraordinary success he has enjoyed (and if the chancellor is tempted to raise CGT rates, then the bitter-sweet tax aftermath will suddenly taste less bitter).
Source: FE Analytics
Where next then?
Of course, this left the problem of how to reinvest the net proceeds. Clearly, most of these have been allocated to other asset classes to re-establish the correct weightings for the risk scale. But within this section of the global equity bucket, we have favoured Monks Investment Trust over the past couple of years, as a lower risk alternative to Scottish Mortgage. Monks is a low-charging investment trust also run by Baillie Gifford and shares several stocks with its stable mate, but does not have the latter’s high allocation to unquoted stocks and is not quite so concentrated in tech.
This better reflects the risk parameters (including liquidity requirements) of many of our client risk profiles. However, Monks has also enjoyed consistently excellent performance and now regularly trades at a premium making it harder to buy too. But there are still days when even funds like Scottish Mortgage can be bought if one monitors the discount/premium situation closely (see lower graph) so there are always ways to gain exposure if you are patient and firmly fixed on a long-term holding strategy. As I write, Scottish Mortgage trades on a small discount to NAV (-1.8 per cent).
As ever, the key in running such portfolios, is not so much in worrying about funds like Scottish Mortgage but more in carefully building in the optimal blend of asset classes less correlated to equities, notably in fixed interest, absolute return and infrastructure. If these are managed correctly, then they should buttress the portfolio in times of market stress and additionally provide a stable income return on top of the capital growth generated by the equity allocations.
In summary, long-term holders of Scottish Mortgage should not worry so much about the debate surrounding valuation of ‘big tech’ or the demise of ‘growth’ as to the more fundamental question of whether their holding truly reflects their risk profile in the long term. As we often try to explain to new clients, successful investment management is mostly about effective risk management, or protecting the downside in rough weather so that your portfolio is in good enough shape to participate in the upside when the winds blow in your favour.
James Burns, co-head of the Smith & Williamson Managed Portfolio Service, reveals three of his core UK equity fund picks and explains why the firm is now underweight US equities for the first time in almost a decade.
Funds run by Ninety One, Artemis and Man GLG are three of the Smith & Williamson Managed Portfolio’s core UK equity picks for the years ahead.
After being overweight US equities for eight years, James Burns, co-head of the Smith & Williamson Managed Portfolio Service, said he is reducing US equity exposure in favour of UK equities.
“We’re making sort of decent move against the US for the first time in seven or eight years,” he said.
Much of this decision was due to the amount of money printing that has happened in the US over the last year and the potential for more as the country approves further stimulus.
This has been one of the drivers of the relative weakness of the US dollar over the last year, which has been declining in value against most other major currencies.
“We were overweight the UK because we think that market is pretty cheap and things are much clearer for the UK now than they have been in the previous three or four years,” Burns explained.
“We were overweight the US for eight years, so now isn’t a bad time to slightly tilting the portfolios underweight the US.”
As such, below are the three core UK funds Smith & Williamson prefers across all its portfolios.
The first core pick Burns highlighted is the £1.8bn Ninety One UK Alpha fund, run by Simon Brazier.
“It’s a really good core holding for the UK exposure,” Burns said. “It does takes bets against the index, but they’re not titanic bets and therefore it’s a good solid core position in a portfolio.”
The fund has 47 holdings as of January and its top stock overweight positions are in Johnson Matthey, Fevertree Drinks and Ryanair Holdings. Its biggest stock underweight positions are in AstraZeneca, HSBC Holdings and Vodafone Group.
Burns also highlighted Brazier’s long term track record of outperformance. Brazier started his career at Schroders, moved to Threadneedle and became head of UK equities before eventually moving to Ninety One.
Performance of fund versus sector & benchmark over 5yrs
Source: FE Analytics
Over the last five years Ninety One UK Alpha has delivered a total return of 35.46 per cent, versus 38.75 per cent from the FTSE All Share benchmark and 40.72 per cent from the average peer in the IA UK All Companies sector.
It has an ongoing charges figure (OCF) of 0.83 per cent and currently yields 1.85 per cent.
The next biggest UK equity allocation across Smith & Williamson Managed Portfolio Service is Ambrose Faulks and Ed Legget’s £1bn Artemis UK Select fund.
This wasn’t always one of the biggest positions but has been built up over the last few years, Burns said.
“Ed Leggett, despite being a more value-type manager, has performed very well last year,” he added. “We were happy to build this position up from being a third or fourth sized a couple years ago to being a one of the bigger ones now.
“The performance divergence was pretty significant last year, so it is doing something slightly different in the portfolio and has a manager with a good long term record.
“The way the portfolio is built, the way we the UK see market going, it could actually be pretty well positioned for a rally in the UK.”
Performance of fund versus sector & benchmark over 5yrs
Source: FE Analytics
Over the last five years Artemis UK Select has made a return of 55.58 per cent compared to 40.72 per cent from the IA UK All Companies sector and 38.75 per cent from the FTSE All Share benchmark.
It has an ongoing charges figure (OCF) of 0.94 per cent and yields 0.99 per cent.
The third core UK equity fund Burns highlighted was the £1.2bn Man GLG Undervalued Assets fund, run by Henry Dixon and Jack Barrat.
“Part of the reason our UK market has genuinely struggled in the last few years because we've had a bias towards more value-type managers,” Burns said.
“But we think this actually could be a positive for the portfolios going forward because we don't have a titanic tilt either way between value and growth in any part of the portfolio.
“In Japan we got a mixture of growth and more value for managers, but in the UK it's probably been a copy skewed more towards the value-type plays.”
He said Man GLG Undervalued Assets complements Artemis UK Select well because although they both have a similar value style, the Man GLG fund has more equities in the mid-cap space.
Performance of fund versus sector & benchmark over 5yrs
Source: FE Analytics
The fund has returned 33.57 per cent over the last five years, compared to a 38.75 per cent from the FTSE All Share benchmark and 40.72 per cent from the average peer in the IA UK All Companies sector.
It has an ongoing charges figure (OCF) of 0.9 per cent and currently yields 1.81 per cent.
The world’s largest asset management house has upped its exposure to the UK and trimmed its allocation to government bonds, eyeing a better-than-expected recovery from the coronavirus crisis.
Asset management giant BlackRock has moved to an overweight stance on UK equities on the back of an improving global outlook and the removal of Brexit uncertainty.
Investors have been avoiding the UK for some time, as uncertainty over its future relationship with the EU and a lacklustre handling of the coronavirus pandemic soured sentiment. The UK stock market has lagged its global peers in recent years, while UK funds have suffered persistent outflows.
However, in its latest update, the BlackRock Investment Institute revealed the “debut” of an overweight towards the UK.
“We are overweight UK equities,” it said. “The removal of uncertainty over a Brexit deal should see the risk premium on UK assets attached to that outcome erode. We also see UK large-caps as a relatively attractive play on the global cyclical recovery as it has lagged peers.”
Rising optimism for UK equities
Source: Bank of America Global Fund Manager Survey
There have been other signs that fund managers are starting to warm towards the UK after its long period in the cold.
The latest edition of the Bank of America Global Fund Manager Survey found asset allocators’ sentiment towards the UK has shifted from ‘max despair’ to a slightly better ‘rising pessimism’, as shown in the chart above.
While the UK remains the most heavily avoided region among BofA Global Fund Manager Survey participants, this now stands at a net 10 per cent underweight – down from 15 per cent in January and a net 34 per cent underweight just three months ago.
Meanwhile, BlackRock – which with assets under management of $8.7trn is the biggest fund manager in the world – has taken an underweight in governments bonds while broadening out its tilt towards cyclical assets, or those that would do better in an economic recovery.
The BlackRock Investment Institute said it has ‘refreshed’ the asset views that it only laid out in December 2020 in light of “major developments” such as the coronavirus vaccine rollout and the potential for up $2.8trn of additional US fiscal spending this year.
BlackRock has three themes for the year ahead: ‘new nominal’, ‘globalisation rewired’ and ‘turbocharged transformations’. The new nominal theme concerns a more muted response in nominal bond yields to stronger growth and rising inflation than in the past.
The firm estimates that a 1 per cent increase in 10-year US breakeven inflation rates (a measure of market inflation expectations) has typically led to 0.9 per cent rise in 10-year Treasury yields since 1998.
But the breakeven inflation has climbed 1.2 per cent since March last year and nominal yields are only 0.5 percentage points higher. This means that real yields, or those adjusted for inflation, have fallen further into negative territory as a result.
BlackRock noted that the unique nature of the coronavirus crisis means economic growth has restarted much faster than seen in past business cycle recessions and this could mean “unusually high growth rates” as the vaccine rollout allows a wider re-opening of the global economy.
“We expect a strengthening economy, a huge fiscal impulse and rising inflation to further drive up nominal yields this year, albeit by less than in similar periods in the past,” it said.
“We expect central banks to lean against any market concerns around rising debt levels and to keep interest rates low for now. Yet if the narrative on high debt levels, combined with rising inflation, were to change, it could eventually undermine the markets’ faith in the low-rate regime – with implications across asset classes.
“We have downgraded government bonds to underweight on a tactical basis, with an increased underweight in US Treasuries. We also downgrade euro area peripheral bonds to neutral, as peripheral yields have fallen to near record lows and spreads have narrowed. We downgrade credit to neutral on a tactical horizon, as spreads have narrowed to historical lows, but still like high yield for its income potential.”
On a tactical basis, BlackRock now prefers stocks over credit, as it sees equity valuations as more attractive.
It has broadened its cyclical tilt by upgrading European equities to neutral, as its sees room for the market to close its valuation gap versus the rest of the world with the restart becoming more entrenched. However, the slow vaccine rollout and more muted fiscal support could act as headwinds.
As well as the overweight in UK equities in the wake of Brexit, the firm stays overweight US and emerging market equities, while underweight Japan as it expects lower risk-adjusted returns.
“We expect our new nominal theme of stronger growth and a muted response in nominal bond yields to higher inflation to further play out, even after significant market moves. This supports our tactically pro-risk stance,” BlackRock finished.“A key risk is a further increase in long-term yields as markets grapple with an economic restart that could beat expectations. This could spark bouts of volatility, even though we believe the Fed would lean against any sharp moves for the time being.”
The dual investment objective of the relaunched Keystone Positive Change investment trust will benefit from widespread investor demand, according to some analysts.
The combination of Baillie Gifford’s long-term growth bias and positive impact approach will give the recently relaunched Keystone Positive Change investment trust a first mover advantage, according to analysts.
Baillie Gifford recently took over the Keystone investment trust from Invesco and unveiled plans to changes its approach from being a UK equity income strategy to an all-cap global equity strategy with a focus on growth and ESG.
“One of the most notable trends in the investment industry at present is the growth in sustainable investing,” said Simon Elliott, research analyst at Winterflood. “While there will be those that dismiss this as a fad, it appears to us that there is significant demand behind this.
“As with other Baillie Gifford mandates, the emphasis is on identifying growth companies but in particular those that have the potential to make a positive impact on society.”
The trust will be largely run in line with £2.4bn Baillie Gifford Positive Change fund, but it will also have the ability to invest in private and smaller listed companies that fit with the positive change philosophy.
Since the strategy launched to the public in January 2017, it has become the highest performing fund in the IA Global sector with a total return of 276.80 per cent. This compares with just 55.52 per cent from its average peer.
Elliott said the positive change strategy is unique within Baillie Gifford because of the fact it places just as a high importance of positive impacts as it does financial returns.
“Baillie Gifford’s Positive Change approach marries the firm’s well-known growth bias to companies that are perceived to be addressing one of four thematic global challenges,” he explained.
“The thesis is that by focusing on companies that have a sustainable competitive advantage, the strategy should generate attractive long-term investment returns.
“We believe that Keystone’s dual investment objective is unique in the investment companies sector at present and it has first mover advantage.”
Indeed, the Keystone investment trust has seen its shares go from a 14 per cent discount to net asset value (NAV) in December to a 0.4 per cent premium as of 19 February 2021.
Keystone’s premium/discount over 5yrs
Source: FE Analytics
Ewan Lovett-Turner, head of investment companies research at Numis Securities, also believes that Keystone Positive Change’s unique strategy will attract a lot of demand from investors.
“The new Positive Change approach represents a significant shift in investment approach, but we believe it has the potential to attract widespread demand given almost all investors are seeking to increase the ESG credentials of their portfolios and focus more on the impact of their investments,” he said.
“The big change in approach may see some rotation in the shareholder base, but we would expect the strategy has the scope to attract new investors and it should benefit from the marketing support and strong reputation of Baillie Gifford.”
Baillie Gifford is a well-known name to investors in the UK. The firm’s £19.5bn Scottish Mortgage Investment trust is the largest and best performing investment trust in the IT Global sector.
The Baillie Gifford Positive Change strategy has nine common investment holdings and a 20 to 25 per cent cross over to that of Scottish Mortgage.
Performance of Scottish Mortgage Investment Trust versus Positive Change
Source: FE Analytics
Lovett-Turner said: “There will clearly be some similarities with the thought process and themes that you see in Scottish Mortgage and other Baillie Gifford strategies.
“Reflecting this, around 90 per cent of holdings in the open-ended [Baillie Gifford Positive Change] fund are held somewhere else within Baillie Gifford, but overlap with particular strategies tends to be relatively low.”
However, this figure could reduce since Scottish Mortgage is reducing its holding in Tesla, which was also a significant holding in the Positive Change strategy.
“Some may sigh at the thought of yet another Baillie Gifford fund investing in global equities,” Winterflood’s Elliott said, “However, we maintain that all five funds are clearly differentiated, offering shareholders distinctive approaches.”
He highlighted the ability of Keystone Positive Change to invest in private and smaller listed companies: “We have been impressed with the investment team and it is clear to us that Baillie Gifford has considerable resource in this area.”
He believes Keystone will make good use of the investment trust structure through its investment in smaller and private companies.
With time, he believes this will prove to be a real differentiator and allow the trust’s portfolio to be more diversified than its open-ended equivalent.
Lovett-Turner agreed: “I think the unlisted holdings will be useful as a differentiator for the listed investment company compared to the open-ended fund and unlisted holdings are expected to be a driver of returns over time.
“That said, it is probably going to be a relatively slow burn, with the exposure to unquoted investments increased over a number of years.”
Although the company has the power to invest up to 30 per cent in unquoted stocks, it will likely increase 5 to 10 per cent over the next few years because the timing of investment opportunities is not always easy to predict.
Lovett-Turner added: “The managers of Keystone Positive Change will make the final investment decisions on what goes into the portfolio, but this will be based on opportunities provided by the private team, headed by Peter Singlehurst.
“It is now a pretty established team that has built a strong record in unlisted investment with a focus on minority stakes in fast growing unquoted companies.”
Meanwhile Investec analysts Alan Bierley and Ben Newell welcomed the appointment of Baillie Gifford and the adoption of “an exciting investment mandate”.
“We see extraordinary growth potential for impact investing over the coming years,” they said.
“We expect Baillie Gifford to fully utilise the inherent competitive advantages of the closed-end structure and this combined with a frugal fee structure, should enhance returns.”
The Keystone Positive Change trust is expected to have charges of 0.55 per cent when its market capitalisation exceeds £250m.
Brunner’s Matthew Tillet warns that a recovery has already been priced in to many cyclical stocks, even though they face an uncertain future.
Investors should brace themselves for a powerful economic recovery from the coronavirus crisis – but shouldn’t necessarily expect it to translate into stock market returns.
This is according to Matthew Tillet (pictured), manager of the Brunner Investment Trust.
There is a growing consensus that the roll-out of coronavirus vaccines in Europe and the US, and eventually the rest of the world, will lead to a sharp bounce-back in economic activity.
The rationale behind this is fairly obvious – the release of pent-up demand. However, Tillet said there are two other forces that will be just as important in helping the recovery to outpace those in the past.
“It is not just the fact that people have been sitting at home and haven't been able to do what they wanted,” the manager explained. “It is also that a lot of people are actually better off than they were before, because the government has provided so much support.”
The final reason is that this government support, in terms of both monetary and fiscal policy, is likely to remain in place until the recovery is well under way. For example, it was suggested last week that chancellor Rishi Sunak is set to extend the furlough scheme and business rate relief into the summer.
Tillet said this is an important difference with what happened after the financial crisis when there was a “fiscal retrenchment”, particularly in the West.
“We don't have that same consensus view among policymakers and the electorate about the drive for austerity, this belief that government debt needs to come down,” he continued.
“That just doesn't seem to be on the cards. In a way, you’ve got the perfect environment for quite a strong recovery. I find it hard to disagree with that consensus.”
However, while a strong recovery could well give people more confidence to invest in equities, it is important to remember there is an erratic relationship between the economy and the stock market.
Tillet said the connection is likely to be especially weak in the coming months and years. For example, he pointed out that while the market is always forward looking, it already seems to have priced in a perfect recovery in sectors that face an uncertain future.
“If you look at the cyclical areas of the market like travel, hotels or outdoor-event companies, some of them are already back to where they were pre-Covid,” the manager said. “Yet their business is a fraction of what it was. You’re scratching your head a bit when you look at that. Are those sorts of stocks really going to continue to outperform at the other end?
Performance of index over 1yr
Source: FE Analytics
“Then you had this huge rally in the early to mid part of 2020 in all of the companies that were beneficiaries of working from home and the Covid restrictions. Many of those companies are still at all-time highs. So it's a more nuanced picture when it comes to how the stock market might behave.”
And the manager warned that a strong recovery could even have negative implications for the market.
For example, he said that once the economy opens up and there is a surge in demand for goods and services, this will lead to inflation if supply cannot keep up. This will be exacerbated as the enormous amount of money created by central banks begins to move faster through the economy, putting upward pressure on interest rates and bond yields.
However, Tillet said the question is whether this will lead to a short-term spike in inflation or a sustained increase in prices over a longer period of time.
“Structurally, there are more reasons to think that inflation will happen now than there were, say, 10 years ago,” he continued.
“The big change is that we don't have the same kind of deflationary force from these pools of low-cost labour, particularly China, that were able to keep down the cost of tradable goods.
“If that's going to dissipate, then you'd expect the overall inflation numbers to be structurally higher going forward.
“On the other hand, technology has come a long way as well over the last 10 to 15 years. A lot of the digital economy is deflationary as technology allows you to provide cheaper products to the customer.”
The manager is not positioning Brunner for either one of these inflationary outcomes. He described it as a one-stop shop rather than a trust of extremes and said he balances the investment case between quality, growth and value when buying a stock.
Tillet added that there are many structural trends that will have a much greater impact on the market over the long term than the fallout from Covid and said it is a better use of his time to focus on these instead.
“Whether it is the digital economy, demographics or energy transition, these things will continue to be with us for many years to come,” he said. “We're more focused on actually understanding those trends and making sure that we're going to benefit from them.
“Maybe some of them will be a bit more cyclical than others and will benefit if interest rates go up, because they are financial companies, for example, while others might not. We're trying to make sure that the portfolio's performance is not going to be totally thrown off course by one of those possible macroeconomic outcomes.”
Data from FE Analytics shows Brunner Investment Trust has made 179.19 per cent over the past 10 years, compared with 183.42 per cent from its IT Global sector and 147.58 per cent from its benchmark, split 70:30 between the FTSE All World and the FTSE All Share.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust is yielding 2.23 per cent. It is on a discount of 11.56 per cent, compared with 11.82 and 10.2 per cent from its one- and three-year averages.
It has an ongoing charges figure of 0.66 per cent.
The early part of a year gives investors an opportunity to take stock. Sunil Krishnan reflects on how the current environment is shaping Aviva Investors’ view for multi-asset portfolios.
Despite some clear economic challenges, we are constructive on the outlook for the economy and risk assets. Strict lockdowns have been imposed in Europe once again and at least parts of the US have followed suit. However, the distribution of vaccines to bring the global pandemic under control should have a positive impact on economic activity in the medium term.
Two other themes inform our current views. The first is that there are signs of froth in equity markets, particularly in US small-caps and some tech companies. Retail investor participation, especially from US households, is high in these names and there is evidence of speculation in short-dated options, again likely from retail investors. Signs of excess bullish sentiment are increasing across a range of markets.
Although we do not yet see them as being material enough to pose a systemic risk to the global equity market, we are watching closely for indications of contamination. Following Tesla’s entry into the S&P 500, it would be a concern if gains in a single stock became a major force in the overall index performance. Similarly, if GameStop-style speculative behaviour began to emerge further afield, in European or Asian markets for instance, we would see it as a further warning sign.
The second theme informing our views is the change of administration in the US. Following the Democrat Senate wins in Georgia, investors have been debating whether the prospect of greater stimulus would be balanced out by more investor-unfriendly measures like tax rises or tightening of regulation.
Stimulus and regulation
On balance, we see the election result as constructive. While there may be appetite to consider changes in the tax regime, it is unlikely to be high on the US administration’s priority list in the middle of a pandemic, whereas president Biden has already put forward a $1.9trn rescue plan and is talking of an ambitious recovery plan to follow. This proposal may be watered down in the legislative process, but even a programme of half the size would have been unthinkable before the Georgia Senate election results given the recent passage of a smaller programme. We expect to see increases in near-term fiscal stimulus.
With regards to regulation, the environment is a stated priority for the new administration. President Trump passed a raft of executive orders to roll back environmental regulation over the last four years, and the Biden administration has already begun to restore some of it. However, this is a return of the inevitable rather than a major surprise, especially in light of the global trend towards decarbonisation.
The second area of debate concerns the tech sector and whether regulation there could pose an existential threat to the largest companies. There is growing interest in trust-busting measures in China, Europe and the US, but without international coordination regulators will struggle to force major changes in tech companies’ business models. For example, large US tech firms may be tempted to address European Union rules by simply creating a standalone European entity.
Regulators are also looking at whether companies’ past acquisitions were made for anti-competitive purposes. It would be difficult to unwind those decisions, but it signals greater scrutiny of such deals in future. The real question is to understand which companies’ business models are most dependent on being able to acquire assets defensively and which benefit from organic growth and innovation. We may see more differentiation between the two in the medium term. But we do not see the current regulatory pressure as a major challenge for tech earnings as a whole in 2021.
The final element of pressure on tech relates to content moderation due to public and political criticism over the seeming inability of platforms to address hate content. Regulators aim to put social media platforms in the position of content editors. It is to some extent inevitable, and we expect the distinction between platforms and content publishers to diminish over time, but this is more likely to require platforms to refine rather than upend their business models. They may need to invest in moderation or editorship, but it is not quite the same as having to shut down large parts of their business.
If the threats to big tech were more existential, they would lead us to challenge the US market as an investment. At the moment, they do not look quite so severe but could still be a headwind for those companies. That is one of the reasons we prefer to remain diversified in terms of geographies, despite the relative US outperformance over the last year and decade.
Diversified exposure in equities
We otherwise remain constructive on equities, particularly since investor expectations do not yet fully reflect the positive medium-term impact of vaccine rollouts in some sectors (despite signs of froth elsewhere). For instance, in industries suffering most from the pandemic, such as airlines, or areas that are highly dependent on global economic demand like energy, prices remain well below pre-pandemic levels.
Despite the uneven price recovery between sectors, we prefer to keep our equity positions broad-based across developed and emerging markets. This is partly because of the potential regulatory headwinds for US tech stocks and general signs of froth, and partly because focusing solely on sectors where stock prices are lagging can become bound up in style and factor risks.
The exception we make is in European oil and gas, as a cyclical play which has not recovered very strongly. Even allocations to energy can be influenced by environmental, social and governance (ESG) considerations. Our ESG team’s analysis shows European firms are much more advanced than their US counterparts in responding to engagement and adapting their business models to a net-zero future.
In terms of valuations, one of the key drivers for energy companies is oil prices. The pandemic continues to limit the potential for increases for now, but the medium-term outlook for demand is more positive in light of vaccine rollouts. In addition, at a meeting in early January 2021, OPEC surprised the market by deciding against a widely expected rise in production levels, to which Saudi Arabia added a unilaterally expressed willingness to take on more of the burden in terms of output reduction to protect prices. Suppressed production and a more favourable demand outlook in the medium term could combine to support oil prices.
Credit is more sensitive to US Treasuries
Credit has been a preferred allocation for us over recent quarters as the economy recovered and central banks pledged support, helping underpin corporate bond markets.
However, alongside high yield and hard-currency emerging-market debt, investment-grade credit has seen significant spread compression since the wide levels reached in March 2020 when the pandemic first hit. As spreads have tightened and total yields converge on equivalent government bonds, these markets have become more sensitive to interest rate moves and the US Treasury market. In this regard, they have become less compelling.
In contrast, local-currency emerging-market debt is not as sensitive to US Treasuries and could benefit if emerging-market currencies rally against the US dollar.
This did not happen strongly in 2020 despite dollar weakness versus developed peers; perhaps reflecting investor caution towards emerging economies given the progress of the pandemic. However, that could change in 2021 if economic activity rebounded in emerging markets at the same time as in the US – especially as a more dovish Federal Reserve will not tighten policy in a hurry, creating less supportive conditions for a strong dollar.
‘Risk-neutral’ Japanese yen
In terms of currencies, we continue to like being long Japanese yen versus the US dollar, although it may be less of a risk-reducer than it once was. Indeed, as more investors short the US dollar, the currency’s correlation with risky assets could become more negative. In other words, episodes of weakness in risky assets could see the dollar rally as investors unwind their levered positions.
In the current context, being long Japanese yen and short US dollars is not a risk-off position but, with the Japanese yen being a traditional safe-haven currency, it could be somewhat sheltered from risk-on/ risk-off movements.
The currency is also supported by domestic investors bringing more investments back into Japan. There is some evidence reshoring began towards the end of last year, especially in equities, and we expect it to gather pace in 2021.
Sunil Krishnan is head of multi-asset funds at Aviva Investors. The views expressed above are his own and should not be taken as investment advice.
Janus Henderson’s latest Global Dividend Index report looks back at impact Covid-19 had on global dividends last year and the outlook for 2021.
Global dividends showed “remarkable resilience” in 2020 despite going through their worst crisis since the second world war, according to Janus Henderson’s latest Global Dividend Index.
In the worst global crisis since the second world war which saw $220bn in dividend cuts within nine months “global dividends showed remarkable resilience”, according to Janus Henderson’s latest Global Dividend Index report.
Last year was a brutal one for income investors, with some $220bn in dividend being cut in the space of nine months. Janus Henderson’s figures show that global dividends fell 12.2 per cent on a headline basis in 2020 down to $1.26trn
There was a 10.5 per cent decline on an underlying basis, which was smaller than the cuts after 2008’s global financial crisis.
Source: Janus Henderson
This exceeded Janus Henderson’s initial ‘best case scenario’ projection for the year ($1.21trn headline). This was mainly down to a “less severe fall” in Q4, which saw some suspended dividends either fully or partially restored.
Dividends fell by 14 per cent in Q4 on an underlying basis to a total of $269.1bn and the headline decline was ‘just’ 9.4 per cent.
The Janus Henderson Global Dividend Index is a long-term study of global dividend trends. It measures the progress companies globally are making towards paying investors an income with its capital.
Jane Shoemake, investment director for global equity income at Janus Henderson, said: “Although the pandemic has changed the lives of billions in previously unimaginable ways, its impact on dividends has been consistent with a conventional, if severe, recession. Sectors that depend on discretionary spending have been more severely impacted, while defensive sectors have continued to make payments.
“At a country level, places like the UK, Australia and parts of Europe suffered a greater decline because some companies had arguably been overdistributing before the crisis and because of regulatory interventions in the banking sector.
“But at the global level, the underlying 15 per cent year-on-year contraction in payouts between Q2 and Q4 has been less severe than in the aftermath of the global financial crisis. The disruption in some countries and sectors has been extreme, but a global approach to income investing meant the benefits of diversification have helped mitigate some of these effects.
“Crucially, the world’s banks (which usually pay the largest share of the world’s dividends) mostly entered the crisis with healthy balance sheets. Bank dividends may have been restricted by regulators in some parts of the world, but the banking system has continued to function, underpinned by robust capital levels, which is vital for the smooth operation of economies.
“Finally, as is usual in challenging economic environments, dividends are exhibiting stability relative to profits. This is one reason why dividends are such an important consideration for investors.”
The Covid-19 pandemic and the measures companies had to take to cope with its financial impact were the ultimate cause of the widespread dividend cuts seen last year.
The first dividend cuts in response to the pandemic were made at the beginning of Q2. Therefore, to determine the full impact of Covid-19 on global dividends the report compared results from April to December 2020 (Q2-Q4) with the same period in 2019.
Janus Henderson’s Global Dividend Index found that dividend cuts and cancellations totalled $220bn between April and December last year.
But the report said: “We want to emphasise that despite the worst global crisis since the second world war companies in our index for the most part continued to pay dividends to their shareholders.”
Indeed, looking at 2020 overall $965bn worth of dividends were paid out, with two-thirds of companies able to increase or at least maintain their dividend. This meant
As a result, 2020’s payouts “far outweighed the cuts”, Janus Henderson said.
But that the end picture for dividends in 2020 was not as bad as expected doesn’t mean the rate of cuts wasn’t serious.
The Janus Henderson Global Dividend Index fell to 172.4, a level last seen in 2017. The index uses 2009 as a base year, with an index value of 100.
According to the report, one in eight companies globally cancelled their dividend payout completely and one in five made a cut. Six out of 10 consumer discretionary companies cut or cancelled payouts.
Banks accounted for one-third of the reductions in total. The impact on banks was felt especially in the UK, where they were put under pressure from the Bank of England ordering them to cancel all shareholder payouts for 2020.
Source: Janus Henderson
Banks were the biggest contributor to both UK and Europe’s dividend decline, which was so significant they alone contributed more than half of the world’s dividend cuts.
The index fell below its 2009 base level for the UK.
But not all areas suffered as much. North America for example saw a 2.6 per cent increase, on a headline basis, setting a new record. The report found that just one in seven companies in the US was affected.
Source: Janus Henderson
Looking ahead at the state of dividends in 2021, the report said that Q1 will see payouts fall, but the decline will be smaller than the one experienced between Q2 and Q4 last year.
Janus Henderson said: “A slow escape from the pandemic, and the drag caused by the first quarter”, could mean in a worst case scenario headline dividends fall by 2 per cent, and fall to minus 3 per cent on an underlying basis.
But in its best-case scenario, underlying dividends could increase by 2 per cent and rise 5 per cent on a headline basis.
Janus Henderson said: “The outlook for the full year remains extremely uncertain. The pandemic has intensified in many parts of the world, even as vaccine rollouts provide hope. Importantly, banking dividends will resume in countries where they were curtailed, but they will not come close to 2019 levels in Europe and the UK, and this will limit the potential for growth.
“Those parts of the world that proved resilient in 2020 look likely to repeat this performance in 2021, but some sectors are likely to continue to struggle until economies can reopen fully.”
February’s edition considers the fate of Brazil, Russia and India and asks why they were lumped in with China in the first place.
The latest issue of Trustnet Magazine attempts to find out what happened to the BRICs. In 2001, Brazil, Russia, India and China were tipped to reshape the world economy, but while the latter has gone from strength to strength, the other three countries have faded away. Anthony Luzio establishes why their paths diverged to such an extent and reveals what investors can learn from the experience. Staying on this theme, Danielle Levy looks for the frontier markets that can power emerging market growth over the next 20 years and Cherry Reynard finds out if China’s dominance means it should be treated as a class apart.
Meanwhile, this month’s sector focus falls on the Asia Pacific region as Adam Lewis says it is likely to be at the epicentre of middle-class growth over the coming decades.
In the magazine’s regular columns, John Blowers has a stab at creating the perfect investment platform, Waverton’s Tineke Frikkee names three UK stocks that are making the most of the opportunity to deliver their services online and Cerno Capital’s Fergus Shaw reveals which trust he is using to benefit from the trend towards delivering cheaper, cleaner and more reliable energy.
As always, Trustnet Magazine is free – you do not even have to enter any details. Simply click here to start reading, then click the arrow pointing down on the right-hand side of the screen if you want to download the PDF.
Trustnet asked market experts for the funds they would consider if the US market is in the late stages of an epic bubble.
Veteran investor Jeremy Grantham recently said the US market has all the characteristics of a bubble that is primed to burst, warning we could be on the verge of another crash like the one seen in 1929.
Often an oracle at calling market crashes, he cited overvaluation and extreme investor behaviour as two preceding hallmarks of the biggest collapses in market history - two things which have been well-documented in recent weeks.
“I believe this event will be recorded as one of the great bubbles of financial history,” said Grantham. “Right along with the South Sea bubble of 1720, the Wall Street Crash of 1929 and the dotcom bubble of 2000.”
The veteran investor is convinced that this bubble will burst in due course, with devastating effects on the economy and portfolios.
“Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives,” he said. “It is intellectually exciting and terrifying at the same time, and a privilege to ride through a market like this one more time.”
With that in mind, Trustnet asked a selection of market commentators for the funds which investors could use to weather the storm of a market collapse.
“Regardless of whether you subscribe to Grantham’s view that the US market is heading towards a 1929-style crash, there are investment opportunities closer to home that are compelling, particularly for those investors with a long-term investment horizon,” said John Monaghan, head of research at Square Mile Investment Consulting & Research.
“We believe that the Jupiter UK Special Situations fund is just such an opportunity.”
The £1.8bn fund has been managed by Ben Whitmore since 2006. Monaghan noted that Whitmore is a high conviction, long-term contrarian investor who seeks opportunities in companies that are out of favour. He has managed money in this style for most of his lengthy career.
Monaghan added that stock selection is determined by conviction, driven by the manager’s view of the quality of the company's underlying business and the attractiveness of its valuation.
The final portfolio, which normally consists of between 35 to 45 holdings, is constructed with less emphasis on the FTSE All Share index.
“This means that the portfolio can look and act very differently to the market at times and display short-term volatility,” he said. “However, risk relative to the index is not a major consideration for the manager who prefers to measure risk simply in terms of the potential loss of investor capital.
“For those investors with a longer-term horizon looking for a value-focused UK equities fund, the Jupiter UK Special Situations fund is certainly one worth considering.”
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Over a five-year period, the fund has made a total return of 38.98 per cent, compared to 46.13 per cent for the average fund in the IA UK All Companies sector. It has an ongoing charges figure (OCF) of 0.76 per cent.
The second pick, from AJ Bell analyst Laith Khalaf, is the Personal Assets Trust, managed by FE fundinfo Alpha Manager Sebastian Lyon.
“The S&P 500 is such an influential market that any steep falls are likely to be replicated in other equity markets,” said Khalaf. “Perhaps to a lesser extent if any sell-off is valuation-led, though bear markets don’t tend to be triggered simply by high stock prices.”
He explained that the traditional place to seek refuge if equity markets are falling would be in government bonds but argued that if an investor thinks US equities are in a bubble, they will likely take a similar view of US Treasuries.
“Tightening monetary policy is often a candidate for sparking a market sell-off, but in an environment of rising interesting rates, bonds wouldn’t be a great asset to own,” he said.
For investors worried about market levels, Khalaf suggested a mixed asset approach and recommended the Personal Assets Trust.
“These funds contain a mix of assets, so cover a lot of bases, and have a professional fund manager at the helm who can navigate switching between assets as market conditions dictate,” he said.
“I’d suggest having a few such funds so that you’re returns aren’t solely reliant on the decisions of just one manager.”
Performance of trust vs benchmark over 5yrs
Source: FE Analytics
The five FE fundinfo Crown-rated Personal Assets Trust has been managed by Lyon since 2009.
Over the past five years, the £1.4bn trust made a total return of 36.69 per cent, while the FTSE All Share made 44.81 per cent.
According to data from the Association of Investment Companies (AIC), it is trading at a 1.4 per cent premium to net asset value (NAV) and has ongoing charges of 0.86 per cent. It is not currently geared.
“As tempting as it is to try and pick something that could make money in a 1929-style collapse, I think that’s a challenge and therefore minimising losses or preserving capital might be a better approach, said Ryan Hughes, head of active portfolios at AJ Bell.
His pick is the £1.4bn Janus Henderson UK Absolute Return fund, run by FE fundinfo Alpha Managers Ben Wallace and Luke Newman.
“While absolute return funds have rightly had a bad press, the Janus Henderson UK Absolute Return fund is one of the good ones and has a good record of navigating its way through sharp corrections,” he said.
Hughes said the managers long/short approach is flexible enough to allow them to go net-short if they feel the need. They successfully used that flexibility in navigating the last financial crisis.
“Key to the approach is the management of risk and adjusting the net and gross positions accordingly, which is where many absolute managers have got it wrong in recent years,” he added.
“While the return may not be spectacular, preserving capital in a market crash is a fantastic way to make money in the long run.”
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Over the last five years, Janus Henderson UK Absolute Return has made a total return of 11.49 per cent, compared to 11.99 per cent for the average IA Targeted Absolute Return sector peer. It has an OCF of 1.05 per cent.
Staying with absolute return, FundCalibre managing director Darius McDermott has gone with the £491m SVS Church House Tenax Absolute Return Strategies fund.
“While it sits in the much maligned IA Targeted Absolute Return sector, it is one of the funds that actually does what it is supposed to do,” he said.
The fund has relatively low exposure to equities with a 25 per cent ceiling, as the managers want to minimise the volatility of the fund.
Managed by James Mahon and FE fundinfo Alpha Manager Jeremy Wharton, the fund places a heavy emphasis on capital preservation and it is one of the few absolute return funds with a track record which goes back beyond 2008 and the global financial crisis.
“During the Covid-19 sell-off the fund fell 6.6 per cent, while global stock markets fell more than 25 per cent. Since the lows in March, it has returned 10.2 per cent,” said McDermott.
"It really came into its own in the fastest bear market in history when everything became temporarily correlated and really showed its worth in a portfolio. It’s also not vulnerable to any more shorting ‘wars’ between social media/retail investors and hedge funds because it doesn’t use shorting.
"If we are going to have another correction, this is a fund I’d like to have in my portfolio mix."
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Over five years, SVS Church House Tenax Absolute Return Strategies posted a total return of 17.75 per cent, against a return of 11.99 per cent for the average fund in the IA Targeted Absolute Return sector. It has an OCF of 1.47 per cent.