Where’s the clever money going? April 2017

Stock markets have shown no sign of an imminent reversal of fortune over the month of March. The FTSE 100 peaked at an all-time high of 7447 on 17 March, though it has retreated marginally since then, while the S&P 500 has tracked sideways, having touched 2,400 at the end of February. But how much longer can the bull run continue?

Russell Investments’ global team of multi-asset investment strategists warn that expectations of continuing global growth are inflated, and that investors should be in the face of ‘looming global economic headwinds, including additional Fed tightening and a slowing Chinese economy’.

‘While market bulls see reflation and investor confidence, we see very expensive US equities, high profit margins and an economy unlikely to sustain the current surge. A pull-back seems likely and should create a buying opportunity,’ comments Andrew Pease of Russell Investments.

However the team also sees ‘attractive growth opportunities in Europe, and resilience in emerging markets’, with the strongest prospects for global equities in Europe, followed by Japan.

The top performing open-ended fund sectors over the past month support that view. Data from Trustnet showed the top five sectors dominated by Europe:

1  Europe ex UK                                      +4.1%

2  Europe inc UK                                    +3.8%

3  European smaller companies          +3.5%

4  Asia Pacific ex Japan                         +3.3%

5  Global emerging markets                 +3.0%

At the bottom of the table, the 10 poorest performers included three bond and two North American sectors.

On the investment trust front, a similar cluster is evident, though the gains are significantly meatier, reflecting tightening discounts and the benefit of trusts’ ability to borrow to enhance returns:

1  European smaller companies            +7.0%

2  Europe                                                   +6.9%

3  Property -direct Asia Pacific             +5.6%

4  Country specialist Asia Pacific         +5.3%

5  Asia Pacific ex Japan                          +4.1%

March’s most-bought funds from broker Hargreaves Lansdown reflect a much broader spectrum of interests, including three global funds but also several regional specialists covering Europe, Asia and India. Evidently the message of diversification in the face of political uncertainty has been taken to heart.
The ten most-bought funds by HL Sipp and Isa investors (in alphabetical order):

• CRUX European Special Situations
• Fundsmith Equity
• Jupiter India
• Legal & General US Index
• Lindsell Train Global Equity
• Lindsell Train UK Equity
• Newton Global Income
• Stewart Investors Asia Pacific Leaders
• Woodford Equity Income
• Woodford Income Focus

The ten most-bought investment trusts among Interactive Investor clients (by value), in contrast, show a strong focus on global generalists, with a handful of specialists thrown in:

• Scottish Mortgage
• Hicl Infrastructure
• Witan IT
• Foreign & Colonial
• Monks IT
• RIT Capital Partners
• City of London
• Woodford Patient Capital Trust
• Edinburgh IT
• Baillie Gifford Japan

Isa ideas for the 2017/18 tax year

There has been an increasing focus through March on the upcoming end of the tax year, on 5 April, and commentators have been falling over themselves to make their recommendations for last-minute Isa investors looking to make use of their £15,240 allowance before the deadline.

Michelle McGrade at TD Direct pointed out that rising inflation is an additional consideration for investors to factor in. She rounded up five diverse funds set to produce inflation-beating returns.

1  The Disruptive Challenger: Henderson Global Technology

‘Despite some potential near-term headwinds, such as protectionist policies in the US, Henderson believes the technology sector could outperform global equities over the medium term,’ says McGrade.

2  The Best of British: MFM Slater Growth

Manager Mark Slater has ‘an exceptional track record’; he tends to focus on small and mid-sized companies, gets to know the ones in his portfolio very well before he buys them, and typically holds them for a long time.

3  Emerging Opportunities: M&G Global Emerging Markets

At M&G, manager Matthew Vaight likes investing in cheaper companies and is encouraged by their improving capital management trend. ‘Emerging markets are a good portfolio diversifier.’

4  Sustainable Future: Royal London Sustainable Leaders

‘Mike Fox and his team identify companies that are run by savvy business people, with the aim of making improvements one way or another for our world,’ McGrade adds.

5  The Contrarian Opportunity: Man GLG Undervalued Assets

Henry Dixon buys companies that are cheap, have been forgotten by the markets and have a promising upside. His portfolio of mainly UK domestic mid-sized companies that have been held back in the last few years has the ability to stage a comeback.

Laith Khalaf focuses on income-producing investments in his recommendations, including three income-focused trusts looking reasonable value:

• Edinburgh Investment Trust, managed by Mark Barnett, currently yields 3.5% and trades on a discount of 6.5%, compared to a three-year average discount of 1.8%. The trust is well-diversified, with exposure to larger and medium-sized companies in the UK, plus some companies listed overseas.
• City of London Investment Trust: Job Curtis has run this trust since 1991. It currently yields 3.9% and trades on a premium of 0.8%, below its three-year average premium of 1.5%. Curtis likes cash generative companies with strong balance sheets, but is also driven by value investing instincts.
• Standard Life Equity Income Trust, managed by Thomas Moore, currently yields 3.8% and trades at a discount of 7.9%, against a three-year average discount of 2.7%. The fund is tilted towards medium-sized FTSE 250 companies, which gives it the potential for strong longer-term growth.

At Wealth Club, Ben Yearsley picks out three value-oriented funds for Isa investors. ‘We’ve had a six-month bull run for value stocks after eight years of growth being in favour..I think there is a lot more to go in the value rally,’ he says.

• Henderson European Focus: comes in fund or trust format and is managed by John Bennett. ‘Along with Japan, Europe remains a very unloved market for a whole variety of well-documented reasons, but is nonetheless home to many great companies on cheap valuations.’
• Jo Hambro UK Dynamic is a recovery/special sits style fund where the manager Alex Savvides looks for companies that have the potential to turn around, for example through new management. All the companies he invests in have to have the ability to pay a dividend within 12-18 months.
• GLG Japan Core Alpha: a large-cap value fund that buys stocks that others are shunning. It is an out and out contrarian fund. ‘I’m a big fan of Japan, it is still one of the cheapest world markets despite the recent strong run,’ says Yearsley. The GLG team led by Stephen Harker is one of the premier teams managing Japanese money.
• Artemis Global Income: ‘equity income funds are at the core of many investors’ long term portfolios – what’s not to like about a fund that invests in profitable, cash-generating, dividend-paying companies?’ The manager, Jacob de Tusch Lec, runs this fund with three distinct buckets of stocks – core, growth, and special situations. The current yield is just under 3%.

Finally, Gavin Haynes of Whitchurch Securities reminds investors that having a stocks and shares ISA does not mean you have to put all your money into the stockmarket. For cautious investors he suggests these two mixed asset funds:

Invesco Perpetual Global Targeted Returns

The fund’s target is to deliver a return of cash plus 5% before asset management fees, over a rolling three-year period but with less than half the risk of investing in global equities. ‘The investment areas and financial techniques that the fund is utilising are truly diverse, both in terms of asset classes and globally, ranging from long-only traditional investing in equities/bonds to making calls on currency, inflation, mortality etc. The fund has delivered robust risk adjusted returns since launch.’

Henderson Cautious Managed

Chris Burvill invests in a diversified portfolio of equities (maximum of 60%), bonds and cash. Burvill actively allocates between the asset classes according to his views of the economic cycle. This fund was launched in 2003, and Burvill has an exemplary record within this sector, having also having previously managed the Investec Cautious Managed fund with aplomb, Haynes says.