Storytelling that drives higher revenue should enable Disney to achieve double digit operating margins, according to Rosanna Burcheri, manager of Fidelity American Special Situations.
US equities have been a shoot-the-lights-out growth market for the past 18 months or so, but for investors seeking diversification away from passive trackers’ heavy weightings to mega-cap technology names, value funds that focus on cheaper stocks in different sectors are a viable alternative.
Rosanna Burcheri, manager of the £633m Fidelity American Special Situations fund, has built a portfolio with a high active share that looks markedly different to the S&P 500. Her largest holdings are Alphabet, Wells Fargo, FedEx, Elevance Health and Salesforce, and her highest conviction position is Disney.
She believes that the US equity market offers a huge pool of opportunities, with many stocks delivering a return on invested cash flow above 25% (including Aon, Lowe’s and McKesson) and earnings per share growth for 2024-25 above 25% (such as Intel and Baker Hughes).
“The message is that there is life beyond the Magnificent Seven and there is an amazing amount of companies you can invest in,” she said.
Burcheri won the 2023 FE fundinfo Alpha Manager of the Year award for US equities, which was based on performance in 2022 – a year of rapidly rising interest rates that penalised growth stocks and played more to her fund’s strengths. She was nominated for the award again this year, having delivered strong risk-adjusted returns throughout her career.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Below, Burcheri tells Trustnet about her investment process, her best and worst-performing holdings and why she has such high conviction in Disney.
What is your investment process?
The Fidelity American Special Situations fund is an unconstrained, concentrated US value strategy with a high active share, where the fund’s sector exposures are purely a result of a bottom-up investment process.
As co-portfolio managers, Ashish Bhardwaj and I invest in great companies that are mispriced, either because they are out of favour or their intrinsic asset value is misunderstood. Bottom-up stock picking is the core of our approach and is the main driver of risk and return, alongside our value-biased investment style.
We aim to identify quality businesses supported by long-term tailwinds that will make them stronger and more successful in the future.
We place a strong emphasis on asset-backed valuations and margin of safety and look for businesses trading below their intrinsic value or close to it. We also mitigate downside risk by avoiding dying industries.
Why should investors pick your fund?
It is a core value strategy providing exposure to the US market. American exceptionalism, supported by a strong industrial policy, deep capital markets and an innovative economy, creates an attractive stock picking pool.
As a core value strategy with a mid-cap bias and high active share, the fund is differentiated from today’s more growth-biased US equity indices. An allocation to the Fidelity American Special Situations fund alongside an exchange-traded fund should enable investors to gain optimal exposure to the US market.
What’s your highest conviction stock pick?
The Walt Disney Company has an unrivalled catalogue of intellectual property (Disney characters, Pixar, Avatar, etc.) which drives the media business as well as parks, resorts and consumer products.
It is delivering on a media business model change to improve the long-term outcome for shareholders.
Disney’s experiences segment is a highly valuable tangible asset that has grown to more than $25bn of revenue annually and represents over 55% of the company’s enterprise value. The business is guiding towards a long runway to grow the size and scope of the parks business over time.
Disney also has intangible assets with franchise intellectual property in the form of Disney characters, Pixar characters and Marvel characters. In 2019 the company launched Disney+ to bring its storytelling around these characters directly to consumers for the first time.
The company’s direct to consumer business (DTC) has been in investment mode for the past five years and is a long-term area of growth in the entertainment industry. In its most recent quarterly results, Disney reported profitability in the DTC business for the first time, driven by cost controls and revenue growth.
Performance of Disney shares over 1yr
Source: Google Finance
What was your best call over the past year?
The fund’s 1% position in Constellation Energy (0.9 percentage points overweight relative to the S&P 500 Index) was a strong contributor to relative performance. Over the year to 31 March 2024, Constellation Energy returned 136.5%.
The company produces carbon-free energy via nuclear, hydro, wind and solar energy solutions. Within its nuclear power generation business, the implementation of US Nuclear Production Tax Credits (PTC) via the Inflation Reduction Act (in place until 2032) provides a floor to power sales prices, supporting future revenue generation.
In addition to this, the business is well positioned to sign large contracts with hyper-scalers building artificial intelligence data centres, to provide low carbon energy.
Performance of Constellation Energy shares over 1yr
Source: Google Finance
Which stock has been your worst investment recently?
The fund’s 2.9% off-benchmark position in Cheniere Energy detracted from relative performance. In the 12 months to 31 March 2024, Cheniere returned 2.3%.
The company is a liquified natural gas (LNG) business, owning and operating LNG terminals and pipelines. Its revenue generation comes from fixed-term export contracts over 20 years, with 95% of the business covered by these contracts. As a result, the business has a high-quality, repeatable revenue stream today, and expansion projects at its LNG terminals will deliver revenue growth in the future.
The energy sector was weak during the year to 31 March, alongside energy commodity prices. Despite 95% of Cheniere’s revenue being covered by fixed-term contracts and not at risk of energy prices, performance returns were broadly aligned with the rest of the energy sector.
The value of Cheniere’s 20-year contracts ending 2028 are $203 per share. As at end March 2024 its share price was $112.3, providing a strong margin of safety.
What do you enjoy doing outside of fund management?
I enjoy spending time with my family and I head to the ski slopes when I can.
How could the 4 July general election affect savings and investments?
So we’re heading back to the polls. This week Rishi Sunak announced there would be a general election, surprising some with the timing.
The under-pressure prime minister was expected by some to hold out for as long as possible in an effort to overturn the Conservative party’s flailing public image.
But inflation figures have come down markedly and are near the Bank of England’s target rate, GDP is growing (albeit mildly) and the economy appears in reasonable shape.
This may have given Sunak the confidence to press ahead with an election in which he will undoubtedly lean on his economic and financial achievements.
Myron Jobson, senior personal finance analyst at interactive investor said: “A general election could bring huge changes in economic policies, taxation and public spending that can reshape not only the nation’s economic landscape but also personal finances.”
For starters, a change in government could spell the end for a short-lived Great British ISA, which has many critics and may fall by the wayside under Labour – the bookies favourite to win in July.
The biggest topic in the financial sphere will be pensions. The ‘pot for life’ initiative outlined in the latest spring Budget would require an employer to contribute to a pension arrangement chosen by the employee, rather than one selected by the employer. Yet the scheme is in its infancy.
Alice Guy, head of pensions & savings at ii, said: “The new pensions minister has a big opportunity here to excite people about their pensions, by allowing more choice about where to invest their workplace pension.”
Perhaps the most impactful difference of opinion will be the lifetime allowance. Recently scrapped by chancellor Jeremy Hunt, Labour has said it wants it reinstated.
That’s before looking at the state pension, where the triple lock remains a contentious issue. While both Labour and the Conservatives are supportive of it, the current system puts the onus on the younger generation to shoulder the cost and it will remain under review by both parties, whichever should win in July.
From a stock market perspective there is likely to be little impact. Most are pricing in a Labour win – a prospect far less impactful than a few years ago when there were real concerns about a left-wing government under Jeremy Corbyn. Keir Starmer is viewed more market-friendly.
Perhaps the biggest spanner in the political works would be a surprise Conservative victory. While this seems unlikely, this too could have minimal impact on markets as it would be viewed as a continuation of the status quo – something that investors have generally responded well to.
Of course, with more than 100 current Conservative MPs not standing at these elections, there may be a new-look government even if the incumbent party does win.
However, the thing markets hate above all is uncertainty. With an election called earlier than expected, this should remove this worry fairly quickly, even if there may be more volatility in the weeks before the event.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said a decisive victory by one side or the other will “tend to bring more settled markets than a close-run thing” but noted that, as always, “it’s worth taking a long-term view”.
Jobson agreed: “As is often the case, the ‘keep calm and carry on’ maxim is worth remembering here. Investors should avoid a knee-jerk reaction based on what could happen and concentrate on their long-term goals.”
For what it’s worth, so do I.
Fraser Lundie is joining Aviva Investors as global head of fixed income.
Aviva Investors has appointed Fraser Lundie as global head of fixed income. He was previously head of fixed income, public markets at Federated Hermes, where he served as the firm’s head of credit.
At Aviva Investors, he will be responsible for the global rates, investment grade, high yield, emerging market debt and global liquidity teams.
Lundie and his team managed around £5bn in credit strategies for Federated Hermes across pooled funds and segregated accounts. Lundie was the lead or co-manager for the firm’s multi-strategy credit, global high-yield credit, absolute return credit and unconstrained credit funds, the latter of which has £1bn in assets under management.
During the 14 years he spent at Federated Hermes, Lundie developed a strong focus on sustainable investing and he designed and launched sustainable credit strategies, including the $1.2bn Federated Hermes SDG Engagement High Yield Credit fund.
Lundie said: “I am incredibly proud and excited to be joining a firm with such a rich history and culture of embracing innovation, technology and sustainability. The opportunity to contribute to Aviva Investors’ efforts in building a best-in-class fixed income franchise for our clients is something I relish being a part of.”
He will report to chief investment officer Daniel McHugh, who said: “Fraser has a very deep wealth of experience across all asset classes within the fixed income universe and a deep understanding of delivering sustainable solutions.”
At Federated Hermes, Mitch Reznick, global head of sustainable fixed income, has stepped up to become group head of fixed income. He joined the firm at the same time as Lundie in 2010 and they were joint heads of credit from 2012 until 2019, when Reznick took the lead on sustainability. Lundie then became the sole head of credit until his promotion in 2022 to lead the fixed income team.
Federated Hermes is not making any further changes to the portfolio management teams running its bond funds.
Chief financial officer Jason Windsor appointed interim chief executive.
Stephen Bird is stepping down as the chief executive of abrdn after a four-year stint trying to revive the fortunes of the struggling asset management house.
A stock exchange statement from abrdn said Bird and the board “have together agreed that it is the right time for Stephen to hand over the reins”. Under Bird, the company has undergone a “significant strategic repositioning” although one of the most notable changes was the rebranding from Standard Life Aberdeen to abrdn.
However, he also restructured underperforming parts of the group – such as its private equity arm and joint venture with Virgin Money – and expanded its wealth management business and bought interactive investor, the UK’s second-largest retail platform.
Bird said: “I am immensely proud of the work we have done together to simplify abrdn and position the company for sustainable growth.
“Together with a refreshed leadership team and an incredibly committed group of colleagues at all levels, we have refocused our global Investments business as a specialist asset manager, working to address its cost base and build mutually beneficial linkages with our wealth businesses.”
Chief financial officer Jason Windsor has been appointed interim chief executive while the board searches for a permanent successor. Windsor joined abrdn in October, having previously been chief financial officer of UK housebuilder Persimmon.
Bird will work alongside Windsor until 30 June in order to ensure a smooth handover.
Douglas Flint, chairman of abrdn, said: “Stephen took time to assemble the talent needed to execute successfully on his strategic vision and he passes on to them, with confidence, the responsibility to execute the next stage of our transformation. We owe him a great debt of gratitude and wish him well in the next phase of his career.”
Troy and Royal London strategies feature amongst fund selectors’ suggestions for retirees.
Investing during retirement is a different kettle of fish to picking funds for a growing pot of assets. Avoiding capital losses – especially in the early days when your pensions pot is largest – becomes more important than generating high returns.
Retired investors usually want a consistent income and downside protection. People’s risk appetite and financial resilience varies, but generally speaking, retired investors have a lower tolerance for risk than younger investors who are accumulating wealth.
As Rob Morgan, chief investment analyst at Charles Stanley, explained: “Managing a portfolio for income in retirement is a lot trickier than the ‘accumulation’ phase. Volatility becomes an enemy rather than a friend, and care must be taken not to drain a pot too quickly and leave the retiree short of income later.”
Lower tolerance for risk often translates into a higher fixed-income allocation but Dan Coatsworth, investment analyst at AJ Bell, argued that there is merit to keeping some equity exposure for capital growth and dividend income, particularly as people are living for longer.
Low risk multi-asset income and capital preservation funds can potentially provide the best of both worlds and as Morgan said, they “take much of the heavy lifting away from the investor in terms of asset allocation and investment selection”.
Trustnet asked fund selectors to suggest a range of multi-asset strategies that are suitable for retirees.
Troy Trojan and Personal Assets
Hal Cook, senior investment analyst at Hargreaves Lansdown, highlighted Troy Trojan and as one option for retirees to consider.
“Troy Trojan is a good choice for the more risk averse. While the income from this fund is limited, the conservative nature of the way the fund invests definitely has its merits for retirees who have limited capacity for loss,” Cook explained.
“The fund has a simple philosophy, looking to provide long-term growth and some income while limiting losses during weaker markets.”
Troy Trojan has outpaced inflation since launch in May 2001 and has been managed by FE fundinfo Alpha Manager Sebastian Lyon since inception and deputy manager Charlotte Yonge since 2013.
Performance of fund vs sector and benchmark over 20yrs
Source: FE Analytics
Morgan – like Cook – rates Troy Asset Management’s Lyon but prefers his Personal Assets Trust, which focuses on preserving capital.
“Lyon builds his portfolio using three ‘pillars’: solid global companies with strong cash flows, index-linked gilts and gold. He is also willing to hold a large amount of cash if he is cautious and wishes to guard against market volatility,” Morgan said.
“Performance can seem quite pedestrian when equity markets are strong, but the trust has historically fared relatively well in weak markets. It therefore might be worth considering as a defensive holding within the core of a portfolio.”
Royal London Sustainable Managed Growth
The Royal London Sustainable Managed Growth Trust, which sits in the top-quartile of the IA Mixed Investment 0-35% Shares sector, might also appeal to cautious investors, said Coatsworth.
“The fund invests mainly in sterling-denominated bonds with some equity exposure on the side, accounting for about one quarter of the portfolio. It has an ethical and sustainable investment tilt,” he said.
Performance of fund vs sector over 10yrs
Source: FE Analytics
It has been the best fund in its sector over 10 years, making more than double (58.5%) the average peer (27.2%), as well as over the past 12 months, while it is in second place over five years.
Waverton Multi-Asset Income
Alex Farlow, associate director, multi-asset research at Square Mile Investment Consulting and Research, chose Waverton Multi-Asset Income.
The fund is managed by James Mee and Matthew Parkinson, who have three goals: to grow capital in-line with or ahead of inflation, pay a consistent level of income and limit capital drawdown in falling markets.
“It is a directly invested strategy, meaning that it is competitively priced relative to its peers and it has an impressive track record,” Farlow said.
The asset allocation is flexible, but tends to be roughly 50% equity, 20% bonds and 25% alternatives, with the remainder held in cash. “This cash weighting is used to protect capital when the managers’ outlook for markets is bearish,” he explained.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It has been the fourth best fund in the 147-strong IA Mixed Investment 20-60% Shares sector over five years, making 35% – more than double the average return (17%) and since its launch in 2014, it is comfortably ahead of the sector and inflation.
Other options
Morgan also highlighted Ninety One Diversified Income, which he said “tries to balance returns with controlling volatility and offers the potential to capture market upside but cap the downside in times of stress, all while producing a decent income.” It currently yields 4.7%.
Farlow meanwhile suggested Ciaran Mallon’s Invesco Distribution, which has a neutral weighting of 60% to global bonds and 40% to equities, as well as Premier Miton Multi-Asset Distribution, which invests more widely across equities, bonds, property, alternatives and cash.
On the latter, he cautioned that “the team's investment approach and the fund’s income focus can mean that the portfolio is exposed to less liquid areas of the market and investments that can fall more sharply than the market when deeply distressed”.
For retired investors with a higher risk appetite or for those approaching retirement who are still looking for some investment growth, Cook proposed BNY Mellon Multi-Asset Balanced, which is predominantly invested in equities.
Baillie Gifford Sustainable Income is also an option for those looking to invest their money in a fund with an environmental, social and governance (ESG) framework.
Henry Dixon and Jack Barrat have won the FE fundinfo Alpha Manager of the Year award for UK equities for the second year running.
As UK value managers, Man Group’s Henry Dixon and Jack Barrat have been pursuing an out of favour investment style in an unpopular region for the best part of a decade and yet they have managed to hold their own. As Barrat said: “We sometimes think of ourselves as the last value investors left standing.”
With the Man GLG Undervalued Assets fund, Barrat and Dixon have developed an investment process that works in today’s market conditions and is a far cry from traditional value investing.
“We've tried to build a process that we think is value for 2024, not value for 1980 – which was buying low price-to-book or low price-to-earnings (P/E) or buying things that were falling. That’s not what we do,” Barrat said.
“We hope that our process, through analysis of proper tangible assets, sensible cash generation and the real value you're paying for a company – the all-in enterprise value – attempts to circumnavigate a lot of the pitfalls of historical value investing. We try to be a modern value fund and I think that’s how we’ve managed to stay alive.”
It hasn’t been easy. Barrat said that he and Dixon designed their investment process during “an era where value hasn't worked”.
For instance, Man GLG Undervalued Assets’ portfolio has a tangible asset value three times greater than the wider market. “There was a moment when rates were zero that felt like we just weren't getting rewarded, because an extension of zero rates was that you could replicate anything you wanted, virtually for free,” Barrat recalled.
When central banks started hiking interest rates in 2022, “a slight compensation” was that higher rates focused attention on asset value.
Amidst that environment, Man GLG Undervalued Assets was one of the few funds to make a positive return in 2022, up 2.9%. The FTSE All Share was flat for 2022 but the average fund in the IA UK All Companies sector lost 9.1% that year.
Last year, Man GLG Undervalued Assets more than doubled its benchmark’s return, up 16.2% versus 7.9% for the FTSE All Share and 7.4% for the IA UK All Companies sector.
In recognition of their track record, Barrat and Dixon have won the FE fundinfo Alpha Manager of the Year award for UK equities, for the second year running.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
A breakdown of the investment process
Barrat and Dixon analyse three key things: core tangible assets, the enterprise value of a business and one-year forward cash generation.
They calculate a ‘conservative baseline’ tangible book value – in other words, what it would cost to replicate the business and its assets.
Then they assess what returns a business is making from its assets and compare that to the enterprise value, i.e. the multiple of book value that investors are being asked to pay for those returns.
Third, they check the business is generating cash flow. “Not only is there a record amount of adjustment to earnings in the UK market right now, the conversion of those earnings to cash flow is, in places, very poor. Indeed, there are businesses out there that may appear ostensibly cheap, but we believe they produce almost no cash at all,” Barrat pointed out.
Having put stocks through their three tests, Barrat and Dixon invest in two types of company, which they classify as ‘undervalued assets’ and ‘undervalued returns’.
‘Undervalued assets’ are companies trading below their tangible book value, in other words the share price is less than the replacement cost for the company’s assets.
“These are businesses that are typically in quite a distressed period of their own capital cycle. The market is almost explicitly calling into question the value of their assets. Ryanair at the height of the Covid pandemic was trading below the value of its planes, right on its balance sheet, because people thought they were never going to fly again,” Barrat explained.
“Now brick manufacturers in the UK are trading below the value of their factories, let alone the value of the clay in the ground. House builders have had a very difficult two years given the rise in interest rates and that has a knock-on effect on brick deliveries.”
An example of this is Whitbread, in which Man GLG Undervalued Assets invested in late 2022 and sold out at the end of 2023. Dixon said he bought the stock at a share price of £25 but the cost of replicating its assets was £34 per share; a target that the share price reached in December 2023.
Performance of Whitbread shares vs FTSE All Share in 2023
Source: FE Analytics
Whitbread has a hotel footprint of 85,000 rooms and Dixon said it would cost just over £100,000 per room to build a hotel. The replacement cost was 40% higher than the share price 18 months or so ago.
There were concerns about the cost of labour and utility bills, and worries about Covid variants and the possibility of further lockdowns. However, Whitbread was well positioned to take market share.
Whitbread did a rights issue after Covid so it had very little debt and was well financed. Its share price has recovered as travel trends have normalised.
“That's a poster child of a well-financed company with a competitive landscape getting easier,” Dixon concluded.
The second type of company, ‘undervalued returns’, generate a return on their assets that is not being appreciated by the wider market. The return stream is undervalued and the market is calling into question whether those returns are sustainable.
“Take a business that is trading on two times its tangible asset base, but we think it is generating say three or four times its return on capital employed,” Barrat explained.
Barrat and Dixon only invest in these businesses if they are delivering positive operating momentum, such as earnings upgrades, beating expectations and things getting better.
Earlier this year, the fund exited from CRH, a US and global aggregates business that performed strongly last year with its shares up 60%. Of that, 20 percentage points came from operational delivery and 40 percentage points represented the value disconnect from being listed in the UK then moving to the US.
Barrat said: “We believed, coming out of Covid, that this business could make a significant multiple of its cost of capital on its tangible asset base and that [its prospects] would be much, much better in an inflationary environment. CRH was trading at two times its tangible asset base and it was our contention that it could make three or four times the cost of capital.”
Consensus expectations were gloomy due to negative headwinds for the construction industry. However, aggregates businesses typically operate in a concentrated local market because infrastructure operators want to work with local suppliers. That gives them pricing power. CRH bid up its prices north of 30% cumulatively over two and a half years which fed into earnings.
Small-caps are an inefficient, under-researched market, which means uncovering the best investment opportunities can be more meaningful.
Since early 2022 when central bank interest rate increases became a reality, European small-caps have underperformed their large-cap peers.
Yet, European small-caps have outperformed large-caps since the inception of the MSCI small-cap indices in 2001. Between that period and the end of March 2024, European smaller companies have generated returns of 5x an initial investment compared to around 2.5x for European large-caps.
Clearly, this positive historical result for small-caps also includes periods of underperformance, such as the one we are going through right now.
However, it is precisely when the market has lost interest in an asset class that opportunities can be found. Small-caps are an inefficient, under-researched market, which means uncovering the best investment opportunities can be more meaningful as there is less analyst coverage and readily available information.
The recent underperformance of European small-caps has resulted in a substantial valuation discount. European small-caps are one of the cheapest size/region combinations we observe today.
This is partly because European small-caps have been buffeted by a plethora of macroeconomic uncertainties. Rising interest rates and geopolitical tensions, combined with ongoing supply chain volatility in the aftermath of the pandemic, have hit this sector hard. Inflation is proving stickier than expected (although is starting to cool) and the labour market remains hot.
If you look at the latest earnings reports from this group of companies, very few made bold, positive predictions for their performance in 2024.
Equally, the market has been distracted by the outperformance of US big tech which is facing an artificial intelligence-infused boom and has seen valuations climb to staggering heights, leaving other asset classes in the dust.
However, in our view, this valuation discount of European small-caps compared to large-caps presents opportunities for long-term investors. Historically, smaller companies have traded at a premium valuation to their larger peers most of the time. A number of factors suggest an inflection point is close by.
We believe European small-caps will continue to post stronger long-term growth than their larger peers especially as the economic environment improves. Latest guidance from the European Central Bank suggests rate cuts could be on the horizon and composite Purchasing Managers Index data are looking more promising, suggesting this period of economic contraction is largely behind us.
The European banks sub-sector is performing particularly strongly as the market’s implied cost of equity is falling. This is in line with our expectations as we think the market has been too conservative in its returns assumptions and that its long-term reflection of risk should normalise with lower rates.
An additional boon to the sector could come in the form of increased merger and acquisition activity. If valuations remain low, it is likely we will see a rise in acquisitions as larger companies buy up their smaller counterparts. We have already seen a number of transactions over the past few years and, if valuations remain at current levels, this is likely to increase, thereby benefitting investors and generating share price premiums.
Small businesses are often more niche and entrepreneurial, as well as displaying greater agility. And they occupy a large investment universe: in Europe there are about twice as many small-cap companies compared to their larger peers. Additionally, smaller companies tend to have fewer divisions, fewer products and fewer end markets to worry about – which also enables them to be nimbler.
As always, there are winners and losers and some areas where there are share price declines driven by short-term developments. Nonetheless, opportunities may present themselves for investors who are willing to look through the near-term macro-economic uncertainties.
Those companies with strong fundamentals and robust balance sheets should see earnings growth outstrip large-caps. We are starting to see the green shoots of a market re-rating.
Ingmar Schaefer is a senior portfolio manager for small-cap strategies at Van Lanschot Kempen. The views expressed above should not be taken as investment advice.
Banks and US companies stand out as the top contributors to dividend growth.
Global dividends reached a new record of $339.2bn in the first quarter of 2024, the latest Janus Henderson Global Dividend Index revealed today.
This was driven by strong underlying growth of 6.8%, although headline growth was slower (2.4%) due
Most (93%) of companies globally have either increased or maintained their payouts.
In the US, where companies have traditionally preferred to reward shareholders through buybacks instead of dividends for tax reasons, payouts reached an all-time record high of $164.3bn.
At the single stock level, Meta and Alibaba announced their first-ever dividends during the quarter and boosted the global total by 1.2 percentage points.
Banks, which have prospered during a higher rate environment, accounted for a quarter of the global growth (up by 12%).
Q1 2024 annual growth rate by industry
Source: Janus Henderson
Beyond banks, most sectors made progress, with oil, retail and media also achieving double-digit headline growth.
Only six of the 35 sectors covered in the report reduced their payouts, with the biggest faller in the first quarter being transport. Much of this was due to the dividend of Danish shipping and logistics company Moller Maersk being cut.
Janus Henderson Investors’ head of global equity income Ben Lofthouse said dividend growth had made “a strong start to 2024”, sustaining the momentum it achieved towards the end of 2023.
“The broad picture is one of continued resilience, especially in Europe, the US and Canada,” he said.
“We continue to expect companies to distribute a record $1.72 trn to their shareholders this year, a headline increase of 3.9% year-on-year, equivalent to a rise of 5.0% on an underlying basis.”
From a geographical perspective, North American companies increased their dividends by 7% on an underlying basis, the most generous increase anywhere.
Wholesaler Costco gave out the most in special dividends, but one-off payments were fewer in number. Disney also restored its dividend for the first time since the pandemic.
On this side of the ocean, Switzerland led the continental European pack, accounting for two-fifths of the regional total, while UK dividend growth was somewhat muted.
“The seasonal absence of banking dividends, which will provide much of the growth in UK payouts this year, and of mining dividends, which will do the opposite, meant that the first quarter was relatively quiet in the UK, with most companies delivering flat payouts or low single-digit increases,” the report read.
Domestically, dividends amounted to $15.3bn – a 2.4% growth. The figure, however, was largely determined by one-off payments, as Trustnet previously reported.
They included a higher payout by Associated British Foods, which traded strongly over Christmas, and the positive impact of a stronger pound.
Many companies, with Shell being the prime example, have bought an extensive amount of their own shares over the last year, impacting dividends.
Annual dividends by region (US$ bn)
Source: Janus Henderson
Further afield, emerging markets have displayed very strong growth rates in the first quarter, which were heavily influenced by a handful of companies and are unlikely to be repeated as the year progresses, Lofthouse said.
The inaugural payment by Alibaba made a big splash, distributing $2.6bn – enough to boost China’s annual total for 2024 by almost five percentage points.
World’s biggest dividend payers
Source: Janus Henderson
A Labour victory would be positive for housing and infrastructure, but the overall impact on financial markets will be muted, investment managers suggest.
Prime minister Rishi Sunak has set the UK’s general election for 4 July 2024, much earlier than anticipated, after a raft of positive economic data.
Sunak is seeking to capitalise on recent good news, with a stock market rally, higher GDP growth and a lower inflation print. Yet voters may not be that easily swayed. As Royal London Asset Management’s head of multi asset Trevor Greetham pointed out, “context is everything”.
“We’ve just seen both the best quarter-on-quarter GDP and the lowest year-on-year inflation in almost three years,” he said. “[Yet] in real terms, GDP is still only 1.5% above its pre-pandemic, pre-Brexit level. Meanwhile, the price level for consumer goods is a whopping 23% higher.”
With Labour leading in the polls, fund managers predicted that a victory for Keir Starmer would be positive for the housing market and the construction and infrastructure sectors.
On the other hand, sticky inflation and possibly the timing of the July election could prompt the Bank of England to hold interest rates steady until August.
Elsewhere, however, fund managers expect the election’s impact to be muted. The new occupants of numbers 10 and 11 Downing Street will have their hands tied by the weak state of public finances, limiting their ability to make major policy changes.
As Chris Beauchamp, chief market analyst at the trading platform IG Group, said: “So far, the election announcement has caused barely a ripple in financial markets.”
Rate cuts could be delayed until after the election
The most-recent UK inflation print showed progress but fell short of market expectations, said Gaël Fichan, head of fixed income at Syz Group.
Core inflation excluding food, fuel, alcohol and tobacco remains high at 3.9% (compared to 4.2% a month ago) while services inflation remains at 5.9%.
“This persistent inflationary pressure has led markets to drastically lower expectations of a Bank of England rate cut at its upcoming meeting, from a 60% probability last week to just 10%,” he said.
“With the latest inflation figures, the BofE has all the economic justification it needs to possibly wait until August before adjusting its monetary policy.”
The market reaction was “quite pronounced”, he continued. “The 10-year UK yield jumped by 10 basis points, while the front end of the gilt yield curve surged by 15 basis points to 4.45%. The UK yield curve remains inverted, with the gap between the two and 10-year UK yields narrowing to 20 basis points, the lowest level since March.”
A snap election should be positive for equities
An early election will be good for the UK stock market and the economy, argued James Henderson, co-manager of the Henderson Opportunities Trust, Lowland and Law Debenture.
“It could break log jams on major investment decisions we’re seeing in several industries. Uncertainty about planning regulations and the retail energy market are just a couple of examples of things causing stasis,” he said.
Wealth manager Evelyn Partners estimates a base case of 5.6% (nominal, annualised returns) for UK equities over the next 10 years. This is based on future real GDP growth, valuations and dividend yields.
Chief investment strategist Daniel Casali said: “Under a bullish scenario, where Labour lifts the UK’s potential growth rate and valuations expand, then that would rise to 7%, while a bear case would produce returns of 4.9% per year.”
Hawksmoor Investment Management’s chief investment officer Ben Conway is much more bullish and believes UK equity returns could reach 10% per annum.
Labour’s Financing Growth document, which sets out the party’s plans for the financial services industry, is “a UK equity fund manager’s dream”, he said. It cites the undervaluation of the UK stock market and low levels of investment by pension funds in their home market as problems. It also states that vibrant capital markets are a necessary precondition for economic growth.
Casali was more circumspect. “Ultimately, what will probably drive UK equity returns is whether a Labour government can improve the investment landscape for UK companies. In the Mais lecture, shadow chancellor Rachel Reeves recognised that unlocking private investment requires institutional reform to encourage UK financial companies to invest in productive assets domestically,” he said.
The UK stock market has, in the past, reacted positively to a change in government, said AJ Bell investment director Russ Mould. Since 1962, the FTSE All Share has recorded a double-digit percentage gain, on average, in the first year after an election that ushered in a new prime minister. There were greater average gains when the governing party changed.
“Labour governments can also point to healthy average stock market gains during the terms of their five prime ministers during the 42-year era of the FTSE All Share,” Mould continued. “That said, the UK equity market has done better since 1962, on average, when the Conservatives have triumphed at the ballot box.”
Planning and housing
Reeves has committed to putting “planning reform at the very centre of our economic and our political argument”. Labour intends to streamline planning applications and devolve more power to local governments who, it believes, are better placed to fast-track high-value applications. Labour has also pledged to reintroduce mandatary local housing targets, employ more people to tackle backlogs and bring forward the next generation of new towns, Casali explained.
Henderson pointed out that Labour’s commitment to house building could benefit companies with large landbanks. He also thinks a Labour victory would be a tailwind for the construction and infrastructure sectors.
“Labour governments have traditionally been good for domestic infrastructure companies, but infrastructure investment is needed regardless of who wins. We need new schools, prisons and hospitals,” he said.
“This could benefit contractors, as these are the companies likely to be out there with the diggers on major projects. But a lot of that’s priced in already.”
Strategic investment in green energy and other priority areas
The shadow chancellor has coined a new term, ‘Securonomics’, to indicate the economic and political stability that businesses need to invest with confidence.
Casali explained: “Labour believes that by improving the information flow to firms through ‘partnership’ with the government, as well as providing strategic direction and selective policy intervention, firms will be encouraged to invest their capital.
“In short, Labour wants to direct business investment to areas it believes the UK will have a strategic competitive advantage, e.g. green technology.”
Tom Slater explains why the trust has sold longstanding holding Tencent.
In a world of ongoing geopolitical tensions, shifting monetary policies and disruptive technology, companies need to be more resilient to warrant inclusion in the Scottish Mortgage investment trust, according to manager Tom Slater.
This shift in mindset led the manager, who runs the trust alongside Lawrence Burns, to sell out of Chinese technology giant Tencent over the course of the year, after having owned it for 15 years.
“The combination of a weak domestic economy, an uncertain regulatory environment and geopolitical concerns have made the inclusion criteria for Chinese stocks in the portfolio more demanding,” he said.
“We think that ongoing political and regulatory developments mean that the constraints that go with scale for Chinese businesses have increased substantially. As a result, it will be difficult for Tencent to meet our more demanding inclusion criteria over the coming years.”
That is not to say the trust has given up on Chinese companies. Far from it. Scottish Mortgage remains invested in e-commerce giant Pinduoduo and added to Meituan, the local services company, last year.
Scottish Mortgage also sold out of Illumina, the US genomic sequencing company, last year, with Slater noting the firm’s “execution could have been better”, while the work required to “drive demand and lower costs will be challenging for some time”.
The trust also sold down some of its holding in Tesla – a long-time favourite of the managers – reducing the exposure partway through the year. As a result, private equity holding SpaceX – also headed by controversial chief executive Elon Musk – has overtaken Tesla in the portfolio.
“Tesla’s recent products have been hugely successful and preliminary sales data indicate that the Model Y was the best-selling vehicle in the world last year. However, the rise in interest rates has reduced the affordability of all high-ticket items, including Tesla vehicles, depressing demand,” said Slater.
“At the same time, the rapid scaling of Chinese electric vehicle production, along with improving quality, is a powerful source of competition and pricing pressure.”
While this may be “irrelevant” to the company’s long-term investment case, due to its successful integration of artificial intelligence (AI), it was enough to encourage the managers to trim the position.
These are all examples of the managers making moves to improve the portfolio’s resiliency, with Slater highlighting the Covid-19 pandemic, supply chain disruptions, two global conflicts and an emerging cold war between the US and China as “eroding trust” in the economy.
“People are more uncertain about trade agreements, financial structures, democratic provisions, the reasonableness of judicial decisions, and the dependability of public health provisions. This feeling of instability makes the idea of rational decision-making less reliable,” he said.
As a result, the pace of globalisation is slowing, or even in reverse, with countries moving production back to their own shores. This has been evident in the chipmaker sphere, where the US passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, as well as in Europe, where the EU has brought energy production back from Russia following its invasion of Ukraine.
“This economic shift is a major adjustment after a long period of relative stability post-World War II. It's unclear when, or even if, the previous stability will return,” said Slater.
As such, the managers are “placing greater emphasis on resilience” as adaptability is “a crucial attribute in a world of uncertainty”.
“It is a multifaceted quality with financial components, such as high margins or strong balance sheets, and cultural elements that are equally important. Diverse organisations are more likely to contain the ingredients for success in a shifting environment than are monocultures,” he said.
“This change in emphasis doesn't diminish our focus on imagining what a company will look like 10 years from now. It is an acknowledgement that businesses must face challenges in the interim as they exist today.”
The manager made these comments in the trust’s annual results, during which time it made an 11.5% net asset value (NAV) total return. With share price gains taken into account, the trust rose 32.5%, thanks to its buyback scheme, which encouraged the share price discount to tighten from 19.6% to 4.5%.
Performance of trust over 1yr
Source: FE Analytics
Following the results, Ewan Lovett-Turner, head of the investment companies research team at Numis Securities, said: “We believe Scottish Mortgage deserves a place in almost every portfolio and has the potential to deliver strong returns over the long-term, although as recent years have demonstrated, it is never likely to be a smooth ride."
He added that the shares closed yesterday on a discount of 10%, which "offers significant value" to those buying now.
Nvidia announced a 10-for-one stock split as it unveiled record-breaking results last night.
From 10 June 2024 onwards, private investors will be able to get their hands on Nvidia’s shares for a fraction of their sky-high price.
Current shareholders will receive nine extra shares for every one they hold after the market closes on 6 June and trading in the split shares will commence on 10 June.
At the time of writing, Nvidia shares were priced at $949.50, implying that after the split, individual shares will be worth about $95, putting them squarely within the reach of individual investors.
Nvidia said the forward stock split would “make stock ownership more accessible to employees and investors”.
However, Dan Coatsworth, investment analyst at AJ Bell, pointed out that a share split does not change the investment thesis or the company fundamentals.
“Playing around with the share price by making technical adjustments is a psychological trick. The value of the business won’t have actually changed and the value of someone’s investment is completely unaffected,” he noted. “It’s a classic technique that has been adopted by Apple and Tesla, among others, many times over the years.”
Nvidia unveiled its results yesterday for the first quarter of its 2025 fiscal year, beating analysts’ expectations yet again. Quarterly revenue of $26bn was up 18% from the fourth quarter and up 262% from a year ago.
“Expectations were high for Nvidia in the run-up to its latest results so to smash forecasts is a major achievement. That makes it six quarters in a row it has beaten the consensus earnings estimate and seven consecutive quarters for revenue,” Coatsworth said.
“Nvidia’s earnings forecasts had already been upgraded six times by analysts since the start of January, according to Stockopedia data, and the latest results means financial models will have to be tweaked upwards again.”
Nvidia also announced a quarterly cash dividend of $0.01 per share on a post-split basis. This equates to $0.10 per share of the current common stock and represents a 150% increase from $0.04 per share. Shares were up 6.85% in pre-market trading at the time of writing.
Alex Umansky, who manages the Baron Global Advantage fund and has invested in Nvidia since 2018, expects the chipmaker’s exponential growth to continue but warned that the share price may not rise in a straight line.
He had predicted yesterday’s results would surprise on the upside but warned that at some point Nvidia will disappoint the buy-side’s lofty expectations.
As a quality-growth manager investing in big, disruptive ideas, his portfolio lost about half its value in 2022 and he watched Nvidia’s share price tank from $315 on 26 November 2021 to $112 on 14 October 2022.
He used the dip as a buying opportunity and Nvidia has been his fund’s largest position since early 2023. “It just ballooned after that. It’s up nine times in the past 18 months,” he said.
Nvidia’s share price over 5yrs
Source: Google Finance
Umansky thinks generative artificial intelligence (AI) will be transformative for a vast range of companies and should benefit 95% of his portfolio, although it is difficult to tell at this early stage who the eventual winners and losers will be. But whatever happens to the rest of the market, Nvidia is in the eye of the storm.
“Nvidia is at the epicentre of this tsunami. It’s the arms dealer although we don’t know who will win the war,” he said.
Over the long-term, he foresees Nvidia growing as large as $15trn from its current market capitalisation of over $2trn, but he does not know how long the chipmaker will take to get there. The company’s growth in the past five years has been twice as fast as he initially expected. “We don’t have a lot of conviction on timing but we do have a lot of conviction in the destination,” he added.
Umansky does not think Nvidia is expensive at 28x earnings. Nvidia’s revenues tripled last year and Umansky expects them to double this year, while the share price has not kept pace with earnings growth.
Schroders Asia funds are going strong, but the Europe offering is struggling.
Not every fund in an asset manager’s collection can excel all the time and in every market. This is particularly true for large asset management companies who tend to have a large swathe of styles represented in their portfolios.
As such, in this series we look at different groups and identify the funds (and their styles) that have and have not worked in recent years. This time, we take a look at Schroders.
The asset manager has many successful vehicles on the market, 12 of which have achieved and maintained the maximum FE fundinfo Crown Rating of five this year, only matched by M&G.
Annual results from 2023 confirmed record-highs in the wealth unit’s assets under management, which reached £110bn; profits however dipped 17% from £586.9m in 2022 to £487.6m.
Schroders’ Europe desk has been taking a few hits recently, beginning with James Sym's departure in 2020. He ran five European mandates for Schroders, two of which, Schroder European Sustainable Equity and Schroder European Alpha Plus (now managed by Martin Skanberg and Nicholette MacDonald-Brown) recently featured in Trustnet’s bang for your buck series for failing to outperform their benchmarks over the past five years.
Both of them, as well as Schroder European, featured in Bestinvest’s Spot the Dog report this March.
The sustainable fund was also impacted as environmental, sustainability and governance (ESG) strategies had a tough time over the past three years as oil and gas prices rose.
Jason Hollands, managing director at Bestinvest, said the Schroder European team aims to be pragmatic and tilt between value and growth stocks but acknowledged it had been “hurt” by a value bias in the smaller and mid-cap names in recent years.
There have also been changes within the team. “The European Alpha fund, once a popular fund, has seen a fair bit of manager change over the past decade and last month was handed over to Martin Skanberg, longstanding manager of the European fund,” he noted.
A spokesperson for Schroders said: “Schroders European equities desk has had periods of substantial outperformance over the long-time and we are confident this will return. “Recent performance has been impacted by the returns delivered by European large-caps – a similar trend to what we are seeing in the US with the ‘Magnificent Seven’.”
They added that the past two years have mostly “encapsulated a period of concern for European risk assets” due to energy crisis fears alongside a possible harsh recession in Europe, which has weighed on smaller & mid-sized stocks.
Darius McDermott, managing director at Chelsea Financial Services, agreed with Hollands on many points, but noted there were bright spots.
Schroders’ value offering has demonstrated “enduring strength”, for example with Schroder European Recovery, which achieved top-quartile returns in the IA Europe Excluding UK sector over past three years.
The value team has sparkled in recent years, particularly domestically where Schroders’ UK strategies have shone despite the style remaining out of favour for much of the past decade. Schroder Recovery delivered strong performance over the past 10 years, for example.
Source: FE Analytics
Similarly, its UK income funds Schroder Income and Schroder Income Maximiser – also run by the same team – have achieved top-quartile returns in the IA UK Equity Income sector over one and three years by employing a strict valuation discipline, said McDermott.
The wider UK branch was a mixed bag, however. While the above have performed well, as has the Schroder UK Mid 250 fund (which has been the best performing mid-cap portfolio over three years) others have struggled.
These include Schroder UK Dynamic Smaller Companies and Schroder UK Multi-Cap Income – the former has remained in the fourth performance quartile of the IA UK Equity Income sector over the past 10 years and 12 months, and was in the third quartile over three and five years; the latter was in the top-quartile of the IA UK Smaller Companies sector over one year but stuck in the fourth before that.
A Schroders spokesperson noted that the UK has suffered from a “similar picture” to the one in Europe, where the largest companies in the UK have “outperformed materially”.
Beyond Europe and the UK, all three experts agreed that Schroders’ Asia fund range is impressive. McDermott was particularly struck by the income-focused options such as Schroder Oriental Income and Schroder Asia Income.
“Headed by the experienced Richard Sennitt, these funds leverage a vast network of on-the-ground analysts in Asia,” he said. “This deep research translates into superior stock selection, with company visits playing a crucial role in their investment process.”
For investors seeking a more growth-oriented strategy, he also flagged Schroder Asian Alpha Plus, while Rob Morgan, chief investment analyst at Charles Stanley, preferred the Asian Total Return Investment Trust.
“The trust has an active country and market hedging approach, which tends to mean any outperformance is based on good stock selection rather than country or sector bias,” he said.
“A mid- and large capitalisation bias allows it to buy smaller companies than it can't own in its similar open-ended fund, which again gives it more option. Additionally, it can build in some protection in falling markets using derivatives, which at times has been helpful to returns.”
Overall, the firm has five funds in the IA Asia Pacific Excluding Japan sector. Three are in the top quartile of the sector over five years, while the other two are above average.
Source: FE Analytics
Also of note is the firm’s fixed income offering. Of the seven funds in the IA Sterling Corporate Bond, Strategic Bond and High Yield sectors, only one is in the bottom quartile over five years (Schroder Long Dated Corporate Bond) while four are top 25% of their respective sectors.
Finally, Morgan’s interest in Schroders also spanned to the manager’s energy and renewable energy equity offering through mandates such as Schroder Global Energy Transition Fund.
A Schroders spokesperson said: “Across the Schroders Group our key performance indicator, three year investment performance, remains strong with 77% of client assets outperforming their relevant benchmarks.”
Previously covered in this series: Jupiter.
Charles Somers, manager of Schroder Global Sustainable Growth, has been named FE fundinfo’s New Alpha Manager of the Year.
Sustainable investment strategies have had a tough few years, grappling with headwinds such as higher interest rates and underperformance in the renewable energy sector.
Despite this, the £426m Schroder Global Sustainable Growth strategy has delivered top-quartile returns over three years, with the fund’s manager Charles Somers named FE fundinfo New Alpha Manager of the Year as a result. The award is given to investment professionals who achieved the Alpha Manager designation for the first time in 2024.
Somers attributes his track record to an inclusive approach, hunting for opportunities throughout the market capitalisation and across most regions and sectors. He avoids the energy sector and ‘sin stocks’, but endeavours to find market leaders in almost every other industry.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Another key element is identifying companies with a ‘growth gap’, where the wider market does not fully appreciate a company’s potential. “If we can correctly identify companies with unanticipated growth then we will generate outperformance, as the market is constantly catching up to the true earnings power and cash flow generation of those companies,” Somers explained.
Most analysts assume a certain level of growth for a company but fade it over time towards the economy’s overall growth rate. “The valuation of a company is quite sensitive to how long you think that growth will sustain at an elevated level,” he explained. He is looking for companies with competitive advantages that can sustain their growth for longer.
The investment process starts with ideas generated by Schroders’ global research platform of sector specialist analysts.
Somers and co-manager Scott MacLennan take ideas that are relevant from a sustainability point of view and put them through 20 questions, which Somers calls the Sustainability Quotient.
These cover seven stakeholder groups: the environment, employees, customers, suppliers, shareholders, society at large and government. “It’s deliberately questions rather than criteria because we want to use all the data available to create a debate,” he said.
Evidence is brought before a committee of six people – fund managers and sustainability experts – who vote on whether a company is eligible for inclusion in the portfolio.
Through this process, Somers and MacLennan whittle down the global universe to a list of 100 companies that have outstanding stakeholder relationships and belong to a wide range of industries, regions and market capitalisation sizes.
“I think that’s quite important to the alpha generation of this fund, in that those 100 companies are giving us a broad enough choice to adapt to the different stages of the market cycle and that flexibility has been quite useful over the past few years,” Somers said.
“We have banks in that list. We have insurance companies, we have industrials and consumer companies, and at different points in the cycle we may want to lean in more heavily to different industries, depending on what’s going on in the wider economy with interest rates and inflation.”
The portfolio is quite concentrated, comprising of 40-45 stocks chosen from the 100 names.
“Whether we divide it up by sector, region or by style factor, the driver of performance has been the individual stocks,” he said. “At different times the regions have helped us or the sectors have helped us but at other times they’ve hurt us and it’s been the stock selection that has carried us through.”
Somers endeavours to run the sustainability aspect of the fund in a way that is compatible with strong investment performance. “One way that sustainability can be supportive is that if a company is doing well by its stakeholders, it has a better chance of sustaining that superior growth than one that is abusing its stakeholders, because those externalities tend to catch up with them,” he explained.
Investors have done incredibly well over the past 15 years by simply holding cheap passive trackers, but returns for the next decade and a half appear far less certain.
Despite bouts of volatility, the past 15 years have generally been favourable for asset prices. For much of this time, both equity and bond markets have delivered strong returns for investors, helped by a tailwind of supportive monetary policy from central banks. That has meant that owning ‘the market’ has generally been a winning investment strategy, and it came with the bonus that it was typically a cheap one at that.
To put this into perspective, an MSCI All Country World Index (ACWI) exchange-traded fund (ETF) is likely to have delivered around 14% annualised in sterling terms since the low of the global financial crisis in March 2009. That’s well above the long-term average return of global equities.
A balanced investor would also have done well by owning the market – for example, a 60/40 portfolio (60% MSCI ACWI exposure and 40% Bloomberg Global Aggregate Bond exposure) would have delivered something like 10% annualised in sterling terms.
Investors could essentially ‘set and forget’ their asset allocation over this period and experience strong returns at low cost; what’s not to like?
I would argue that the next 15 years are unlikely to be like the past decade and a half for financial markets. And there are several reasons why.
A more challenging return environment ahead?
Firstly, the high valuations of global equities today are likely to be a headwind to future returns. In the short-term, valuation isn’t necessarily a great predictor of future returns, but over the long-term, it is a very powerful one. High starting valuations do not tend to augur well for future returns. In other words, the 14% annualised return experienced by global equity investors over the past 15 years is unlikely to be repeated.
What can we expect instead? It is of course a fool’s errand to try to predict what specific returns will be, but we can get an idea of potential magnitude. For instance, Invesco’s capital market assumptions (CMAs) indicate a much lower annualised return for global equities (MSCI ACWI) of around 6% annualised over the coming years. If this turns out to be even close to correct, then it is fair to question whether owning ‘the market’ will deliver enough for investors.
Sources: Bloomberg and Invesco. Realised returns – past 15 years are total annualised returns in sterling terms for MSCI ACWI as at 30 Apr 2024. Expected 10-year annualised returns are nominal return estimates based on Invesco’s 10-year capital market assumptions.
How diversified is the market?
Second, markets have in some cases become more concentrated and skewed over the past 15 years. US equities are a glaring example of this and they are a big part of the reason that the overall market looks expensive.
When I joined Invesco in early 2012, US equities made up around 43% of MSCI ACWI and around 50% of MSCI World, the former being the ‘all countries’ index and the latter being ‘developed countries’ only.
Source: MSCI as at 30 Apr 2024
Today, US equities account for around 63% and 71% respectively. Essentially around two-thirds of global equity exposure is US exposure. That is a lot of reliance on one market, especially one which is trading at what appear to be lofty valuations.
Currently, the US equity market’s 12 month forward price-to-earnings ratio is around 30% above its longer-term average.
While it may seem that the US has always outperformed, it’s worth remembering that this isn’t always the case. For example, in the first decade of the 2000s, US equities significantly underperformed the rest of the world, particularly emerging markets.
Japan is an interesting – albeit extreme – historical example of what can happen when markets become too prominent or concentrated. By 1989, Japanese equities had performed strongly and came to dominate the global market, accounting for around 40% of MSCI World. What followed was a multi-year period of underperformance and an exodus of investors. Today Japanese equities account for just 6% of MSCI World.
Source: MSCI as at 30 Apr 2024
A more challenging future means a more flexible approach
Given the risks of a more uncertain environment, lower market returns and a potential lack of diversification, what are investors to do?
I think a more flexible approach is a must. In my view, having two-thirds of the equity exposure of a ‘global’ portfolio in one single country is a significant risk. The ability to adjust asset allocation over time will therefore be an important tool in the investor’s toolkit in the coming years. As will the ability to change the underlying funds and ETFs they may invest in to ensure that no unintended biases are present in portfolios.
In short, take a more active approach, even if that is done by using passive underlying investments.
For those who would rather somebody else make those active asset allocation decisions on their behalf, the good news is that the cost of active management has reduced dramatically over the past 15 years. It is possible to access active asset allocation for relatively low cost. Over the next few years, I think that will prove to be a price worth paying.
David Aujla is a multi-asset strategies fund manager at Invesco. The views expressed above should not be taken as investment advice.
One global fund has been cutting back on its US tech exposure and adding to this UK company.
US dominance and the relative bottoming out of the UK market over the past decade may have left some global investors wondering whether there is a need to look to the domestic market at all.
Murmurs have begun about a potential poor run for the US, with Temple Bar manager Ian Lance telling Trustnet yesterday that investors should expect to make a loss from American stocks over the long term from here.
Chris Rossbach and Katerina Kosmopoulou, who are in charge of the $252.4m J. Stern & Co. World Stars Global Equity portfolio, are bullish still on the prospects of the US titans, recently stating that “we are in not a tech bubble of any kind”.
They have stuck with their exposure to digital through tough times before – most notably in 2000 – and did so again in 2021-2022 when they added to stocks such as Nvidia, the leading chip manufacturer. This has rewarded the managers, with the stock rising to be the top holding in the fund, making up 8.3% of the total assets under management (AUM).
Yet even they have begun to look elsewhere, trimming some of their tech allocation as they weigh up the continued strong growth from the US giants versus the prospects of better returns from elsewhere in the future.
Thanks to successful calls on these US names and the returns they have brought in, Kosmopoulou explained that the fund is now in a strong position to take some profit and allocate to other areas.
One such area has been the UK, where, however, only one business convinced the managing duo – spirits company Diageo.
The company has been through a turbulent time in recent years, marked by a profit warning and its chief financial officer stepping down. Unsurprisingly, therefore, it has been a terrible performer of late, losing almost 20% over the past 12 months, 12% over the past three years and 6% over five months.
Performance of stock over 1yr
Source: FE Analytics
But the company is a good recovery play to Kosmopoulou, who said that Diageo is “a screaming buy”.
“Covid massively disrupted consumption and generated excess inventory throughout the supply chain. This is in the process of being corrected now, but the market hates that, so the stock is trading at more than 10% discount to its historical levels,” she said.
“Now if you could tell me that you and I will never drink again, I'm going to sell my Diageo position. But if you tell me that tonight we are likely to have a nice glass of whiskey, then to me that is that is basically a screaming buy.”
This is currently the only UK-listed company owned by the fund, Rossbach noted, with the overall country exposure adding up to 2% of the total AUM.
“We look at a global universe of companies, and the listing matters only in regards to the history of the company, the governance and the liquidity of its shares, with the UK being very strong on all of those points,” he said.
“There are a number of world-leading businesses that are here that we keep on analysing, especially in consumer products, healthcare and the intellectual property (IP) and payments-related areas of financial services, which we think are very interesting.”
Historically, Shell had been a holding in the J. Stern & Co. World Stars Global Equity fund. It was bought in 2012 at inception and sold later in 2014, when the managing team decided energy stocks weren’t for them. Since then, Diageo has been the only UK stock in the portfolio.
It is not alone in owning Diageo, with IFSL Evenlode Global Equity and Lindsell Train Global Equity among six funds in the IA Global sector also placing the stock in their respective top 10 holdings.
Nick Train also has a big position in the stock through his investment trust Finsbury Growth & Income. In the trust’s latest factsheet, the manager noted that it is “well-established” that the stock is out of favour and warned “it is still possible the next set of results will disappoint already low expectations”.
“Nonetheless, Diageo’s shares have now fallen over 30% from their peak in 2021 and we are sure it is right to be looking ahead to better trading for the company. In our view, Diageo shares will likely recover before those better conditions are confirmed,” he said.
Defined-contribution pensions will have access to L&G’s first private markets long-term asset fund from this summer.
The Financial Conduct Authority (FCA) has approved Legal & General’s first private markets long-term asset fund (LTAF). The regulator decided last week that L&G’s vehicle is suitable for defined-contribution (DC) pension funds, as per the FCA’s fund register.
The multi-asset fund will launch this summer and it will be able to invest in public and private markets, including less liquid industries such as infrastructure, real estate and private credit.
Jesal Mistry, head of DC investments at Legal & General called this “a significant milestone” which will provide over 5 million DC members with the opportunity to access illiquid investment opportunities.
“As the largest DC pension provider in the UK market, we have a real opportunity to use our scale and expertise to facilitate increased member access to private market,” he said.
“We designed a solution which meets the operational and liquidity needs of DC schemes, while providing additional return drivers and diversification benefits with the potential to further increase value for members.”
Further details on the strategy will be announced in due course.
The LTAF structure is designed to protect investors from liquidity issues and emergency exits, as they will be able to buy into or sell out of the fund at longer intervals than traditional open-ended funds, which deal daily.
L&G joins the list of providers with approved LTAF solutions so far, which includes Schroders, Aviva Investors, and BlackRock, among others.
Access to LTAF has also been approved for retail investors, with Nikhil Rathi, chief executive officer of the FCA, saying in March that the three umbrella funds and five sub funds currently authorised will be followed by “a strong pipeline and more expected shortly”, with the target assets under management after three years for LTAFs authorised to date nearly £6bn.
The consumer prices index hit its lowest since July 2021.
UK inflation dropped back to 2.3% in April, hovering just above the Bank of England’s 2% target, according to figures from the Office for National Statistics.
The main reason for the rapid drop in the consumer prices index (CPI) from the previous month’s 3.2% was falling energy costs on the back of Ofgem’s 12% reduction in the household bills cap, with the 27.1% fall in gas, electricity and other fuel prices being the largest on record.
It marks a sharp decline from the 11% inflation figures seen just two years ago, although the 2.3% figure is slightly above expectations, with 2.1% mooted by many, according to Isabel Albarran, investment officer at Close Brothers Asset Management. This was largely due to an upswing in motor fuel prices.
Source: The Office for National Statistics
Hetal Mehta, head of economic research at St. James’s Place, added that the monthly pace shows “significant inflation remains in the system”.
“Services inflation [unchanged at 6%] is still too rapid for comfort and higher energy prices in recent months are yet to fully feed in,” he said, while Zara Nokes, global market analyst at JP Morgan Asset Management, noted that this was “a lot hotter than its latest projections”.
Despite this it is still the closest we have been to the Bank of England’s 2% target since July 2021.
What will the Bank of England do now?
Nokes said the upside surprise in services inflation may “dent the Bank’s confidence that entrenched inflationary pressures are receding” making a June cut less likely.
“In our view a cut in June would be premature; if the economy were slowing we would expect core inflation to follow headline lower, but recent data has shown activity reaccelerating,” she said.
Quilter Investors investment strategist Lindsay James noted the biggest risk for the Bank will be further inflationary spikes in the second half of the year – something that could occur if wag growth (currently 6%) remains high.
“Pay deals and rises are going to come under intense scrutiny should that figure not begin to fall in line with the overall rate of inflation. Furthermore, the global picture shows no sign of helping the Bank of England in its task, with geopolitical risks still very much present and US inflation proving stickier than many would like,” she said.
Albarran suggested the Bank will wait until August for its first rate cut, with the latest CPI data going “some way in providing the evidence they need to justify an impending cut”.
Not all were as convinced. Mehta said: “For the Bank of England, the data is not conducive to a slam-dunk rate cut in the coming months – we expect there to be a continued split on the Monetary Policy Committee for a while.”
The impact on finances
Tom Stevenson, investment director for personal investing at Fidelity International, said mortgages are already pricing in lower interest rates with money markets giving a 40% chance of the first quarter-point cut in rates coming in June and a further reduction to 4.75% by the end of the year.
“For savers who have enjoyed ‘real’ inflation-adjusted returns on their cash for several months the good times may be time limited,” he said.
“Stock markets typically offer the best protection from low levels of inflation. At today’s rate, they have outpaced price growth in nine years out of 10 since the 1970s.”
Hawksmoor is bullish on the “astonishingly cheap” UK and expects returns of 10% per annum or more.
Hawksmoor Investment Management has placed a bold bet on the UK stock market, with its cautious Vanbrugh multi-asset fund having 20% in UK equities and the allocation rising to nearer 30% for the higher risk Global Opportunities portfolio.
Chief investment officer Ben Conway said UK equities are so cheap that they have a high probability of returning 10% or more per annum for the next decade, with even greater gains from mid and small-caps.
Valuations are Hawksmoor’s “north star” because, over five years and longer, they are a reliable indicator of returns, he explained. UK equities are “tremendously attractive from a valuation standpoint”.
The broad UK equity market is currently valued at 10x price to earnings. Historical data from Liberum dating back to 1927 shows that when valuations are below 10x, returns in the subsequent three to 10 years average about 14% per annum. From starting valuations of 10-15x, returns tend to be about 9-10% over the subsequent three to 10 years, Conway said.
Under-valuations are even more pronounced in UK small and mid-caps and therefore the return potential is commensurately greater.
UK equities have begun to rally, outperforming the S&P 500 over three months. Conway thinks the UK stock market is just getting started and said recent gains were driven by takeover activity, with cheap companies attracting attention from private equity and international trade buyers.
UK equities vs S&P 500 over 3 months
Source: FE Analytics
The UK stock market has been cheap for years but it recently entered the national conversation and is featuring in headlines and in politicians’ speeches, such as chancellor Jeremy Hunt’s Mansion House compact.
The chancellor’s request that pension funds disclose their UK equity allocations is the first step towards putting pressure on them to invest more in their home market, Conway said, “but there’s a fabulous investment reason to do so because it’s so cheap”.
Labour’s Financing Growth document, which sets out the party’s plans for the financial services industry, is “a UK equity fund manager’s dream”, he continued. It cites the undervaluation of the UK stock market and low levels of investment by pension funds in their home market as problems. It also states that vibrant capital markets are a necessary precondition for economic growth.
“UK equities are at the centre of policy to the extent that I don’t think they’ve ever been before,” he concluded, which is part of a “magic formula” driving the current rally.
Hawksmoor’s fund picks
For private investors who want to increase their exposure to the UK, Conway’s first suggestion would be a FTSE 250 tracker to capture a broad spectrum of opportunities in the mid-cap space.
Choosing active managers increases the odds of both outperforming and underperforming the market and requires an immense amount of research and monitoring, he said, hence passive investing may be more appropriate for retail investors if they do not possess the time or resources to research active managers.
For those who prefer active managers, Conway thinks investment companies are well-suited to retail investors because they have an independent board of directors looking out for shareholders’ interests who can hold the investment managers to account and replace them if a key person leaves.
He has high conviction in Aberforth Smaller Companies and Odyssean.
The Aberforth trust is managed by a long-established team of value investors based in Edinburgh and has a track record of accessing the cheapest parts of the small-cap universe, he said. Its largest holdings are publisher Wilmington and derivatives dealer CMC Markets.
Conway described Odyssean Capital’s Stuart Widdowson as a “wonderful investor” with an impressive five-year track record. He invests in high-quality, undervalued businesses, several of whom have received takeover bids. For instance, he holds XP Power, which has just rejected a bid from Advanced Energy Industries.
Performance of trusts vs sector over 5yrs
Source: FE Analytics
For large-cap exposure, FE fundinfo Alpha Manager Ed Legget, who runs Artemis UK Select, is “very talented”. The £2.2bn flagship fund has delivered top-quartile performance over one, three and five years and its largest holdings are Barclays, NatWest, 3i Group, Rolls-Royce and Shell.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Three managers reveal their favourite stocks across different markets.
Nothing excites value managers more than good businesses trading at cheap prices, with bottom-up stock selection being at the heart of the investment process of many value-focused investment funds.
But knowing where to look is not always easy. At present, the UK, Europe and South Korea seem to be going through a popularity crisis, with many experts interested in companies from these markets.
Below, we collected a sample of stocks that have recently been on value managers’ radars.
UK companies
Sarah Ketterer, chief executive officer and portfolio manager at US-based Causeway Capital Management, highlighted plane engine maker Rolls Royce, the top holding in the Causeway Defined Growth fund.
As flying hours dropped in 2020, the company’s cash flow turned negative, which had an impact on the balance sheet, but it was during this crisis period that Ketterer began to accumulate a lot more of the stock.
“The reason why we were so bold with it is because this company has a fantastic competitive position. It is effectively in a duopoly with GE Aerospace. When earnings collapsed, the stock looked like it was very high-multiple, but that's where the opportunity is the best,” she said.
“Yes, flying hours have improved because planes are back in the sky, but it's what the management team did to make the business more efficient that brought in results. It was never in a situation where it would go insolvent, it had businesses to sell and very valuable assets, so it was just a question of getting the balance sheet recapitalised and focusing on being more efficient”.
Source: Causeway
Also on the manager’s radar was Prudential, which she highlighted for the growth momentum in its Asian business, improving capital management and its valuation, as the stock is trading on 12-year low price-to-book and price-to-tangible-book ratios.
Emerging markets companies
CIO and global portfolio manager at Antipodes Jacob Mitchell went for automotive manufacturer Hyundai Motor, in a market, South Korea, that has recently been gaining attention from value managers.
The company has been hurt by its position in China, with its market share in steady decline. But Mitchell said this was “a blessing in disguise”.
“Hyundai famously pivoted towards India, which has been an amazing success. India is in the early innings of auto adoption in what you can call a structural growth in terms of auto penetration,” he said.
The manager is particularly excited about Hyundai’s leading incumbent position together with Toyota and Honda, which are much better positioned, he said, compared with Tesla.
“Because of the saturation in the high-end electric vehicle market, Tesla's margins over the past 18 months – excluding deferred income and environmental credits – have gone from 18% to 2%. There is very little room left for it to actually invest,” he said.
“On the other hand, for the leading incumbents such as Honda, Toyota and Hyundai, margins are up over that period, so their ability to continue to incrementally invest is very strong.”
European companies
Clive Gillmore, chief investment officer (CIO) of Mondian Investment Partners, selected a stock that he said is the inverse of what people might think is exciting – Italian energy infrastructure company Snam.
Snam is in the business of transportation and storage of gas and re-gasification, that is changing imported liquefied natural gas (LNG) back into gas.
“Pretty straightforward and, frankly, pretty boring,” said Gillmore. This is compounded by Italy’s poor economic growth outlook and predictions of dwindling gas demand in Europe.
But in the stock, Gillmore sees an underappreciated growth story and a strong investment case both in the short- and long-term.
In the short term the case is “very positive”, with the company having “strong stability and visibility of earnings” in a 100% regulated industry. But the long-term too is better than people think, said the manager. Firstly, because dwindling gas demand accounts for only half the picture.
“Just like for the tube network, peak demand is what matters – not those who travel at 2:30pm, but at 6pm. Even though there might be a decline in overall gas use, peak demand is expected to increase. On top of that, Italy could also benefit from a chunk of the gas market moving away from Russia,” he said.
“Secondly, this is a utility company which earns money on return on its capital risk, and its capital expenditure is going to increase as gas companies invest in greener solutions to align with European Union stipulations expecting a move away from gas.”
Ketterer added a few more European picks, including Gucci’s parent Kering and rolling stock manufacturer Alstom SA.
The former is undergoing a re-vamp with less wholesale exposure, store remodels, marketing, talent hires and increased product quality. It is also poised to return “significant” capital to shareholders between 2025 and 2028, she noted.
Alstom SA meamwhile is improving on a “misstep” with the 2021 acquisition of Bombardier Transportation in an attempt to strengthen its global position in rail stock and signalling. It is now on a path to reduce net debt and achieve operational, commercial and cost efficiency, she said.
Robin Parbrook, manager of Schroder Asian Total Return, has been named FE fundinfo Alpha Manager of the Year.
Schroder Asian Total Return manager Robin Parbrook has won FE fundinfo’s Alpha Manager of the Year award, based on his long-term track record as well as recent performance.
Last year, his concentrated, best ideas strategy beat the benchmark by 9 percentage points and its peers by even more so. Parbrook attributed this outperformance to going overweight technology and underweight China. Stock picks in Australia and the ASEAN region also helped.
His £436m Schroder Asian Total Return investment trust returned 10.3% last year compared to just 1.3% for the MSCI Asia Pacific ex-Japan index and a 2.1% loss for the IT Asia Pacific sector.
Investors can also access the strategy via the $4.8bn Luxembourg-domiciled Schroder ISF Asian Total Return, which returned 7.4% in sterling terms last year, versus a 2.5% loss for its sector.
Performance of fund vs benchmark and sector since inception
Source: FE Analytics
Below, Parbrook tells Trustnet how he and co-manager King Fuei Lee use quantitative screens to take a view on countries, why they like tech and why they’ve taken profits in India.
Please describe your investment strategy
Parbrook: King Fuei and I believe that the Asian index is not the reason why people invest in Asia. It doesn't represent a good opportunity; you really should be completely unconstrained.
Schroders’ Asian equities team manages about $50bn and we have 40 analysts, each of whom covers about 25 stocks. Obviously we're not going to buy the sell-rated stocks, nor do we buy state-owned enterprises. We don't buy businesses that we don't believe have good long-term dynamics or where we don't trust the management, because in Asia you're always nearly always buying family-owned businesses.
That takes us down to a universe of about 200 stocks that are buy-rated by our analysts. King Fuei and I then pick the best 40 or 50 ideas.
We also have some stock screens looking at valuations and earnings momentum versus history. We look for upside to fair value, positive analysts grades and positive return on invested capital.
We leave the top-down perspective to quantitative models, which decide the level of beta to have in the fund and whether we should add capital preservation strategies.
How do your quant models work?
We have a country model for each of the main stock markets in Asia, which assumes mean reversion over time to a standard valuation matrix such as price to book, price to cash flow or dividend yields. The models forecast returns over one to two years based on historical trading patterns, valuation metrics and where we are in the business cycle.
At the end of 2022, markets were pretty bombed out in Asia. Our model was forecasting quite strong returns. Since then, China isn’t out of the woods but the rest of the Asian markets have done well.
At the beginning of this month, our model’s indicators were actually deteriorating. Following a strong rise in markets, the models were picking up on more earnings downgrades than upgrades. That means we should probably be looking to take some profits or rotate to more defensive stocks.
We also have a tactical model that looks out three to six months and incorporates economic surprise indices, inflation expectations and sentiment indicators. We then look at what ‘node’ we are in – in other words, when in the past has the economic backdrop looked similar to today and how did markets perform subsequently?
In the past couple of weeks, we have bought some puts on the Taiwanese index and the Australian index to provide some capital preservation. We’re trying to buy some cheap insurance just in case markets do fall because there is a bit of froth out there.
Puts are an attractive instrument to use because puts are cheap when markets have risen as they are a measure of complacency. We have also used VIX call options in the past. Again, they tend to be cheap when markets have just risen.
How are you positioned in China?
The main reason we performed well in 2023 was that we got China right. When China reopened last year (and this is one of the advantages of having a team in Shanghai) we could tell the animal spirits weren’t there. Reopening was a damp squib and we sold most of our Chinese stocks.
Our models are still quite cautious on China because business cycle indicators are negative and earnings downgrades are huge. Despite what the China bulls say, valuations in China are not cheap because of the lack of earnings momentum.
Another reason we're quite cautious on China is because there is irrational allocation of capital to anything that is a strategic priority for the Chinese authorities. State-owned capitalism will generate economic growth, but it will generate very poor returns on invested capital.
What were the other reasons behind strong performance last year?
The other positive contribution was the rebound in the tech stocks. The fund is nearly always overweight tech. We took a bit off the table at the end of 2021 but nowhere near enough, so we had some performance issues in 2022, but in 2023 the rebound in stocks such as Taiwan Semiconductor Manufacturing Company (TSMC) and MediaTek was helpful.
In Australia some of our healthcare stocks did quite well, while we were correctly cautious of Australian banks. A few stock-specific names in the ASEAN markets did well and that offset negative numbers in India, so those factors balanced each other out.
Why are you always overweight technology?
Tech stocks are the best companies in Asia. The best company I've seen in the 34 years I've been investing in Asia is TSMC by some margin because of its singular focus on process, process, process and delivering the best results. No-one can compete with TSMC’s leading-edge chips so it has genuine intellectual property and huge barriers to entry, which means it sustains a high return on invested capital.
Because TSMC is so dominant in Taiwan, it creates a clustering effect of good companies around it such as MediaTek, Realtek, Novatek, Advantek and Chroma, which is hard to replicate anywhere else. These are the best companies in Asia. This is what you want to own, in a nutshell.
MediaTek is one of the largest chip designers in Taiwan. It is taking market share and it benefits from having its main design centre in Hsinchu, right next to TSMC.
We are overweight semiconductors including Samsung and SK Hynix in South Korea so the next move is probably to take profits.
The semiconductor industry exhibits good solid revenue growth of 5% to 7% per annum. The world is continually becoming more semiconductor-intensive, but semiconductors fall in value every year because TSMC and Samsung drive prices down, which makes them fairly oligopolistic. It does mean that revenue growth is probably never quite as high as we think, because prices are falling whilst demand is growing very strongly. I don't think artificial intelligence really changes that.
How are you positioned in India?
We're actually slightly underweight India at the moment. The problem with India is that valuations increasingly reflect the good news so we've been taking profits, possibly too early.
In 2023, the one market where we clearly underperformed versus the benchmark in our stock selection was India, because we were too cautious. Domestic investors are quite active in India. They like growth and momentum and are not so worried about valuations. We are bottom-up value-orientated, so we really struggled to get our heads around why we’d pay 60-70x earnings for Indian consumer staples stocks.
We still like bits of the Indian market – healthcare, banks, some IT services companies – but in general, we have been relatively cautious just because of the valuations.
What do you enjoy doing outside of portfolio management?
I've always been a runner and I’m currently training for a half marathon with my daughter. I also play golf and I love hiking.
With fears of an economic hard landing abating and interest rates expected to stay higher for longer, a greater allocation to high yield can potentially boost the returns of a multi-asset credit strategy.
Following a period of interest rate normalisation, investors no longer need to reach down the risk spectrum for yield. It has been readily attainable in government bonds and money market funds.
However, while higher rates are good for these instruments, spread premia can be an additional draw for credit investors. Even when spreads are tight, investors can access attractive yields, especially in high-yield bonds, without having to veer into the lower-quality triple-C segment.
The benefits of a multi-asset approach
For credit investors, a multi-asset credit (MAC) approach can provide the broad diversification of risk while increasing yield and total return potential.
More conservative investors may prefer a portfolio with a greater weighting to investment-grade bonds given their relative safety and security in a variety of market conditions. Investment-grade yields are lower than in high yield, but investment-grade bonds can offer slow and steady income generation via the coupon, potential for low to mid-single digit returns and capital preservation.
Boost the juice
Those with a modestly greater risk appetite may consider a multi-asset credit approach with more high-yield exposure. The circa $2trn global high-yield market offers significant opportunities for investors able to identify credits with strong underlying fundamentals and we believe an attractive yield premium.
A well-structured multi-asset credit strategy can properly deal with the recent increase in bond prices. It can also invest during market dislocations and/or sell-offs. This can provide greater return potential through a longer holding period; the best opportunities tend to be during short periods of indiscriminate selling, not just when markets are going up.
One of the key features of high yield is its regular coupon income. Compounding this income and incorporating it into the price return provides an attractive total return picture over the longer term, as the chart below illustrates.
Capturing the premium in high yield
Sources: ICE Data Platform, ICE BofA US Cash Pay High Yield Index (J0A0) as of Dec 31, 2023
Risk on
High-yield bonds may be more volatile than investment grade, but investors should be able to tolerate higher volatility in exchange for additional yield, which is where credit selection comes in. A long-term approach to high yield means that, over time, yields can mitigate volatility.
Knowledge of rising and falling credit trends is also an important requirement. High yield comprises different industries operating within their own business cycles (cyclicals, financials, non-cyclicals, etc.). A multi-sector credit strategy that can identify emerging and maturing industry trends is therefore beneficial.
Stronger for longer
The inverse relationship between yields and price means that with higher yields come lower average prices. With prices at circa 93 in the US and 94 in Europe for example, an investor will receive an additional seven or six points when the price reverts to 100 at maturity.
Given the tendency of issuers to refinance before maturity, the discount is recouped over a shorter timeframe, resulting in a significant increase in yield and spread. While not a common phenomenon, it is present in today’s market conditions. The more commonly referenced yield-to-worst calculation may underestimate the potential realised return for bond investors reflected in the yield-to-call calculation.
Example services issuer 3.25% 2027 bonds
Sources: Muzinich, Bloomberg, data as of 8 Mar 2024
Abating recessionary fears and a higher-for-longer rates environment give high yield the green light. The asset class offers a compelling level of yield, while spreads compensate for default risk.
Credit quality is improving: only 10% of the global high-yield universe is CCC-rated. The investible universe – certainly in Europe – is shrinking, with a lack of supply underpinning prices.
While defaults are rising, they are likely to be limited given the underlying fundamental strength of high-yield corporates, especially in the higher-quality B and BB parts of the market. High-yield bonds also tend to have shorter durations, making them less sensitive to changes in interest rates.
For multi-asset credit investors, diversification is already part of the package. Yet those who want more risk and are willing to accept the volatility could consider strategies with a higher weighting to high yield, complemented by a smaller, but still beneficial, allocation to investment grade.
However, this shouldn’t be a short-term, tactical allocation. It should be a more strategic, long-term investment that seeks to benefit from deep credit analysis, as well as a strong understanding of market dislocations and the broader macroeconomic environment.
Mike McEachern is co-head of public markets at Muzinich & Co. The views expressed above should not be taken as investment advice.
RLAM, Man GLG, Janus Henderson and Schroders triumph in two categories each.
Schroder Asian Total Return manager Robin Parbrook has been named FE fundinfo Alpha Manager of the Year, achieving the highest scores across all asset classes for risk-adjusted returns and career-length outperformance.
Charles Younes, deputy chief investment officer at FE Investments, said: “Robin Parbrook’s win is testament to his perseverance and consistency in performance for his clients. His consecutive back-to-back nominations in this category reflect his successful career.”
Charles Somers of Schroder Global Sustainable Growth was crowned New Alpha Manager of the Year, having received the Alpha Manager designation for the first time in 2024, placing him within the top 10% of managers running funds for UK retail and wholesale investors.
Royal London Asset Management head of sustainable investment Mike Fox was the only person to win two awards, gaining accolades for global equity and responsible investing.
Jack Barrat and Henry Dixon at the helm of Man GLG Undervalued Assets won the UK equity award for the second year in a row. Their colleague Jonathan Golan, who took the New Alpha Manager title last year, returned this year to receive the sterling fixed income gong for his Man GLG Sterling Corporate Bond fund.
He was one of two bond managers on the podium and was joined by Richard Hodges of the Nomura Global Dynamic Bond fund.
Janus Henderson Investors clocked up two awards. Ben Wallace and Luke Newman were jointly recognised for outperformance in the absolute return sector and John Bennett took the European equities title.
The US equity award went to Aziz Hamzaogullari, founder, chief investment officer and portfolio manager of the Growth Equity Strategies team at Loomis, Sayles & Co. M&G Investments’ Carl Vine was recognised for Japan, while the emerging markets and Asia Pacific title was awarded to GQG Partners’ Rajiv Jain, Brian Kersmanc and Sudarshan Murthy.
Younes said: “The past few years have presented unprecedented challenges for the investment sector. From Covid-19 to international conflict, fund managers have battled high interest rates, political instability and rapid inflation.
“Everyone recognised at this year’s Alpha Managers awards has managed to achieve success and deliver value for clients in the face of these circumstances, thriving rather than just surviving.”
Rates could still appeal however, despite recent drops.
Cash ISA rates have fallen almost across the board this month while the yields from fixed-rate bonds also dropped ahead of expected Bank of England interest rate cuts later this year, new research from Moneyfacts has found.
The average easy access ISA rate fell month-on-month to 3.34% down from 3.38% in April, the first fall since January 2024. Meanwhile the average one-year fixed ISA rate was down to 4.42% from 4.51% and the average longer-term fixed ISA rate slipped 0.01 percentage points to 4.06%, its lowest point since June 2023.
There was a similar trend for non-ISA products too. The average one-year fixed bond fell for a seventh consecutive month to 4.58%, also an 11-month low, while the average longer-term fixed bond nudged 0.01 percentage point lower to 4.12%.
It means the longer-term bond average rate has now dropped by 0.90 percentage points in the past six months. The one-year bond is down 0.78 percentage points over the same timeframe.
Rachel Springall, finance expert at Moneyfacts, said: “It is worth noting that the extent of the latest month-on-month cuts were more subdued than over the past six months. Indeed, between the start of January and February 2024, the average longer-term bond rate fell by a staggering 0.34%, the biggest monthly cut seen in 15 years”.
Despite the cuts, year-on-year fixed bonds are paying much higher rates and “could still appeal to savers hoping to get a guaranteed return on their cash”, she noted.
The falls in rates come despite the amount of products available to savers rising slightly to 1,935, the most on offer since November 2023. This included 547 ISA deals – the most since Moneyfacts began collating the data in 2007.
The number of providers to offer a Cash ISA also rose up from 91 at the start of April to 95 the beginning of May, the biggest month-on-month rise in providers in three years and the highest number in more than 15 years.
“As providers enter the market and improve the availability of products in the aftermath of a busy ISA season, it will be interesting to see whether product choice continues to flourish in the coming months,” said Springall.
It was not all doom and gloom however. The average easy-access rate remained unchanged month-on-month at 3.11%, the first time it has not moved since December. This is positive, said Springall, as last month it experienced its biggest monthly drop since June 2020.
“Savers will still need to proactively check their accounts regularly and switch if they are getting a poor return,” she added.
Variable rates on easy access and notice accounts have also been “generally resilient” in recent months, and year-on-year, are paying more than 1 percentage point more across the board, which includes easy access and notice Cash ISAs.
The average notice rate nudged 0.01 percentage point to 4.28%, the first increase this year. The average notice ISA rate also rose to 4.17%, up from 4.15% in April.
Springall said: “Savers will find a combination of both rises and falls to rates month-on-month, but fixed bond and ISA rates reduced across the spectrum.
“Those coming off a fixed-rate bond would do well to consider the challenger banks which offer some of the best fixed bond rates, enticing deposits to fund their future lending.”
Indeed, based on a £5,000 lump sum, the best easy access savings account rate comes from Ulster Bank, which pays 5.2%, while the top one-year fixed-rate bond from Habib Bank Zurich pays 5.21%. This drops to 4.71% for three-year fixed-rate bonds and 4.57% for five-year bonds, both of which are offered by Shawbrook Bank.
For early-bird ISA savers, Plum offers the top easy-access rate of 5.17%, while Virgin Money has the top one-year rate of 5.06%. For longer fixed periods, again Shawbrook comes out on top, with its 4.41% three-year bond. For the top five-year rate, savers would be best turning to the State Bank of India, which pays 4.15%.
Expected US returns are likely to disappoint investors, said Redwheel’s Ian Lance.
The US has been investors’ favourite market for more than a decade and particularly so in 2023 and 2024. However, Temple Bar manager Ian Lance warned fans of the New World should reconsider their positions or be willing to lose on average 4% of their money each year for the next 12 years.
For UK investors who maxed out their £20,000 ISA allowance this past financial year, this could mean be losing up to £7,745 by 2036, if that money was all invested in the S&P 500.
For investors who didn’t go all-in and allocated approximately 70% to the US – for example through the MSCI World index, whose weighting to the US is 70% – the losses from the US portion of the tracker on the £20,000 initial investment would amount to £5,422.
This is what can be drawn from the chart below, put together by John Hussman of Hussman Strategic Advisors. The culprit for this is valuations.
Market cap of non-financial US companies as a ratio to their gross-value added
Source: Redwheel, Hussman Strategic Advisors
“The market has become too valuation-agnostic,” Lance explained. “People disregard them, but valuations do drive future returns.”
The chart above shows the US stock market’s annualised returns 12 years on from the point of purchase (on the y axis), in connection to valuations (across the x axis, cheap on the left-hand side, expensive on the right-hand side).
Unsurprisingly to Lance, buying the US market on a ratio of 0.5x made investors about 18% per year, while buying them off at an average valuation of 1x produced an average return of about 9%.
“And then just take a look at where we are today, over the far right-hand side of the chart. If that data holds, by buying the US stock market today you should expect to lose 4% per annum for the next 12 years.”
“Although the US looks this expensive, lots of investors that I know of have 70% of their clients' equity money invested in the US market on those very high valuations.”
Other US value managers agreed with Lance. One of them was Phoenix-based Cole Smead, manager of Smead US Value UCITS, who called the US “the most over-owned market in the world” and what’s going on in it “a craze and a mania”. He came to this conclusion using the chart below.
US household equity ownership
Source: Federal Reserve Economic Data, Bloomberg
The blue line shows American households ownership of stocks as a percentage of US household financial assets. There are three highs in this dataset – 1969, 1999 and 2021, which was the highest so far. The orange line displays the subsequent 10-year rolling-returns of the S&P 500.
“You'll notice the y axis starts negative on the right side and it ends positive on the bottom, and that’s because these two datasets have a powerful relationship to be negatively correlated,” Smead said.
“This is not particularly shocking. When everyone's excited about stocks, how does broad common stock participation United States do, as noted by the S&P 500? It does terribly.”
With this, the manager wants to prepare investors for the upcoming stock market failure, whereby the market will fail to make money in real (inflation-adjusted) terms.
In 1969, the 10-year forward return of the S&P 500 was 5.9%. If that sounds not too bad, there's a catch. The decade started with 6% inflation and ended it with 13.3%, amounting to a 4-5% real negative return.
Again in 1999, investors lost almost 1%. With 3% inflation during the decade of the 2000s, they ended up losing 3-4% in real terms, all of which are examples of stock market failure in Smead’s opinion.
“The highs in this data set argue that the S&P is going to make negative returns in real terms. When I hear people say that you can't lose money over 10 years in stock markets, I say you absolutely can. You can be broadly diversified and still lose money in stocks,” he said.
“The US is the most over-owned market, the biggest casino in the world. What's going on with the meme stocks [stocks such as Coinbase Global and Gamestop Corporation, which can maintain elevated prices regardless of their underlying worth thanks to their web-based popularity] is just evidence that this is a craze and mania and the biggest danger to global capital today.”
Retirees and those saving for retirement often invest in poorly performing funds, an AJ Bell study finds.
Some 90% of pension funds have failed to beat a UK equity tracker over the past decade, according to data from AJ Bell, which showed the scale of poor performance suffered by those saving towards retirement.
The benchmark has hardly been a demanding one. Indeed, the FTSE All Share index – which was used in this study – has been one of the worst performing markets globally over 10 years, as the below chart shows.
Around three quarters of the underperforming funds failed to beat the index by at least 10 percentage points, the study found, while more than a third were 20 percentage points behind or more.
It is worth noting however that not all are 100% invested in equities and will have other assets such as bonds and alternatives, which will have impacted performance.
Laith Khalaf, head of investment analysis at AJ Bell, said: “This doesn’t look like a market which is serving consumers well, and yet tens of billions of pounds are invested in pension funds posting disappointing performance.”
Performance of indices over 10yrs
Source: FE Analytics
Included in the list of underperformers were Standard Life/Invesco Perp High Income 4 Pension, which was the worst of the group, making just 13% over 10 years. This included a 0.25% platform cost per year, which was taken into account, although pension funds have different share classes and it is possible some performed better than others.
Standard Life UK Equity 4 Pension (44.5%), SE Ethical Pension (46.7%), Scottish Widows UK Equity 2 Pension (47.5%) and Sun Life Canada CLIC Equity 1 Pension (47.7%) rounded out some of the worst “big funds with small returns”.
Poor performance can have seriously damaging effects in the real world, Khalaf said, as it will dramatically impact the size of savers’ pension funds when they retire.
“If you are able to get a 6% net return on a £50,000 pension pot for 20 years you will end up with £167,357. Reduce that return to 4%, and you end up £57,801 poorer, with a pot of just £109,556.
“Returns from the UK stock market itself haven’t been great over the past decade, but funds which have fallen significantly behind a tracker add insult to injury.”
There are several reasons why pension funds are performing so poorly. First is that many were set up decades ago before the invention of tracker funds. Instead, they invested in ‘closet trackers’ which charged active management fees, Khalaaf said.
Another is that charges on older pension plans tend to be higher. Khalaf said they “look high by modern standards, because they were set a long time ago before investment and platform costs started to fall”.
For example, Stakeholder pensions were popular in the early 2000s. They were marketed as a low-cost scheme with a maximum cost of 1.5% per year for the first 10 years and 1% thereafter.
“But you can now buy an index tracker fund for an annual charge of under 0.5% in a SIPP, and many successful active funds will cost less than 1% per annum including platform charges,” Khalaf noted.
The final reason is the “inertia tax”. This is a result of many pension schemes now being closed to new money, which has meant there is a lack of motivation to improve the products.
“The Financial Conduct Authority’s (FCA’s) Consumer Duty regulation will apply to closed books from July, which should in theory help drive improvements for investors in closed pension funds. There is still the risk that providers drag their feet, are hamstrung by the original pension fund mandates, or make improvements which still fall far short of the most competitive pension plans now available to savers,” the AJ Bell head of investment analysis said.
All savers should assess the performance of their pensions by requesting a performance factsheet and compare the fees they are being charged. Some older pensions can charge as much as 2.4% per year, according to a 2019 paper by the FCA.
“As a rough rule of thumb, you can now buy a UK tracker fund for around 0.3% to 0.5% including platform costs, and an active equity fund for around 1% to 1.2% including platform costs. Some active funds, especially multi-asset funds, cost significantly less,” Khalaf said.
If you are being overcharged or find you are in a poorly performing portfolio, it could be time to transfer to a cheaper or better performing option.
There is a rich vein of opportunity in European smaller companies that provide essential tools for the technology and healthcare sectors.
California in the 1840s was at the centre of the gold rush, which created enormous excitement, as prospectors and investors went in search of their fortune.
However, the real winners weren’t the gold mine owners or the landlords who leased the land but rather individuals such as Samuel Brannan, who became a millionaire selling picks and shovels to miners, and companies such as Levi’s (Levi Strauss travelled from Germany to California), which began providing durable clothing to workers.
Both Brannan and Strauss were able to profit from growth in the overall industry by providing critical products and services.
California is once again the centre of investors’ attention, and this time the excitement is about silicon, or, put more simply, technology. With the Magnificent Seven stocks (Apple, Microsoft, Nvidia et al) and the explosion of data creation, manipulation and storage, we see many parallels with the original gold rush.
Generative artificial intelligence (AI) and related services are turbo-charging data consumption, and the companies providing the tools that create and store this data stand to benefit most from the growth opportunity.
During this current gold rush, European companies once again are among those providing the ‘picks and shovels’.
Critical tools
Large companies such as ASML or ASM, two the world’s biggest suppliers to the semi-conductor industry, tend to get all the plaudits, but in Europe’s smaller companies universe there are several standout names providing critical tools and infrastructure to the supply chain.
There are two Swiss companies which, we believe, are well-placed to benefit from this structural trend. Firstly, VAT, the world’s leading vacuum valve producer, will see increased demand as more tools require high-integrity vacuums, with its valves (picks) being critical in getting to those ever-smaller node sizes.
The second, Comet, stands to benefit meaningfully from the AI revolution as more complex chip architectures are required, and in turn its plasma technologies become even more integral to the manufacturing process.
However, California’s Silicon Valley is not the only site of a current gold rush – we see structural growth in other areas. For example, health efficiency and the ability of blockbuster products to help reduce healthcare spending remains a focus given ageing populations and indebted governments.
As with the technology sector, stock market participants tend to focus on the headline names, for example Lilly and Novo Nordisk, when looking at the growth of GLP-1 based obesity drugs. But delve beneath the surface of the industry and analyse the supply chain and one can uncover some highly attractive ‘pick and shovel’ makers in the European smaller companies space.
Swiss company Bachem manufactures the ‘P’ (peptide) in the GLP-1 name – the key active ingredient for the drug. Capacity is in short supply and, with its reputation for quality and delivery, we think Bachem stands to benefit from the booming industry.
Dig deeper still into the GLP-1 supply chain and you find two German companies, Schott Pharma and Gerresheimer, which supply the devices (vials, synergies and injectable pens) that allow the drugs to be administered. These devices are designed into the manufacturing process, verified by the regulator and therefore hard to displace once the contract is won. This gives the companies and investors like us confidence in the future cashflows and growth trajectory of these businesses. Furthermore, there is a large and growing pipeline of biologic drugs in addition to GLP-1s that will drive demand for their products.
As we look across our portfolios, we see numerous other examples of ‘pick and shovel’ makers: Weir Group (mining equipment), Carel (control units for HVAC equipment), Tecan (sophisticated diagnostic machines for labs) and engcon (innovative tiltrotators to the excavator industry). The European smaller companies universe is rich with businesses that have important attributes.
One might ask, why not buy the company that is at the forefront of development — or the large-cap names we have all heard of? Because, as in the gold rush of the 1840s, we believe that by buying the pick and shovel maker, you are betting not on a single ultimate winner in the industry but on the entire industry winning.
Structural growth
By buying businesses that can grow along with industry volumes and more importantly provide unique and critical components for the industry’s infrastructure, you reduce the competitive (or regulatory) pressures often faced by the larger players, yet still benefit from the structural growth of the sector.
Our view is that investors will be rewarded by owning businesses that provide a specific service or product to the industry, where the competitive moat is high, where the products are ‘under the floorboards’ of the customers and where the industrial niche is relatively concentrated.
The European smaller companies sector is rich with businesses such as these. However, the focus on the Magnificent Seven in the US and the Super Six in Europe has meant less attention has been paid to this area of the market. We believe this allows investors to find businesses exposed to the same growth themes as well-known large caps – at more attractive prices. It also allows investors to diversify their risk, as often these companies provide for the entire industry, rather than being reliant on a single customer.
European smaller companies comprise a unique area of the global stock market, and with a quality growth philosophy one can access these ‘pick and shovel’ businesses and thus partake in gold rushes around the globe.
Phil Macartney is an investment manager, European equities at Jupiter Asset Management. The views expressed above should not be taken as investment advice.
Experts prefer UK small-cap funds with £60m to £200m, but a larger size is acceptable for US strategies.
The size of a fund is an important metric, as it can impact the manager’s ability to apply their investment philosophy.
This is particularly true for funds specialising in small-caps due to liquidity considerations. For instance, a fund that has become too big will have to take excessively large positions in small companies, creating concentration and liquidity risks.
Another risk is that the fund may have to increase its exposure to larger, more liquid businesses, which would dilute its genuine small-cap exposure. In other words, this could turn a small-cap fund into a mid-cap portfolio.
Kamal Warraich, head of equity fund research at Canaccord Genuity Wealth Management, said: “A small-cap fund’s maximum size is based on ‘capacity’, which is essentially how big a total strategy can get (strategy meaning all funds and mandates run under the same philosophy and process) before it has to abandon its current investment approach.
“Many things can impact a strategy, but the most important considerations in my opinion are: size and speed of fund inflows, breadth and depth of the investable universe and liquidity profile of the fund.”
There is, however, no magic number for how big a small-cap fund can get before its size becomes a hurdle. It depends on the average market capitalisation of underlying companies, the size of positions the manager intends to take and the breadth of the market.
Nick Wood, head of fund research at Quilter Cheviot, said: “For example, small-cap investors in the US are likely to hold much larger and more liquid companies than counterparts elsewhere simply down to the structure of that market."
While US small- and mid-caps tend to be relatively large and would, in some instances, be considered large-caps if listed elsewhere, UK and European smaller companies are much less liquid.
Rob Burgeman, investment manager at RBC Brewin Dolphin, said: “The perils for a larger fund, then, of finding themselves stuck in lobster pots – investments that they can get into but not out of – are increased.
“This can be a problem, as successful strategies attract greater flows of funds. These funds then pour into the same holdings, boosting their prices further and increasing the returns of the fund. However, when the tide turns, the fund manager can find that the only buyer of some of their larger holdings was themselves. Prices then start to fall sharply, redemptions increase, and it becomes something of a vicious circle.
“Good fund management houses will soft close and then hard close their funds to prevent them growing too large and avoid this issue.”
For UK smaller companies funds, which invest in a less liquid market, the sweet spot is under £200m, saidTom Hopkins, senior portfolio manager at BRI Wealth Management. A size range between £60m and £200m is “ideal for active, concentrated, yet liquid portfolios”.
He warned against funds exceeding £500m in assets under management as they may need to increase their exposure to large- and mid-caps.
While smaller funds are generally better in this asset class, there are risks associated with buying units in tiny funds.
Hopkins explained: “The risk of investing in a fund that’s too small is that your deal size could make you a significant shareholder within the fund, which some investors may find uncomfortable.”
While Hopkins would back a fund as small as £60m, Burgeman is wary of funds under £100m.
“A micro fund is going to struggle to generate the returns required to be financially viable for the fund management group, leaving it exposed to the prospect of being abruptly shut or merged with another strategy,” Burgeman said.
“This is okay, maybe, if a fund has just launched and there is reasonable prospect of it reaching critical mass within an acceptable period.”
Small-caps have been deeply out of favour in the UK and elsewhere in recent years. Data from the Investment Association showing that the size of small-cap equity funds has contracted from £14.5bn five years ago to £9.8bn today, as a result of both outflows and disappointing returns.
Yet, easing inflation and the potential for rate cuts this year could benefit smaller companies, which are trading at significantly lower valuations than the wider UK market.
Hopkins concluded: “As smaller companies remain undervalued, we will continue to see heightened M&A activity from overseas and private equity buyers if these valuations continue.
“For a long-term investor, the current valuation of the UK small-cap market provides an attractive buying opportunity as the market still has plenty of high-quality and exciting businesses for investors.”
Jefferies and Peel Hunt one, short sellers zero as the brokers’ buy ratings prove prescient.
Hargreaves Lansdown’s volatile share price has rebounded strongly since March 2024, although it is still way off its 2019 peak. Broker Jefferies has issued a buy rating for the platform’s stock in the belief that its fortunes are turning around under new chief executive Dan Olley and Peel Hunt recently reaffirmed its buy rating.
Nonetheless, Hargreaves Lansdown remains one of the UK’s most shorted stocks judging by the percentage of its share capital disclosed to be in the hands of short sellers (5.5% at the end of April 2024, according to the Financial Conduct Authority).
Hargreaves Lansdown’s share price year-to-date vs FTSE 250
Source: FE Analytics
Analyst recommendations are split with six analysts expecting Hargreaves Lansdown to underperform, five saying it will outperform, three buys, four holds and one sell, according to the Financial Times as of 9 May 2024.
So, who is right? And should you buy, hold or fold Hargreaves Lansdown’s shares?
Eric Burns, chief analyst at Sanford DeLand, sides with Jefferies and Peel Hunt. Hargreaves Lansdown is a high beta play, so he expects its shares to perform well if the UK and global stock markets – which hit fresh highs last week – continue to rise.
“I struggle to follow the logic of being short a stock like HL when the FTSE is reaching new highs on a daily basis. Rising markets provide an organic uplift to assets under administration – HL’s key performance metric – even without it adding new customers,” he explained.
“Following the sell-off, we have a business with a free cash flow yield we estimate of about 7.1% this year, rising to 7.5% next. This puts it very much in the ‘value’ category.”
Peel Hunt agreed that the platform looks cheap. “Hargreaves Lansdown is now trading on a December 2024E EV/EBIT of c.8x, or a price-to-earnings ratio of 12x, well below the other listed platforms,” the broker said on 30 April 2024, reiterating its buy recommendation. “We do not believe the longer-term prospects are being reflected in the share price.”
Sanford DeLand has held Hargreaves Lansdown (HL) in its CFP SDL Buffettology fund since October 2014. It also owns AJ Bell in its CFP SDL Free Spirit fund. “We love platform businesses; they are very scalable and tend to exhibit the sort of returns we are looking for,” Burns said.
“In the case of HL, return on average equity is in excess of 50% and conversion of reported earnings into free cash flow is high. Despite all the negativity you will hear, this is a business that has grown revenue at a 10%+ compound annual rate over the past 10 years during which time active clients have gone from 507,000 to over 1.8m. It’s the sort of steady compounder we like.”
Hargreaves Lansdown has benefitted from the higher rate environment through its popular Active Savings product which enables savers to achieve a better rate of return on cash, Burns added.
“There have also been regulatory concerns regarding the interest platforms earn on client cash balances although this appears to be ameliorating,” he noted.
Julian Roberts, an equity analyst at Jefferies, argued that although Hargreaves Lansdown is not the cheapest investment platform, its pricing is competitive – and fees are not as critical to customer loyalty as the platform’s detractors may believe.
“Platform fees of 45 basis points (bps) are capped at £45 a year for shares. On an average account size of c. £75,000, that is 6bps. It is more than AJ Bell, which caps out at £25 (3⅓ bps), but the £20 difference is quite slim in the scheme of things, and HL would point to execution cost savings due to their larger size and network. This does not hold for all asset classes, but absolute differences are not huge,” Roberts explained.
“Perhaps more importantly, in our survey of UK savers this year, the two most expensive platforms were also the most popular, so we doubt that the target market is as price sensitive as people might think. Brand and service probably matter more.”
Roberts thinks that Hargreaves Lansdown’s sheer size masks its success at bringing in new customers. “HL fishes for new clients in the same pool as all of its competitors, but it loses them from a much bigger one. Lose 10% of 1.8m customers, and you need 180,000 new ones to replace them. AJ Bell can lose 10% and only need 35,000 new ones to grow,” he said.
“HL added 34,000 net new customers in the quarter to March 2024, versus 15,000 at AJ Bell, but the gross numbers are even further apart. We see this as a sign of brand strength.”
For Hargreaves Lansdown, this represented a 48% jump in net new clients compared to the first quarter of 2023, as its new cash ISA and ready-made pension portfolios proved popular.
Positive market movements also helped the platform to grow its assets under administration by 5% during the first quarter of this year to £149.7bn, according to Peel Hunt. Net inflows improved to £1.6bn, which was above consensus expectations.
Since coming onboard as CEO last year, Olley has had “a real impact”, Roberts continued. The former dunnhumby boss has “re-jigged the sequence and content of the investment programme, replaced the chief technology officer, brought in a new strategy office and a new corporate affairs director, and there have been results”.
The most recent addition to the investment programme is a range of passively-managed model portfolios, which will start trading next month.
On the other side of the equation, short-sellers have had plenty of reasons to bet against the stock during the past few years.
Having owned the platform for a decade, Burns acknowledged its fall from grace. “If you combine difficult market conditions with the unwanted connection to the [Neil] Woodford affair and a spat with its founder then I guess that’s fodder for the shorters,” he said.
The platform’s shareholders, Burns included, are hoping these headwinds are in the past and that momentum has turned in Hargreaves Lansdown’s favour.
In a further potential fillip to shareholders, Burns suggested that HL might join the increasing ranks of British companies catching the attention of overseas buyers.
Morgan Stanley’s MS INVF Emerging Leaders Equity fund and Carmignac Portfolio Emergents outperformed the most over five years.
Active investing is all about stock selection and outperforming indices in order to give investors extra returns that they can’t get through passive funds.
By outperforming their benchmarks, managers can show that their decisions have benefitted the fund, keeping investors happy and justifying their higher fees.
In this series, Trustnet is looking at funds’ outperformance, as measured by alpha, over the past 61 year-long periods measured every month from 2018 to 2023.
Today, we analyse the IA Global Emerging Markets sector, where the Morgan Stanley Investment Management’s MS INVF Emerging Leaders Equity fund had the highest alpha score.
The $955.6m fund follows a benchmark-agnostic investment process whereby the manager Vishal Gupta focuses on companies that are poised to benefit from future growth themes.
His top three stocks are Brazil-based digital banking firm Nu Holdings (8.3%), Argentinian online marketplace MercadoLibre (7.4%) and Taiwan Semiconductor Manufacturing Company (7%).
Over the past five years, the fund outperformed its benchmark, the MSCI Emerging Markets index, by an average of 5.9% per annum.
Source: FinXL
The second-best fund was Carmignac Portfolio Emergents, with an average alpha of 5.31.
It is co-managed by Xavier Hovasse and Haiyan Li-Labbé, who combine a fundamental top-down approach with bottom-up analysis. The fund’s main country exposure is China (27.9%), followed by South Korea (18.4%) and India (14.4%). The top holding is Samsung (9.9%).
In third position, BNY Mellon Global Emerging Markets Opportunities concluded the podium with an average alpha of 4.8. It is managed by Liliana Castillo Dearth, although she joined Newton Investment Management in October 2023 – the fund’s track record prior to that was built by former managers Paul Birchenough and Ian Smith.
Other notable strategies in the list included the value-focused Artemis SmartGARP Global Emerging Markets Equity fund (average alpha: 4.09), which is recommended by FE Investments analysts as a core emerging-market fund. Its investment process “goes beyond deep value and distressed stocks to include a wider variety of factors”, they said.
The Aubrey Global Emerging Markets Opportunities fund (average alpha: 3.39) has a “strong consumer focus and growth-bias”, FE analysts said, making it a good fund for secondary exposure
Finally, the five FE fundinfo Crown-rated JPM Emerging Markets Income (average alpha: 3.35) also deserves a mention.
“In tough environments such as 2020, where many companies looked to cut their dividend payments, this fund’s ability to focus on capital appreciation provided it with resilience and the capacity to maintain total return generation in downward markets,” FE analysts said.
“Unlike traditional income funds, this fund takes a more flexible approach, in that capital appreciation is as equally important as income generation. The fund is best suited as a core emerging market exposure, with defensive characteristics for those seeking a source of income.”
There was only one fund in the whole emerging markets sector that consistently delivered a positive alpha throughout the past five years – the First Trust Emerging Markets AlphaDEX UCITS ETF.
With just £15.3m of assets under management (AUM), this overlooked exchange-traded fund (ETF) has beaten the benchmark it is tracking, the Nasdaq AlphaDEX EM index, with an average outperformance of 3.1% – higher than many active managers in the sector.
For this, it only charged 0.80%, in a sector where the average ongoing charges figure (OCF) is approximately 0.95%. Its main exposures are to China (18.1%), Turkey (15.3%) and Taiwan (11.63%).
At the bottom of the table were funds with negative alpha, whose managers’ active decisions detracted from performance rather than contributed to it.
Source: FinXL
The most negative scores were those of JSS Sustainable Equity Systematic Emerging Markets (-6.39), Comgest Growth Emerging Markets (-4.88) and Multipartner SICAV Baron Emerging Markets Equity (-4.45).
Sectors previously in this series: UK Equity Income, UK All Companies, Global, Global Equity Income, Sterling bonds, smaller companies, global bonds, cautious funds, balanced and adventurous funds, European funds, Asia funds.
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