Where is the clever money going? June 2018

Despite continuing geopolitical uncertainties – headlined by North Korea, President Trump’s global trade tariff aggression, tension with Russia and Iran, and concerns over Italian politics and the future of its relationship with the EU – global markets enjoyed an upward trajectory over much of the past three months.

The FTSE 100 index gained almost 7% in April, making it one of the top-performing global indices. Energy and natural resources funds did particularly well, driven in part by an oil price surge on the back of continuing tension with Russia and in the Middle East. ‘The possibility of renewed sanctions against Iran, as well as OPEC’s cutbacks, all helped push oil higher,’ explained Ben Yearsley of Shore Financial Planning.

The best-performing fund sectors in April were led by UK Equity Income and UK All Companies, both of which returned an average 6.3%.

The FTSE 100 maintained its position among global indices in May, gaining 2.7%. It continued to climb steadily until the second half of May, peaking at 7877 on the 22nd, before markets globally showed their anxiety over issues such as US-China trade, North Korea and emerging markets. Emerging markets suffered most, with the MSCI Emerging Markets index losing 2.3% over the month.

Yearsley commented: ‘It isn’t completely accurate to say markets are spooked, but tensions are rising and any bad news is punished swiftly. Risk assets appeared to take a tumble in May; however the UK market was saved by sterling’s weakness, with the pound falling 3.6% versus the US dollar and more against the yen.’

World Cup investment line-up

Finally, as the World Cup looms large, Tilney Bestinvest’s Jason Hollands has pulled together a ‘dream team’ of ‘world class’ funds for a well-balanced portfolio comprising both more adventurous attackers and defensive holdings.

Centre forwards: The centre forwards of our team are all global star plays, but each with their own distinctive styles. There are two developed market funds, Lindsell Train Global Equity and Artemis Global Income, but while the former typically backs larger well-known quality growth companies, the latter is more sensitive to valuations paid. In the centre is a striker fund focused on high growth developing markets.

Lindsell Train Global Equity

‘Michael Lindsell and Nick Train have a distinct investment style, taking large positions in a small number of high quality businesses and holding them for the long-term. Given the quality and stability of these businesses this does not necessarily increase risk, and in fact their funds have typically offered a degree of protection in falling markets.

Fidelity Emerging Markets

‘Nick Price is an experienced emerging markets equities manager. He favours companies with strong market positions and competitive advantages, as these are typically able to deliver attractive earnings throughout the economic cycle. Historically they have enabled the fund to deliver a more defensive performance profile.

Artemis Global Income

‘Run by Jacob de Tusch-Lec, the fund has ‘go anywhere’, unconstrained approach to investing in developed markets and currently has far less exposure to the expensive US stock-market than global funds which stay close to the Index. The fund also has a high weighting to medium-sized companies compared to its peer group.

‘Midfield: In the midfield we have four funds, each focused on major stock market region.

Dodge & Cox Worldwide US Stock Fund

‘Managed from San Francisco, this fund is dominated by major blue chip US companies. Identifying companies that the managers believe are undervalued is a key part of the approach, which we think is the right strategy at a time when overall US stock market valuations are expensive on a range of measures.

Jupiter European

‘Alexander Darwall is a high conviction manager with a distinct investment style who has built a formidable track record since taking over this fund in 2001. His portfolios have little in common with the benchmark, with Darwall instead focusing on identifying high quality European companies.

Baillie Gifford Japan

‘The fund aims to achieve sustainable capital growth through investment in large and midcap Japanese equities in any economic sector. The team use a bottom-up, growth orientated style to invest in companies which have strong financials, a positive industry background, a competitive advantage in that industry and favourable attitudes towards shareholders.

Schroder Asian Alpha Plus

‘Manager Matthew Dobbs has an unconstrained mandate.  He is supported by a sizeable team of analysts and other managers based in the region. The fund invests in a portfolio of 50-70 companies with a focus on those with positive cash flow, balance sheet strength and valuation support. The fund has an overweight exposure to China and Hong Kong.

Defence: ‘Our defence is where we have placed funds investing in UK listed companies – there is less currency risk, the UK is relatively inexpensive compared to other developed markets at the moment and the UK market remains a leader for dividends.

 Evenlode Income

‘Manager Hugh Yarrow invests in a concentrated portfolio of mostly UK companies, as well as selected US and European large caps. His investment style, which focuses on “quality” asset-lite companies, typically provides a degree of resilience in falling markets. The fund has a bias to sectors such as consumer goods and health care.

Liontrust Special Situations

‘Managed by Julian Fosh and Anthony Cross, fund has managed to achieve both significant and consistent outperformance over the long term, but with less volatility than the UK market. The companies the fund invests in have distinct characteristics, like ownership of intellectual property, strong distribution channels or significant recurring revenue streams.

JO Hambro CM UK Equity Income

‘The investment process, which incorporates a strict yield requirement for portfolio holdings, was developed by fund managers James Lowen and Clive Beagles at previous employers Newton. Stock selection also incorporates long-term investment trends identified by the managers used to focus research.

Goalkeeper: In goal we have placed a targeted absolute return fund designed to deliver steady eddy returns but with low volatility. The approach is not going to lead to dazzling returns, but should help provide a degree of capital preservation in tougher times.

Invesco Perpetual Global Targeted Returns

‘The fund has 25-30 individual investment strategies running within it at any given time, which cover equities, bonds and currencies. The aim is positive returns in all market environments on a rolling basis, aiming for returns 5% above interest rates but with low capital volatility.

Top-performing funds

America and technology led the way among fund sectors in May; the top five look like this:

1  North American Smaller Companies          + 9.2%

2  Tech & Telecoms                                        + 8.8%

3  North American                                           + 6.0%

4  China                                                          + 5.7%

5  Japanese Smaller Companies                   + 3.6%

That strength was reflected in the top performing funds over the month, with all five leaders either American or tech-focused quasi-US funds:

1  Baillie Gifford Global Discovery                 +13.8%

2  Baillie Gifford American                              + 12.5%

3  MFM Techinvest Technology                     + 11.9%

4  JPM US Smaller Companies                      + 11.6%

5  LF Miton US Smaller Companies               + 11.1%

Down at the bottom of the table, emerging markets and Latin American funds in particular continued to suffer as the Brazilian market fell on the back of a week-long truckers’ strike and the rising oil price. The bottom 10 funds were all Latin American focused, and all lost more than 11% over the month.

Top-performing trusts

Among investment trusts there was rather more diversity at the top of the one-month performance tables, with private equity, alternative energy and the UK and Europe smaller companies trust Gresham House Strategic alongside Baillie Gifford’s recently launched US growth trust and the global smaller companies trust Edinburgh Worldwide.

1  Electra Private Equity                     +14.9%

2  Edinburgh Worldwide                     +13.2%

3  Leaf Clean Energy                          +13.2%

4  Baillie Gifford US Growth Trust      +12.1%

5  Gresham House Strategic              +11.6%

Most-bought and least-bought funds and trusts

The Investment Association’s statistics for April – the most recent – show that despite the strength of the UK market, the outflow from UK-focused funds that started after the vote to leave the European Union continued.

Laura Suter at AJ Bell said: ‘Despite the FTSE nudging close to 8,000 in April, outflows from UK focused funds continued. Since Brexit, £7.9bn has poured out of UK stock market funds, with £1.8bn of that coming from UK Equity Income funds, and £5.8bn from UK All Companies funds. Investors tentatively moved back into the UK Equity Income sector in April, but UK stock market funds overall still saw outflows of £142m in the period.’

The five most popular IA sectors were:

1  Global                                                         £586m net retail sales

2  North America                                             £446m

3  Mixed inv 40-85% shares                           £228m

4  Global Emerging Markets                           £267m

5  Mixed Inv 20-60% shares                           £227m

Among clients of broker Interactive Investor, the five most popular funds included the top-performing Baillie Gifford Global Discovery and BG American.

1  Fundsmith Equity                                        +6.4% over the month

2  Lindsey Train Global Equity                       +7%

3  Vanguard LifeStrategy 80% Equity            +2.6%

4  Baillie Gifford Global Discovery                 +13.8%

5  Baillie Gifford American                              +12.5%

The most popular investment trusts were dominated by technology and tech-heavy global trusts, though Woodford Patient Capital still made an appearance, driven presumably by hopeful investors seeking to take advantage of the 12% discount.

1  Scottish Mortgage                                       + 31.8% over one year

2  Allianz Technology                                     + 42.8%

3  Baillie Gifford Shin Nippon                         +35.2%

4  Edinburgh Worldwide                                 +47.8%

5  Woodford Patient Capital                           -19.1%

Narrowing investment trust discounts

Stockbroker Stifel looked at discounts in different investment trust sectors, noting that many UK small cap specialist trusts are trading at their narrowest discount for some years as investors seek growth stock portfolios. For example:

BlackRock Throgmorton Trust has seen NAV total returns of +130% and trades on a 7% discount (six-month range 16% to 7%),

Henderson Smaller Cos +118% over five years; trading on a 6% discount (12% to 6%).

In contrast many European small cap specialists have seen a sharp widening. For example:

European Assets Trust trades at 7% discount, its widest level for at least a year. Historically this trust has traded around NAV, principally due to its chunky dividend yield (currently 6.6%) which is partly paid out of capital.

TR European Growth is now trading at a 10% discount, which compares to earlier in the year when it was trading around NAV.

Some emerging market specialists have also seen discounts widening. For example:

Templeton Emerging Markets is trading at a 13% discount (six month range 13% to 8%) – the trust has been hit by currency issues in some emerging markets and the surprise resignation of its manager Carlos Hardenberg in February.

F&C Global Smaller Cos is currently trading close to its widest discount for the past year with the shares on a 3% discount (4% discount to a 3% premium over the past six months).

 European risks and opportunities

Looking ahead, several commentators have been considering the best way for investors to protect themselves against possible problems ahead for European markets in the face of resurgent populism in Italy.

‘When investing in Europe, you need to look beyond the politics, which can be complex and confusing, and consider the fundamentals. The region covers a broad number of countries and companies and is still growing fairly strongly. Corporate earnings are also improving although the speed of recovery has slowed recently,’ advised Adrian Lowcock of Architas.

He suggested three funds to help navigate European markets:

Schroder European Alpha Income

Manager James Sym runs this fund on a business cycle approach, taking into account macroeconomic climate and market sentiment when picking individual stocks.  There is a tendency towards value stocks but this will vary with where Sym believes we are in the economic cycle. The cyclical stock picking strategy should benefit investors most in rising markets and is designed to take the best advantage of the European recovery.

Blackrock European Dynamic

Manager Alistair Hibbert uses a flexible style, allowing him to adapt the portfolio to changing market conditions. He employs a rigorous, disciplined fundamental research process combined with strong economic awareness and sophisticated risk management tools to produce consistent market beating returns over time.  Hibbert runs an unconstrained fund with a focus on companies which have higher potential earnings growth than the market over the medium and long term.

Jupiter European

‘Alexander Darwall looks to build a portfolio of world class companies that are able to sustain profit growth and margins over a long period of time. He looks for companies with a good track record of profitability, a proven product and business model, combined with evidence of entrepreneurial endeavour and the prospects of above average growth opportunities. The fund is concentrated with 35-45 holdings and usually has a bias towards medium sized companies.’

Protection against global risks

Meanwhile Fidelity’s Tom Stevenson had some thoughts on the best ways to protect portfolios against a riskier world, citing issues such as the rising oil price, the impact of the strong US dollar on emerging markets and their currencies, and the ‘ongoing ‘Brexit drag’, wavering business investment and fears of a housing market slowdown which are weighing hard on the UK economy.’

He added: ‘The best way to cope with the inevitable uncertainty at this mature end of the market cycle is to ensure that a portfolio is well-diversified.’ To that end, he suggested some funds for a well-balanced portfolio.

Rathbone Global Opportunities

‘A good starting point for someone looking to add some diversification is an active global equity fund, which is able to cherry pick the best stocks from across the globe.’

2 Jupiter Strategic Bond

‘Having some bonds in your portfolio makes sense as they offer different qualities from equities and a mix of the two will smooth your investment ride. Consider a strategic bond fund for added diversification, as these funds have the flexibility to invest across the bond spectrum.’

Fidelity Select 50 Balanced

‘Alternatively, for those who prefer to leave things in the hands of an expert, the fund provides built-in diversification and balance in one simple to access fund. This fund currently has just under 60% of its assets in equities, nearly 30% in bonds and the remainder in cash and other assets.’


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