11 chosen funds as Europe and Japan remain favourites

In our quarterly multi-manager series we reveal the funds and trusts selected by a panel of leading multi-managers. Rather than build their portfolios by investing in individual stocks or bonds, these managers invest largely or exclusively in investment funds and trusts, leaving them well placed to identity future winners.

This quarter Europe and Japan have emerged as firm favourites, as the regions continue to power ahead in otherwise uncertain and volatile global markets thanks to supportive economic policies and favourable equity valuations. UK smaller companies also appear to be slowly regaining favour, particularly with our investment trust managers, after a painful rout in 2014.

As has been the case over recent quarters, Asia and emerging markets continue to divide opinion, with our contrarian investors taking a punt on bombed-out valuations while our more conservative fund pickers are avoiding the region like the plague, fearing volatile politics and the Fed's impending rate rise. Fixed income also remains an investment pariah, as our managers allocate to bonds over the shortest term possible.

Ayesha Akbar, Fidelity Solutions

While she says that geopolitical risks remain in Europe, Fidelity's Ayesha Akbar thinks that prospects for recovery remain intact. 'The benefits from quantitative easing (QE), as well as low oil prices and a weak euro, continue to be felt, and data points to an expansion for the rest of 2015,' she says.

Akbar likes Invesco Perpetual European Equity Income, which focuses on 'attractively valued companies with reasonable earnings visibility'. Performance has been strong over the past three years and the fund has also protected capital in down markets.

Like many managers at the moment, Akbar likes Japan, where QE and a weak currency are also driving markets. One of her favoured vehicles for exposure to the region is Money Observer Rated Fund Baillie Gifford Japanese.

'The fund takes a long-term approach and tries to find companies currently unloved by the market but with strong long-term growth prospects. As they tend to hold companies until this potential has been achieved, this fund has a low stock turnover,' she says.

Akbar continues to favour equities over bonds; however, she concedes that should investors wish to diversify their portfolios, they might consider high-yield bonds, which should prove 'relatively resilient' to prospective interest rate rises by the US Federal Reserve.

She suggests the Investec Monthly High Income fund, which 'combines bottom-up security selection with top-down strategic economic themes'. The fund invests predominantly in high-yield bonds across the UK, Europe and the US and pays more than 5 per cent.

John Ventre, Old Mutual Global Investors

Nothing if not consistent, Old Mutual's head of multi-asset John Ventre remains firmly in favour of equities this quarter, particularly those benefiting from supportive economic policies.

'The investment concept of taking risk when the central bank is on your side and avoiding it when it isn't - "don't fight the Fed" - may be a cliché, but that doesn't mean it isn't good advice,' he says. Accordingly, Ventre is currently most keen on European equities, choosing Argonaut European Alpha for manager Barry Norris's 'pragmatic style'.

He is less bullish on US equities, with the US Federal Reserve's impending interest rate hike likely to lead to losses in the short term. Nonetheless, he likes Legg Mason Royce US Small Cap Opportunity.

'The sort of stocks which manager Bill Hench owns in this fund should do well as the economy continues to improve, which should outweigh any interest rate sensitivity,' he says. It is denominated in US dollars, however, so UK investors should be wary of currency risk, as this has detracted from returns in recent years.

As last quarter, Ventre is still wary of fixed income. 'Spreads are still attractive in the context of balance sheet strength but we can't realistically expect credit spreads to contract from here,' he says.

He says he is sticking to short-term high-yield bonds for his fixed income, as shorter spreads should mean less volatility in the near term. Currently he favours Wells Fargo Worldwide US Short Term High Yield Bond, a nimble fund at just $118 million (£75 million) in size.

Ian Aylward, Aviva Investors

Like F&C's investment trust expert Peter Hewitt, Aviva's Ian Aylward favours the UK this quarter. Rather than taking a pure smaller-company view though, he is sticking to mid-caps, which are well exposed to the UK domestic economy but less risky.

So as 'not to miss out on any opportunities in the larger names', however, he has selected multi-cap fund GVQ UK Focus. 'Manager Jamie Seaton has been in place for over a decade and we like the unusual private equity-style philosophy that is applied to the stock analysis,' says Aylward.

Aylward is also keen on Japanese equities and, like Akbar, has chosen Baillie Gifford Japanese as his favoured fund. 'Sarah Whitley, the portfolio manager, has a great track record, having been at the firm for 35 years and head of the Japan team since 2001. The team takes a bottom-up approach to stock selection and has a tilt away from yield and valuation metrics,' he says.

As a predominately growth-orientated fund, Baillie Gifford Japanese would complement another Japan fund with a value approach, he notes.

One area Aylward is particularly wary of is South America. 'Despite positive demographics, the region is heavily reliant upon commodities. The commodity super-cycle is dead and with prices at low levels and falling, this does not auger well for either South American economies or the equity markets,' he says.

However, if he did want exposure to the region, the manager says he would choose MFS Latin American Equity, managed by Jose Luis Garcia since its launch in 2009.

David Hambidge, Premier Asset Management

Another Japan bull, Premier's David Hambidge is placing his faith in the Japanese government's ability to kick-start the economy. 'This of course could be yet another false dawn in the land of the rising sun, but there is no doubt that companies in Japan are benefiting from the government's efforts,' he says.

Hambidge favours Coupland Cardiff Japan Income & Growth for its concentrated portfolio of around 40 holdings and emphasis on companies that appear undervalued.

In spite of strong returns over the past two years, Hambidge says the medium-term outlook for UK commercial property remains favourable. 'While London has produced vastly superior returns compared with the rest of the country over the last few years, we think that may be about to change,' he says.

With this in mind he has chosen Threadneedle UK Property. It has a good geographic spread of properties but very little in London - a factor contributing to its sector-busting 4.2 per cent yield.

Like Ventre, Hambidge is not keen on fixed income, particularly as we head into an interest rate hiking cycle in the US and UK. 'The biggest risk investors face with fixed income investments is rising interest rates, and therefore our focus is generally on funds that look to reduce this risk,' he says.

Hambidge highlights Money Observer Rated Fund TwentyFour Dynamic Bond, with its 'pragmatic approach' and ability to invest in a wide range of fixed income assets while paying an 'attractive' income.

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