As 2017 draws to a close, investment experts have been looking into their crystal balls to assess economic prospects for the coming year and the funds and investment trusts that could benefit.
While there seems no end to the equity and bond markets’ enduring bull run and many managers remain positive on prospects for 2018, there is increasing concern among other commentators that investors could be in for a nasty shock as markets are in bubble territory.
Andrew McHattie, who runs the Investment Trust Newsletter, sums it up: ‘We still speak to plenty of managers who are positive on the prospects of extracting more value from coordinated global growth, but we are also aware of a growing hubbub of cautionary voices.’
Examples among the investment trust world include Neil Woodford, the manager of the Woodford Patient Capital Trust, who has warned that ‘there are so many lights flashing red that I am losing count’. Alastair Mundy of Temple Bar Investment Trust agrees, arguing that there are not enough cheap stocks available.
‘Conflicting views are what make markets function, of course, so we’ll see what 2018 brings,’ adds McHattie.
For those looking for inspiration – whether to exploit areas of relative value, to take advantage of successful approaches in particular markets or to position their portfolio more defensively – we’ve rounded up some ideas from leading brokers and fund managers.
Tom Stevenson of Fidelity is ‘more cautious’ looking ahead than he was in 2017, and expects ‘some more volatility in markets in 2018’. ‘After a year without even a 5% pull-back, I would be surprised if we did not see one in the next 12 months,’ he says.
He is looking for opportunities in regions that are still behind the main equity bull market led by the US, and favours Europe, where ‘sentiment remains at a low ebb, relatively speaking’. He believes the region is ‘a treasure trove of excellent companies that will benefit from the ongoing global pick-up in activity’, picking out the value-oriented Invest Perpetual European Equity Income fund. ‘If economic recovery picks up then this fund could have its moment,’ he explains.
He also recommends ‘another out-and-out stock picker’ to take advantage of what could well be a sideways-moving market, in the shape of a home-grown fund, Fidelity Global Special Situations – ‘an unconstrained global fund which can chase opportunities wherever in the world the manager finds them’.
For Asian exposure, including to the likes of the high-flying Tencent and Alibaba tech stocks, Stevenson selects Old Mutual Asia Pacific. ‘With sentiment likely to be more volatile next year, I like Old Mutual’s focus on this key driver and the manager’s ability to move in an agile way between stocks and sectors as the market mood shifts.’
Darius McDermott of FundCalibre identifies several areas that he believes could thrive in 2018, starting with emerging markets. ‘Despite having done well this year, we believe many areas within emerging markets are attractively valued relative to many of their developed market counterparts,’ he explains. His pick is Lazard Emerging Markets, whose manager he considers a ‘particularly adept’ stock picker.
Like Stevenson, McDermott is positive on Europe: ‘Improving economic growth, increased political stability and falling unemployment levels have bolstered sentiment in Europe, with M&A activity in the region picking up and IPOs continuing to come to market. That said, there are still pockets of value which can be captured by selecting the right managers.’ Marlborough European Multi-Cap is his favoured choice, on the grounds of its diversity and overweight exposure to smaller companies.
He also likes Japan, which remains relatively out of favour with UK investors but where Prime Minister Shinzo Abe has a powerful mandate for his business-friendly reforms. Baillie Gifford Japanese is his pick.
At broker AJ Bell, Ryan Hughes takes a slightly different approach, offering a selection of funds to suit different risk appetites in the face of concerns that we may be moving into bubble territory. ‘Calling the top of the market is simply a guessing game and we currently have some of the most experienced investors in the market at odds over the outlook for equities,’ he says.
Cautious: Given that equity markets are hovering around all-time highs and fixed interest markets appear ‘challenged’, Hughes suggests Troy Trojan as a multi-asset solution with ‘a very clear eye on protecting capital’ for cautious investors.
Balanced: Hughes too stands in the pro-Europe camp, as the region’s economic recovery continues; he believes the Crux European Special Situations fund could be well placed to benefit. This high-conviction fund ‘focuses on companies that have exceptional management and a market leading position’, typically mainly among medium and smaller businesses.
Adventurous: Japan is his choice for adventurous investors, and he too selects Baillie Gifford Japanese. ‘The team at Baillie Gifford are one of the strongest around; with a strong focus on stock picking and a willingness to look different from the index, this is a good choice for higher risk investors,’ he says.
Income: Hughes points out that the UK’s dividend-paying culture makes it a good choice for income seekers, but that it’s worth looking beyond the few high-profile big fund names that dominate the sector. River & Mercantile UK Equity Income has ‘a very experienced manager and with a quantitative screen underpinning the process, this diversified portfolio will be a good foil to other better-known equity income funds.’
Many tipsters are focusing their ideas on Europe and Japan, but Brewin’s Ben Gutteridge makes some suggestions for investors looking for the best bets in other areas as well.
In the UK, Gutteridge says that so-called ‘GARP’ funds targeting growth at attractive prices ‘should make for a sound investment strategy in 2018’. He picks the Man GLG UK Income fund which has ‘both growth and value features and within those value characteristics a premium dividend yield to the market’.
For North America, where opportunities to find value are concentrated among smaller companies, his preferred fund is Legg Mason US Small Cap Opportunities. ‘The management have a clear value bias allowing them to benefit from any upside surprises to US economy performance,’ he explains.
In what is likely to become a more difficult climate for fixed income investors, Gutteridge’s choice is Robeco Global Credit, which invests mainly in investment grade corporate bonds but then throws additional ‘high conviction ideas and value opportunities, which are sourced from a wider market and include speculative grade bonds, asset backed securities and emerging market debt’. He adds that evaluating macro data and determining where we are in the business cycle is crucial to the strategy. ‘This will drive sectoral and geographical allocation in a portfolio and dictate how much credit and interest rate risk the fund managers are willing to take.’
What about opportunities in the investment trust universe? Peter Walls, manager of the Unicorn Mastertrust, a fund of investment trusts, points out that the rising market tide that has lifted all boats has affected trust ratings too. As a consequence, he says, ‘discounts are at their narrowest level in my experience’, making it quite difficult to find new areas offering the good value he is looking for.
One currently less popular area where he has been adding to his holdings is in UK smaller companies, through the value-oriented Aberforth Smaller Companies trust, currently trading on a 13.5% discount to net asset value. He has also added the hedge fund BH Global to help protect the portfolio if volatility does increase.
He is steering clear of the income-generating alternative trusts – for example focusing on peer to peer lending or specialist property – which have gained such large followings in recent years as interest rates have remained at rock bottom levels. They are now trading on high premiums, but are ‘quite vulnerable to seeing their premium ratings run off over time and in some cases turning to discounts’ if other income sources come back into the picture and demand for these pricey assets drops away.
Finally, Money Observer’s Bargain Hunter Kyle Caldwell echoes the idea of the UK as an unloved area with potential. He points out that ‘the latest Bank of America Merrill Lynch fund manager survey in November showed 37 per cent of respondents were underweight UK equities – the highest figure since the financial crisis.’
That’s partly because domestically focused stocks have struggled since the Brexit vote; but star managers such as Neil Woodford and Mark Barnett believe they have been ‘unjustifiably penalised’ and will see a return to favour in due course.
‘Private investors who share the same view can pick up Woodford’s Patient Capital Trust on a 9.4 per cent discount, while Edinburgh IT, headed up by Barnett, is trading on a discount of 7.1 per cent,’ says Caldwell. ‘Both discount figures are notably wider than their 12-month averages; -4.8 per cent and -5.7 per cent respectively.’
However, he suggests that an even bigger bargain for UK-focused value investors is offered by Henderson Opportunities Trust, which also has a bias towards domestic stocks and currently trades on a discount of 14.2 per cent. ‘Within the past year the discount has been as tight as -9.6 per cent, so there could be some scope for further narrowing from its current level,’ he says.