As the country counts down to a general election, our expert panel backs the UK.
Back in August, government bond yields around the world were falling, as investors worried about geopolitical uncertainty. In October, markets were rising once again, including the American S&P 500 index and Germany’s Dax index. Closer to home, uncertainty around Brexit has loomed large, but some of our fund managers have been turning to the UK in anticipation of a potential recovery in domestic stocks.
Below, our four experts tell us what their biggest bull and bear points are. They also reveal the new funds they have recently bought, the funds they have increased their holdings in and the ones they have trimmed or sold.
Bull point: Dovish central banks globally could see risk assets continue to perform strongly. All eyes remain on the US Federal Reserve.
Bear point: With record levels of negative-yielding debt globally, the ‘reach for yield’ has become even more pronounced in 2019. We think this could present risks for high yield and the riskier end of investment grade credit.
New position: Akbar sees emerging markets as the most likely beneficiaries if global growth improves. “Artemis Global Emerging Markets is an effective way of allocating to emerging markets,” she says. The team’s investment approach consists of investing in ‘cheap’ stocks with attractive growth prospects. “While this is not a classic value fund per se, the process tries to avoid value traps by identifying positive catalysts for future re-rating,” she adds.
Increased: With very low or negative interest rates across developed markets, and uncertainty on the direction of travel for risk assets, Akbar views “allocating to infrastructure as a prudent trade”. She values the FP Foresight UK Infrastructure Income fund’s experience in the renewable energy and infrastructure sectors. The objective of earning 5% annual income also catches the eye. “We would expect it to provide diversification from equity and bond markets, and the asset class should also benefit from some protection from inflation.”
Held: Akbar sees a “number of growing headwinds in Europe”, and Germany remains “an area of concern.” As a result, she would not add to the Barings German Growth Trust at the moment. But, she adds: “Should we see a reversal in the headwinds for the eurozone, we think the investment trust could be an attractive allocation.”
Bull point: The NFIB Small Business Optimism index in the US remains at elevated levels in this economic cycle. While expectations have plateaued a little, the level of activity at these companies remains robust, and they report that hiring activity is set to increase in the coming months.
Bear point: Manufacturing confidence indicators across the world have been weakening, and this weakness in confidence has now bled into the service sector as indicators across both developed and the developing world are showing signs of a potential recession.
New position: Fixed income assets have had a strong year across the board, from high credit quality government bonds to low credit quality corporate bonds. “With global monetary policy getting looser, the next asset allocation decision within fixed income is becoming increasingly difficult,” says Sriharan. He has invested in the MFS Global Opportunistic Bond, which he says “maintains a disciplined approach to portfolio construction”.
Increased: In the third quarter, Sriharan added Chelverton UK Equity Income, which backs smaller companies. He says that it has a domestic bias, which “reflects the more value-driven philosophy of the fund”. He adds that the fund could materially outperform in the event of some form of Brexit deal.
Sold: Sriharan sold his position in Polar Capital North American. He says: “Within the value names in the portfolio there have been some poor stock decisions, that have detracted from performance – indeed, they appear to look like value traps.” He says performance has also suffered from asset allocation decisions as the fund managers increased their cash allocation into the latter part of the fourth quarter of last year, “only to see the market rally into 2019, so giving upside performance away”.
Bull point: Some sort of Brexit agreement would remove uncertainty and clear the way for UK equities to experience a rally from the current very depressed levels.
Bear point: Ongoing US/China trade dispute that is yet to be resolved remains a headwind for emerging market and Asia Pacific equity markets.
New position: Hewitt recently purchased Temple Bar, which is a long-established UK equity income trust with assets of over £900 million. “The manager Alastair Mundy has consistently employed a disciplined value investment approach, which has not been in favour in recent years as growth stocks have prospered,” he says. Now, he argues, there are signs that value stocks are beginning to perform once again. Should the uncertainty of Brexit be removed, UK domestic stocks could experience a “significant recovery”. What’s more, Temple Bar is on a small discount with a 3.9% dividend yield.
Increased: Hewitt increased his position in Merian Chrysalis, an investment trust that invests in late-stage private companies, mainly, though not exclusively, in the UK. He says the trust’s shares have moved to a premium in anticipation of strong asset gains from the underlying holdings of “technology-enabled disruptors” such as Transferwise, the Hut Group, Starling Bank and Secret Escapes. But he’s still a happy buyer: “There is a strong pipeline of new investments, with the manager anticipating the proceeds to be deployed quickly.”
Sold: Hewitt decided to sell the closed-ended Majedie Investments. He says the value style employed by Majedie Asset Management “has persistently underperformed over the last three years, with its UK equity, UK income and Tortoise funds (absolute return) all doing poorly”. These three funds comprised most of the investment trust’s assets. Also, funds under management have declined, meaning the value of the management company’s holding in the trust has moved lower. “Aviva Investors owns 13% and is looking to realise the value,” he says. “However, Aviva made clear it will not sell at the Blighty current discount of 18%. With little prospect of the discount narrowing and persistent lacklustre performance, I decided to sell.”
Premier Asset Management
Bull point: Despite Brexit uncertainty, there are opportunities in UK equities with attractive and growing dividends.
Bear point: Growth has been borrowed from the future as a result of quantitative easing, with potentially catastrophic results for longer-dated government bonds should the inflation genie ever escape from the bottle.
Increased: Hambidge has continued to add to UK equities, while many investors have avoided them due to persistent Brexit uncertainty. Recently, he decided to increase his position in Schroder Income. “This fund has lagged behind the market this year but offers an attractive dividend, which we believe will continue to grow,” he says.
Trimmed: The outlook for many parts of the bond market is, according to Hambidge, “disappointing at best and potentially catastrophic should the inflation genie ever escape from the bottle”. It is for this reason that he continued to reduce his exposure to bond funds with greater sensitivity to interest rate movements, such as the Royal London Corporate Bond fund. “Despite the prospect of very poor returns from bonds over the medium to long term, this has not stopped investors pilling into them this year,” he adds.
Jordan Sriharan is an investment director at Canaccord Genuity Wealth Management. He previously worked at Mercer, Fidelity Investments and the Wellcome Trust.
David Hambidge is head of multi-asset investment at Premier Asset Management. He helped set up Premier’s fund-of-funds operation in 1995 and is regarded as one of the UK’s most experienced multi-managers.
Ayesha Akbar is a portfolio manager in Fidelity’s multi-manager team. Prior to joining Fidelity, she worked at Barclays Wealth, where she was instrumental in helping establish the firm’s multi-manager business.
Peter Hewitt is a director and investment manager with the BMO global equities team, and fund manager of the BMO Managed Portfolio Trust, where he specialises in investment trusts.