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

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

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

Fund versus benchmark and sector since inception

Source: FE Analytics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brexit’s impact on business fundamentals

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

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

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

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

Outperformance not dependent on a re-rating

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

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

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

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

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

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

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

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

The point of maximum pessimism

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: FE Analytics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Trustnet

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

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

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

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

Source: Trustnet

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

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

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

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

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

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

Source: Trustnet

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

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

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

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

A few other trends are apparent from the above table.

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

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

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

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

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

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

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

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

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

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

Source: Trustnet

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

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

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

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

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

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

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

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

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

Source: Trustnet

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

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

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

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

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

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

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

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

Source: Trustnet

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

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

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

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

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

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

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

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

Performance of fund vs sector over 3yrs

Source: FE Analytics

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

What is your investment process?

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

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

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

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

Why should investors pick your fund?

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

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

What’s your highest conviction stock pick?

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

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

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

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

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

Performance of Disney shares over 1yr

Source: Google Finance

What was your best call over the past year?

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

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

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

Performance of Constellation Energy shares over 1yr

Source: Google Finance

Which stock has been your worst investment recently?

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

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

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

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

What do you enjoy doing outside of fund management?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For what it’s worth, so do I.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Troy Trojan and Personal Assets

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

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

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

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

Performance of fund vs sector and benchmark over 20yrs

Source: FE Analytics

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

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

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

Royal London Sustainable Managed Growth

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

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

Performance of fund vs sector over 10yrs

Source: FE Analytics

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

Waverton Multi-Asset Income

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

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

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

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

Performance of fund vs sector over 5yrs

Source: FE Analytics

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

Other options

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Performance of fund vs sector and benchmark over 10yrs

Source: FE Analytics

A breakdown of the investment process

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

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

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

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

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

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

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

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

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

Performance of Whitbread shares vs FTSE All Share in 2023

Source: FE Analytics

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

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

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

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

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

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

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

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

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

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

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.

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.”

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

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. 

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.

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.