Why our fund experts remain cautious despite risk asset rally

Developed and emerging market stockmarkets have bounced back, but our five fund experts are mindful that what goes up can also come crashing down.

It has been a case of so far so good for investors, as stockmarkets in both the developed and emerging world have enjoyed a strong start to the year. One of the main highlights has been the performance of the S&P 500 index, which notched up its best quarterly performance since 1998, driven once again by technology stocks, with the so-called Faangs returning to form.

Markets are being buoyed by the US Federal Reserve’s dovish stance, with a hold on interest rate hikes and a slowdown in quantitative tightening. It’s also positive that Beijing has been stimulating the Chinese economy by loosening credit and investing in local infrastructure projects. But headwinds remain. Most notably, global growth is still predicted to slow down, and the US/China trade dispute rolls on.

For now, some of our fund experts are diversifying beyond mainstream funds, into absolute return, gold and private equity, for example.

With Brexit still unresolved, they are largely avoiding UK-focused funds, although one is taking a contrarian view. Below, they detail the new funds they have recently bought, the funds they have increased their holdings in and the ones they have trimmed or sold.

A graph showing the performance of Neptune UK Mid-Cap

 

Please click here to see enlarged version of graph

Peter Walls
Unicorn Mastertrust

NEW BUY: In March, fund manager Neil Woodford raised eyebrows when he announced a controversial transfer of £73 million worth of unquoted stocks from his Woodford Equity Income fund to Woodford Patient Capital Trust(please note, this article was written in late April). As a result, the discount on the trust hit a record high of 19%, a move that Walls took advantage of. “The old venture-investing adage that the lemons ripen before the plums seems to hold true,” says Walls. “While there may be more negative surprises to come, the attractive rating appealed to my contrarian tendencies and I established a position in the trust for the first time at the end of March.”

NEW BUY: Walls has long maintained a weighting towards listed private equity investment trusts, expecting superior long-term returns compared to public markets. “Over recent years three of my former holdings have been lost to corporate activity, so I am often on the hunt for suitable replacements.” A recent addition is Oakley Capital Investments, “which rather blotted its copybook with a dilutive share issue in 2017”. Walls says that despite assurances that further share issues below net asset value have been ruled out, the shares still typically trade at a discount of around 30%. He adds: “With the underlying portfolio performing well and a strong track record of successful realisations, this looks like a good entry level.”

TRIMMED: The only recent reduction in Walls’ portfolio was Atlantis Japan Growth fund, which offered redemptions to shareholders at a price closer to its net asset value. This redemption facility is normally offered every six months in an attempt to keep a lid on the discount, which currently stands at 10%. “As with most traditional tender facilities within the investment companies sector, the decision to redeem shouldn’t necessarily be seen as a sell signal but as pragmatic portfolio management,” says Walls.

Jordan Sriharan
Thomas Miller Investments

NEW BUY: Sriharan thinks value in corporate bonds may have peaked at this point in the cycle, but argues that there is still plenty of upside remaining. He recently added TwentyFour Absolute Return Credit fund to his portfolio for exposure to global credit markets. He points out that, bearing in mind many credit managers have performed well in the post-QE period, this fund focuses on keeping volatility at low levels to give investors a smooth ride.

INCREASED: Sriharan increased his position in the JP Morgan US Equity Income fund. In the depths of the fourth quarter of last year, the fund outperformed its S&P 500 benchmark, as its investment style naturally “helps to protect the downside”, notes Sriharan. To take a “more cautious stance” on equities, Sriharan switched away from a passive holding and added to this actively managed fund.

TRIMMED: The Neptune UK Mid-Cap fund has struggled over the past few years, having in the past been a strong performer. Its relative performance compared to its benchmark has been particularly poor over the last five years, notes Sriharan. The fund has changed some of its holdings recently, but the rationale “remains opaque,” he says. “We believe there are alternative active managers better positioned to profit in the long term.”

Peter Hewitt
BMO

NEW BUY: A new addition to Hewitt’s portfolio is Tetragon Financial Group. The trust seeks to generate a mixture of growth and income through a broad range of investments in alternative assets, including infrastructure, property, private equity, hedge funds and loans. It has about 40% of its assets in Europe, and another 40% in North America.

INCREASED: Following a recent meeting with management, Hewitt increased his holding in Henderson Smaller Companies IT. He notes that the trust “has an outstanding long-term record, outperforming its benchmark in 14 of the last 15 financial years”. It has a domestic bias, evidenced by over 60% of the portfolio being held in FTSE 250 companies. Overall, over half of the underlying revenues of the portfolio holdings are generated in the UK. Although there is a great deal of uncertainty due to Brexit, Hewitt’s view is that much of this is reflected in attractive valuations.

SOLD: Over the past quarter, Hewitt sold GCP Infrastructure IT. “The shares were sold purely on grounds of valuation, which had become extended,” he says. The investment trust provides loans to smaller renewable energy infrastructure projects (66%), private finance initiative projects (20%) and social housing projects (14%). “Since listing in 2011, GCP has been very successful.” However, the shares have moved to a 14% premium to asset value, so have become too hot to handle. “With the likelihood of further issuance at a much lower level than the current premium, the shares are overvalued and vulnerable to a de-rating despite the solid prospects for the company itself,” he says.

David Hambridge
Premier Asset Management

NEW BUY: A new position in Hambidge’s more cautious multi-asset funds is the recently launched Polar Capital Global Absolute Return fund. “The volatility of this fund is likely to be low and while it certainly is not a ‘get rich quick’ strategy, average mid-single digit annual returns should be achievable,” he says, noting that the management team has enjoyed success with its other funds.

INCREASED: Hambidge has also been adding to his holding in Jupiter Absolute Return, which has 28% of its assets in the UK. The fund has struggled of late, but he says he rates the manager highly, “and should equity markets take a turn for the worse, in particular the US, we would expect this fund to produce strong returns”.

SOLD: While Hambidge has been pleased with the start to the year from a performance point of view, he says he will “refrain from popping the champagne corks just yet”, as he reckons a lot of the good news is already priced in by markets. “Having added into weakness at the end of last year and with most asset classes having risen so far this year, it has not been a difficult decision to take profits in a number of our holdings,” he says. One that he has completely sold out of is the Foresight Solar fund, an investment trust investing in large-scale solar energy. But he notes he “may well revisit this fund in the future.”

Ayesha Akbar
Fidelity Investments

NEW BUY: To increase exposure to “one of the most attractive regions globally, given fundamentals and valuations”, Akbar has selected the Merian Asia Pacific fund. She says the team applies a quantitatively driven investment process in order to make investment decisions based on objective criteria, which “helps free their strategy from behavioural biases”. They believe Asia Pacific is particularly rich in “inefficiencies to be exploited”, compared with other markets in which they invest.

HOLD: While risk assets have rallied substantially so far this year, Akbar argues it makes sense to reserve a spot for traditional hedges such as gold. She favours exposure to the safe haven metal through both physical gold and gold miners. “While we aren’t adding to the position at present, we do like the Investec Global Gold fund.” The fund management team is experienced, and they “allocate portfolio assets to a diversified mix of global gold-mining company shares.” 

WATCHING: “It is no secret that the Brexit saga continues, and until we see more clarity, we won’t be adding further to UK equities despite attractive long-term valuations,” she says. If there is a positive surprise, she would consider adding to UK exposure through the Liontrust UK Growth fund, but for now she is not positioning for either of the binary outcomes that Brexit is presenting to investors.

Multi-manager biographies

Jordan Sriharan
Sriharan is head of the collectives research team and a senior portfolio manager at Thomas Miller Investments. Prior to working at the firm, he worked at Mercer, Fidelity Investments and the Wellcome Trust.

Peter Walls
Walls manages Unicorn Mastertrust, an open-ended fund of investment trusts. Before he joined the Unicorn investment house in 2001, he was an investment trust analyst and commentator for nearly 20 years.

David Hambidge
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
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
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. He joined the ­firm in 1983.

*Please note, this article was written in late April.

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