Where’s the clever money going? June 2017

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Sterling, rather than the UK stock markets, continues to bear the brunt of current economic and political uncertainty. As campaigning for the snap election gathered pace, the pound reached its highest value against the dollar since last September, with £1 briefly breaching $1.30 in mid May.

But it was knocked back somewhat towards the end of the month as polls indicated an increasingly uncertain election outcome, combined with signs of economic slowdown and concerns over the Brexit talks which begin this month.

UK stock markets have meanwhile continued to creep steadily upwards: The FTSE 100 rose from around 7250 to 7550 over the month. That’s because declines in the value of sterling benefit the big internationally oriented companies of the blue-chip index which generate much of their revenue in other currencies, particularly dollars.

But the best gains of the month have come from Japanese funds, with four out of the top five performers in May focused on Japan.

Ben Yearsley of Shore Financial Planning comments: ‘Interestingly the Topix index only rose 2.39% and the yen increased 1.15% against sterling, so active managers delivered an excellent result.’

Adrian Lowcock of Architas points out: ‘The outlook for the country improved as consumer spending started to rise and inflation returned to the country. The Japanese market continues to look cheap compared to other developed markets.’

The top five performers look like this:

Invesco Perpetual Japanese Smaller Companies     +10.9%

Baring Korea                                                                       +9.3%

Legg Mason Japan Equity                                               +9.27%

First State Japan Focus                                                   +8.79%

Fidelity Japan Smaller Companies                                +8.55%

In terms of the strongest sectors, Europe was also very much in evidence, claiming three of the top five slots. Yearsley points to significant gains for the euro against sterling as a key factor.

The euro started the month worth around 84.5p, but strengthened to end the month around 87p on the back of both improving economic data and diminishing fears that the Far Right is in the political ascendancy across Europe. The sectors look like this:

Japanese Smaller Companies                +6.2%

Technology & Telecommunications    +5.7%

IA Europe Excluding UK                          +5.4%

IA European Smaller Companies           +5.3%

IA China/Greater China                             +4.8%

IA Europe Including UK                            +4.6%

IA Asia Pacific Including Japan              +4.3%

IA Japan                                                        +4.1%

IA UK All Companies                                 +3.6%

IA Asia Pacific Excluding Japan            +3.6%

 

At the other end of the table, North American Smaller Companies was the only sector to fall in value in May, losing 0.6%.

‘The sector has performed well recently on the expectation that President Trump would introduce significant tax cuts which would benefit US smaller companies the most. However, Trump has not made any progress on introducing tax cuts and looks increasingly unlikely to deliver on his promises, at least in the short term. As such, investors started to take profits on US smaller companies in May,’ explains Lowcock.

Among investment trusts, there’s a similar slant, with Japan, Europe and telecoms all holding their own, but the UK also in evidence. Smaller companies trusts continue to outperform, claiming four of the top ten sectors.

The 10 top performing investment trust sectors look like this:

Japanese Smaller Companies                            +10%

European Smaller Companies                           +8%

Tech Media & Telecoms                                     +8%

Europe                                                                      +6.8%

Global Smaller Companies                                  +6.6%

Japan                                                                                    +5.8%

Small Media Comms and IT Cos                        +5.2%

Property  Securities                                               +5.1%

UK Equity Income                                                  +5%

UK Smaller Companies                                        +4.5%

 

Commentators have recently been light on investment tips for the months ahead generally.

However, India is increasingly being flagged as one of the brightest emerging market prospects, given its youthful population and a proactive prime minister in Narendra Modi.

Adrian Lowcock suggests two funds that could provide a good way into the Indian market.

Fidelity Emerging Markets: The fund has around 11% invested in India and provides investors with a diversified exposure to emerging markets. Manager Nick Price has a well-established process and is focused on investing in companies with superior growth potential, sustainable profitability and a consistent track record over time.

Jupiter India: Manager Avinash Vazirani looks for companies whose growth prospects have been overlooked by the market. His process is mainly driven by detailed company research but he is aware of broader economic developments and themes in India. The fund has traditionally had a healthy weighting to small and medium-sized companies.

Meanwhile Sam Lees of Fund Expert recommends the Asia Pacific sector as a great place for income seekers – not least because of its ‘outstanding’ income growth potential.

However, there is considerable diversity among the funds available. Lees identifies three attractive Asia Pacific funds that all provided substantial growth in the amount paid out in both 2016 and 2015:

Matthews Asia Asia Dividend     +21% (2016) +21% (2015)

Liontrust Asia Income                   +14% (2016) +9% (2015)

Henderson Asian Dividend Inc  +12% (2016) +4% (2015)

 

Passive funds have been increasingly popular during this long-running bull market as a low-cost means of tapping into the upward momentum of particular indices.

In Money Observer, Morningstar’s Hortense Bioy identifies three competitively priced exchange traded funds (ETFs) providing exposure to different parts of the UK market.

iShares Core FTSE 100 ETF is a good route in for investors looking specifically at the internationally oriented large-cap segment of the market, where the pounds weakness has benefited overseas earnings when they are converted back into sterling. It charges an ‘ultra-competitive fee’ of 0.07%.

Vanguard FTSE 250 ETF provides very cheap exposure to both large and mid-cap companies of the UK market. Vanguard FTSE 250 ETF is an attractive option. ‘At 0.10%, it is one of the cheapest UK midcap trackers. It has also tracked its benchmark very closely,’ says Bioy.

SPDR FTSE UK All Share ETF covers the whole UK market, though it has a natural large-cap bias in line with the market, which means active managers able to stock-pick strongly performing small companies may outperform it.

However, says Bioy, ‘this ETF’s cost advantage should make a difference over the long term. With an ongoing charge of 0.20%, the fund enjoys a considerable cost advantage. It is also the cheapest FTSE All-Share ETF on offer.’

Sticking with the UK, McHattie’s latest investment trust newsletter highlights broker notes on three UK trusts offering attractive prospects.

Henderson Opportunities:  housed in the UK All Companies sector and profiled by Winterflood, this trust has around half its assets invested in the Alternative Investment Market, Aim, which makes it relative risky.

But Winterflood says: ‘we believe that its unconstrained approach and the

access to the stock picking abilities of the team is attractive and complimentary to more traditional UK funds.’ The trust is on an 18% discount, which the broker sees as ‘a potentially attractive entry point.’

Schroder UK Mid Cap: Also in UK All Companies, Panmure Gordon’s research on this trust presents a rather different proposition. The broker sees it as “a get rich slowly” fund in which investors can benefit from dividend and capital growth gradually over time without taking excessive risks.’ It has produced annualised returns of 9.5% a year over the past 10 years, with relatively low volatility.

Schroder Income Growth: in the UK Equity Income sector, Stifel picks out this trust as “a consistent performer trading on an illogical discount”, given that it has consistently outperformed some of its more highly rated peers such as City of London. It is currently trading at a 7% discount and has a 3.6% yield.

 

 

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