Where’s the clever money going? August 2017

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July was a fairly quiet month in the markets, with most indices making some gains. The FTSE 100 has tracked broadly sideways during July and so far in August, wavering between 7300 and 7500. It has been supported by further falls in the value of the pound relative to the euro, in the face of positive economic data from the Eurozone plus Brexit concerns.

That’s because weak sterling is good news for export-led blue-chip businesses – though not for the UK’s beleaguered holidaymakers as they head to the Continent: the pound is now worth around €1.08, with some airport forex outlets offering travelers as little as €0.87 for £1.

However, sterling strengthened against the dollar over July, hitting a 10-month high at the end of the month amid concerns over President Trump’s progress on economic policy and fears for slowing growth in the US.

Looking at markets globally, emerging markets did well, with the MSCI EM index up 4.4%, driven by improving growth forecasts in China. But top of the list was the Hang Seng index in Hong Kong, which gained more than 6% over the month.

Emerging markets and Asia showed their colours as far as investors were concerned during July, taking three of the top five slots in the fund sector performance table.

 

IA China +5.22%
IA Global Emerging Markets +4.34%
IA UK Smaller Companies +3.09%
IA Tech & Telecoms +2.97%
IA Asia Pacific ex Japan +2.9%

 

Similarly, turning to individual fund performances over the month, a cluster of broader emerging markets and regional specialist funds dominated the table of top performers.

 

HSBC Chinese Equity +9.0%
Neptune Latin America +8.9%
Baillie Gifford Emerging Markets Growth +7.9%
Scottish Widows Latin America +7.9%
Baillie Gifford Emerging Markets Leading Cos +7.8%
Baring Emerging Markets Inst +7.7%
JPM Natural Resources +7.6%
Baillie Gifford Greater China +7.4%
UBS Global Emerging Markets Equity +7.3%
Aberdeen Latin America +7.2%

 

The other end of the table features a mixed bunch of absolute return and equity income funds, including Woodford Equity Income, run by the legendary Neil Woodford.

‘Last month was a shocker for Woodford, with the top three positions all falling sharply during the month, for different reasons. Astra Zeneca’s latest drug trials disappointed, Imperial Brands was hit when the FDA in the US decided last week to reduce the amount of nicotine in cigarettes and Provident Financial plunged after first half profits disappointed,’ comments Ben Yearsley of Shore Financial Planning. ‘Last month showed the benefits of not having too many eggs in a single basket and also that today’s markets savagely punish perceived poor results.’

 

Manek Growth -5.9%
CF Eclectica Absolute Macro -4.0%
Blackrock Emerging Markets Absolute Alpha -4.0%
City Financial Absolute Equity -2.7%
Rathbone Blue Chip Income & Growth Inst -2.5%
Woodford Equity Income  -2.5%
SJP UK High Income -2.4%
VT De Lisle America -2.3%
Blackrock Global Income -2.2%
Blackrock Global Equity -2.2%

 

Among investment trusts, the picture is much more mixed – and the gains are substantially larger. According to Morningstar, the top 10 table looks like this:

 

Independent Investment Trust                                    22.3%

Better Capital PCC 2012                                                14.5%

Qatar Investment Fund                                                 10.9%

Lindsell Train                                                                   10.9%

LMS Capital                                                                      10.8%

River & Mercantile UK MicroCap                                 10.7%

Riverstone Energy                                                            10.3%

BlackRock World Mining                                                10.3%

Aberdeen Smaller Companies Income                         9.6%

BlackRock Latin American                                             9.0%

 

McHattie points out that there’s a particular reason for the success of the ‘aptly named self-managed Independent IT’ at the top of the table, and that is ‘the trust’s large and hugely successful holding in Fevertree Drinks’.

Looking to the future now, and the Association of Investment Companies has been sounding out specialist trust analysts on some of the up-and-coming manager stars in the investment trust sector.

 

  • Paul Major of BB Healthcare Trust was picked by Anthony Leatham of stockbroker Peal Hunt for his experience and ‘stock-picking skill’.
  • Leatham also identified Ross Teverson of Jupiter Emerging and Frontier Income Trust. Teverson has a ‘disarmingly intuitive focus on companies that are undergoing change, companies with an unconstrained mandate’, he says.
  • Guy Anderson of Mercantile was the choice of Emma Bird of Winterflood. She says: ‘Guy Anderson is a highly regarded manager and we believe that his promotion to lead manager of the largest investment trust investing in UK equities within five years demonstrates JPMorgan’s confidence in his ability.’
  • Bird also picks Olivia Markham, co manager of BlackRock World Mining Trust and a ‘rising star’ of the company.
  • Ewan Lovett-Turner at Numis likes James Goldstone, who has taken over Keystone Investment Trust from Mark Barnett. ‘He has already put his stamp on the portfolio’ and made a good start, despite having such big shoes to fill, says Lovett-Turner.
  • Lovett-Turner also likes Laura Foll, co-manager of Lowland with James Henderson; ‘I’ve been impressed by Laura’s deep stock-specific knowledge,’ he comments.

 

The hunt for income continues unabated, but as the tables above show, UK equity income funds have struggled to deliver the goods recently. That has prompted Adrian Lowcock of Architas to come up with five alternative income-oriented investment ideas to diversify a portfolio.

Small companies: large companies are the main focus for income, but smaller firms may also pay dividends.These companies are often still growing so could offer investors an attractive but growing income. They also offer diversification away from more traditional core UK equity income funds,’ says Lowcock. He suggests PFS Chelverton UK Equity Income.

Go global: Many companies listed in other countries have impressive dividend histories, says Lowcock.  ‘In addition, global equity income offers investors access to income from sectors not readily available in the UK’, and from countries enjoying faster economic growth. Lowcock likes Schroder Global Equity Income.

Property  – Commercial property benefits from having different characteristics from shares, with rents typically the main driver of returns. ‘Rents are often linked to inflation so rise as prices rise, giving investors an inflation proofed income,’ comments Lowcock. ‘In addition over the longer term property has been an excellent diversifier from shares and bonds.’ He likes First State Global Property Securities.

Bonds still offer potential – ‘Bonds continue to have a lot to offer income seekers, in a low interest rate world bonds offer a potentially less risky income than equities. However, with yields so low and inflation having returned there are risks, particularly to capital, and it is important to invest in bonds through a flexible manager,’ he warns. MI Twentyfour Dynamic Bond is his choice.

Think long-term – As with property, infrastructure is an excellent potential diversifier from equities and bonds. ‘Infrastructure projects provide a reliable income, often guaranteed by government, which is often linked to inflation.’ Lowcock likes John Laing Infrastructure fund.

A new climate impact rating for funds was launched by Climetrics in July, designed to ‘enable investors to compare the climate impact of investments in funds and provide the missing link between individual investment choices and the global problem of climate change’.

Only 8% of the fund universe, 221 of more than 2,500 funds, have earned the top five-leaf rating, and just 10 fund management houses have one or more such ratings.

Six of the funds earning the highest accolade are:

 

EdenTree Amity International

Rathbone Global Opportunities

Stewart Investors Worldwide Sustainability

Liontrust SF Global Growth

HSBC GIF Global Equity Climate Change

Old Mutual Newton Global Income

 

And finally, sticking with the SRI theme, Morningstar for Money Observer has picked out a diverse range of socially responsible ETFs offering exposure to themes such as climate change, clean energy or best workplace practice.

Morningstar warns that investors need to look at the screening process used by any SRI ETF, and also keep an eye on fees. Among the best-value ETFs in the sector, it identifies the following:

 

Ongoing charge (%)

No of stocks

BNP Paribas Easy Low Carbon 100 European ETF 0.2 100
BNP Paribas Easy MSCI Eur Sm Caps ex Controversial Wpns ETF 0.25 19
UBS MSCI EMU Ucits ETF 0.28 59
UBS (IE) MSCI UK IMI Socially Responsible Ucits ETF 0.28 165
iShares MSCI USA SRI ETF 0.30 161

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