Our panel of multi-managers manages ‘funds of funds’, selecting investment trusts or funds rather than building their portfolios by investing in individual stocks or bonds. This quarterly series rounds up their views on the best investment opportunities in the current environment.
Having lagged for several years after the financial crisis, European equities have been performing strongly recently on the back of a decent pick-up in the region’s economic activity, which is reflected in the choices our multi-managers have made. Several of them feel positive about funds that invest in Europe.
Considering the uncertainty around Brexit negotiations, our managers are divided on prospects for the UK. Some are avoiding UK-focused funds altogether, while others focus on bigger British-listed businesses with more international exposure. Several of our experts are looking towards Asia and emerging markets, to escape the high valuations of the West.
Some also express an interest in the health sector and the technology sector, to take further advantage of strong growth prospects.
Commenting on the European economic renaissance, David Coombs of Rathbones points out that the continent is finally dragging itself out of almost a decade of poor growth and high unemployment, but he is concerned that ‘we can’t get past the baked-in problems of a monetary union without a shared fiscal budget’. He argues that the inability to co-ordinate fiscal spending, taxes and other policies will always be a handicap to the region.
Investing in Europe
Still, that hasn’t stopped him investing in Europe – it just means he favours funds holding particular companies that occupy a niche or have specific products and services that are growing regardless of the wider economy. Jupiter European, managed by Alexander Darwall, focuses on such businesses, which tend to be in healthcare and industrial areas.
With Brexit negotiations stalling and UK growth picking up only slightly in the last quarter, Coombs feels vindicated for being dubious of investing at home. ‘Earlier this year we sold some of our UK holdings, while also swapping smaller companies for large-cap businesses that are less exposed to the domestic economy. The Lazard UK Omega fund helped us do this,’ comments Coombs. The fund owns huge global businesses that are listed in the UK, such as Royal Dutch Shell and Unilever. ‘These companies make most of their money overseas in foreign currency, which protects us against weakness in sterling – although it would hurt us if sterling rallied substantially.’
Emerging markets are tumultuous, he argues. ‘They offer the chance for higher returns, but they are vulnerable to many risks: fluctuating currencies, weaker governance and fickle investor moods. They should be treated with care, but should not be ignored or written off wholesale.’ He recently bought the RWC Global Emerging Markets fund, which is run by a large and experienced team. Despite having just a small amount of his portfolio in emerging markets, Coombs stresses that they are the developed markets of tomorrow and should not be disregarded.
Peter Walls of Unicorn Mastertrust is less wary of the wider UK market than Coombs. ‘You will not be surprised to note that the stock exchange ticker for Henderson Opportunities Trust is HOT,’ he says. While the trust’s bias towards UK smaller companies could be a deterrent given the uncertainty surrounding Brexit, he argues that HOT’s prevailing discount of 18.4 per cent looks overstated.
In comparison he says the average UK smaller companies investment trust trades at a discount of 13.5 per cent and the UK all companies sector average sits at 9.7 per cent. When it comes to HOT, Walls believes it still represents great value for the long-term investor.
Next, he picks Herald Investment Trust, which seeks to achieve capital growth through investments in smaller companies involved in technology, communications and multimedia throughout the world. ‘Managed by Katie Potts since inception in 1994, the trust has been a significant provider of primary capital to emerging businesses, in an area of the market that has largely been abandoned by the majority of institutional investors,’ he says. ‘While performance can go in fits and starts, the long term record is impressive.’
Walls points out that while Asian equity markets have been on a tear this year, market leadership has come from a narrow band of technology companies. Meanwhile, Asian smaller companies appear to have been left behind, despite improving earnings and solid fundamentals. Scottish Oriental Smaller Companies and Aberdeen Asian Smaller Companies, on discounts of 11 per cent and 15 per cent respectively, look interesting, he says.
Should you have concerns regarding the eventual outcome of Brexit, or the continuing struggle to improve productivity in the UK economy, then a trust that does not and never will have any exposure to the UK is worthy of attention, according to Peter Hewitt of the F&C Managed Portfolio Trust at BMO Global Asset Management.
The trust he picks is Henderson International Income. It trades at around underlying asset value, has about 40 per cent invested in Europe, with 25 per cent in Asia Pacific and most of the rest in North America. The yield is 3 per cent and dividends have grown steadily at around 5 per cent per year over the past five years.
Continuing the overseas theme, another area of interest for Hewitt is frontier markets, which, as well as offering exciting growth potential at modest valuations, provide further diversification and can therefore help reduce volatility in emerging market exposure. ‘Blackrock Frontiers Trust is an excellent way of gaining exposure to these markets, which the managers note are under-researched,’ he says.
He argues that although the UK may be one of the less attractive equity markets when viewed in an international context, there is still considerable scope for a genuine stock-picking fund to prosper. ‘Fidelity Special Values is one such trust, with returns well ahead of the FTSE All-Share index over one, three and five years.’ The trust trades on a 4 per cent discount to asset value.
‘We hold a number of different European funds in our multi-asset portfolios, all of which have a different investment style,’ says David Hambidge of Premier Asset Management. He argues that all have produced strong returns this year, although it is Baillie Gifford European that stands out. He likes the fact that the managers are very good at identifying long-term growth companies and are prepared to hold them for many years.
While Europe appears to be back on investors’ radar, recent statistics confirm that many continue to shun the UK, argues Hambidge. ‘We can only assume that this is down to concerns surrounding Brexit, although this is clearly Europe’s problem too. Unless you think that the UK economy is about to fall off a cliff, there are some very good funds to choose from.’
Amongst the best in his opinion is the Man GLG Undervalued Assets fund. ‘The portfolio is nicely diversified and invests in predominantly large and mid-sized companies across a wide range of sectors, although like the Baillie Gifford fund it has a high active share, unlike a tracker or closet tracker.’
Hambidge’s contrarian pick is from the UK commercial property sector, where values fell sharply following the Brexit vote but have subsequently recovered. He argues there is still some value to be found, for example via the London-listed Schroder Real Estate investment trust, whose shares continue to trade at a reasonable discount to the value of the underlying assets.
Emerging markets are a good place to start for investors looking for long term growth, maintains Ayesha Akbar of Fidelity. ‘Nick Price, portfolio manager of the Fidelity Emerging Markets fund, focuses on quality companies that come at a reasonable price. He believes that prioritising quality will help the fund over the long term, as emerging markets mature and the emphasis shifts from the pace of emerging market growth to its sustainability.’
Defensive UK market
She says that UK companies offer a very different opportunity set from emerging markets, and the UK is generally seen as a more defensive market. Within UK equities, she likes the JOHCM UK Equity Income fund: ‘It has a value bias, but companies are only bought if they can grow earnings and dividends over time.’
Echoing Hambidge and Coombs, Akbar also picks a fund with a European focus. Her final choice is the Baring German Growth Trust. ‘It focuses on small and medium-sized companies, often running an underweight to large companies which dominate the German market,’ she says. She credits the manager Robert Smith for having a disciplined approach to selling and says he is not afraid to hold cash.
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