Investment experts are pivoting towards capital preservation mode

The recent volatility in markets looks unlikely to dissipate much this year, so our multi-managers are rather inclined to seek out safer investment options.

The first quarter of this year was tough for many asset classes. Following a decade of relative buoyancy in financial markets, during which many equity indices rose to record highs, investors are less bullish on both bonds and equities. The UK is still out of favour, so investors have turned to global equities and are also considering more-defensive positions in case of another market downturn.

So it’s a great time to catch up with our multi-managers to ask their views on the best investment opportunities. Rather than investing in individual stocks or bonds, our experts invest largely or exclusively in investment funds and trusts, which leaves them well-placed to identify the strongest prospects.

Our panellists currently prefer global and diversified funds and trusts. Some express an interest in emerging markets. Others favour infrastructure and energy funds. Given recent market volatility and few indications that calm is set to return this year, some of our managers are drawn to bond funds and capital preservation in anticipation of further volatility.

Jordan Sriharan, Thomas Miller Investments

Against the backdrop of recent market choppiness, Sriharan chooses funds with strong long-term performance, looking for those that stumbled a little in the first quarter but are well-placed to rebound.

His first pick is the Hermes Asia ex-Japan fund which, he says, ‘has an outstanding long-term record, with the agnostic investment style of manager Jonathan Pines proving itself to be repeatable and successful’. However, he adds that the first quarter of 2018 proved tricky, as the fund’s China exposure struggled with stock-specific issues, in particular its underweight position to Chinese banks. Sriharan says: ‘The fund’s scepticism over the strength of the banks’ balance sheets means it has little exposure to a sector that has rallied by more 25 per cent in the year to date.’ But Sriharan remains confident that this reflects the fund’s prudence, which will be beneficial in the long run.

The Somerset Emerging Market Dividend Growth fund, his second pick, focuses on identifying high-quality firms capable of generating strong returns over the long term. However, he says the high-conviction, concentrated nature of the fund means it may significantly underperform the benchmark in particularly momentum-driven markets. He believes that once the momentum in price slows down for tech companies such as Tencent and the tech sector more widely, this fund is likely to outperform because of its other holdings.

Sriharan says his final pick, Lazard Global Listed Infrastructure Equity, ‘has had a tough start to the year and is down about 8 per cent, as concerns about a rising bond yield environment have hit infrastructure stocks’. But he argues that the fund’s recent weakness has created an opportunity to rebalance the portfolio, ‘notably by increasing exposure to UK water firms, following a de-rating on political interference risk over the past year’. He says the fund is tilted away from infrastructure asset class areas that look expensive, such as North America, finding better value in European assets.

Peter Walls, Unicorn Mastertrust

Walls says the landscape for global emerging market investment trusts has changed dramatically over the past decade. It has moved away from a typical portfolio that ‘might feature holdings in the major energy producer, bank, brewer and consumer staples in a range of developing countries’, to one where the largest sector is information technology, led by Chinese giants Alibaba and Tencent.

He believes JPMorgan Emerging Markets investment trust has ‘successfully negotiated this ever-changing landscape under lead manager Austin Forey’. Over the past one, three and five years, the trust has outperformed its peer group and benchmark, yet its shares continue to trade at a double-digit discount to net asset value. 

Following two years of negative performance by the US oil and gas indices in 2016 and 2017, Walls argues that it was probably inevitable that a discount would open up on the shares of his second pick, Riverstone Energy investment trust. The trust invests in the global energy industry. Walls says the macro environment for this trust has ‘improved significantly over the past two years, with coordinated global growth and an oil price more than 50 per cent higher than the lows of last summer’.

The board of his third pick, Schroder UK Growth trust, has recently announced that it intends to appoint Baillie Gifford as its investment manager, following relatively poor performance and the trust’s shares persistently trading at a discount. Walls says: ‘While the trust’s investment objective and policy will not change, Baillie Gifford will realign the assets to invest in a bespoke “best ideas” portfolio of around 40 stocks, aiming to offer a UK-focused, high-growth investment proposition.’ While he expects the discount to narrow over time, he says ‘it remains to be seen what happens to the 24 per cent of the share register presently held in the Schroder savings scheme.’


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