“The relative valuation in equity and higher yielding bonds versus government bonds remains compelling, but the lack of inflationary pressures should also keep central banks in accommodative mode,” he said.“With this background, our fund-picks reflect a more optimistic outlook and would disappoint should the world experience a deflationary shock – such as a US recession or a Chinese hard landing. In this environment, we would expect richly valued government bonds to trade even richer.”
Gutteridge tips three funds to help diversify portfolios – TwentyFour Monument Bond, Artemis Global Equity Income and River & Mercantile World Recovery.
Capital Preservation – TwentyFour Monument Bond
Bonds have been an increasingly difficult place to be as rising equity markets have outstripped the asset class, but Gutteridge thinks they still have a place in investors’ portfolios for capital protection.
For this, he likes the £78.2m PFS TwentyFour Monument Bond fund, headed up by a seven member team from the boutique fixed income fund house.
“This fund invests in high quality residential mortgage backed securities (RMBS). Clearly such investments conjure up fears of the US subprime crisis, however, those assets are on a different risk plane to that in which TwentyFour looks to invest,” he said.
“Instead, only those RMBS with much lower ‘loan to value’ ratios are picked up. In that regard, these investments are much higher quality and can suffer a significant degree of house price depreciation before they become vulnerable.”
“Income also increases as interest rates rise, given the floating rate nature of many of the loans.”
The fund, which sits in the IMA Specialist sector, has consistently outperformed its cash-plus benchmark over one and three years, returning 12.76 per cent over the latter period.
Performance of fund vs index over 3yrs
Source: FE Analytics
While the portfolio did dip in the market correction last summer – it fell 1.29 per cent from the end of May to the start of July – it has regained all the ground it lost over that period.
However, in the down markets of 2011, the fund did lag behind its benchmark, losing 6.33 per cent that year.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.36 per cent.
Income – Artemis Global Income
The hunt for income is a key theme in many investors’ portfolios, particularly as they near retirement.
Gutteridge says his favoured fund that follows this theme is the five crown-rated Artemis Global Income fund, managed by Jacob de Tusch-Lec.
“This fund is managed in a much more pragmatic fashion than the larger, more widely recognised strategies operating in this space,” Gutteridge said.
“This pragmatism has afforded the manager the flexibility to invest more cyclically than his peers, and enjoy to a much greater extent the fruits of economic recovery.”
“There is no wedded approach to a ‘minimum yield’ or ‘continuous dividend growth’ and, as such, it is able to invest in much smaller, less well researched companies, as well as those undergoing significant restructuring.”
The fund is yielding 4 per cent, making it one of the higher yielding funds in the IMA Global Equity Income sector.
As Gutteridge highlights, the fund has a strong performance record, beating the sector and MSCI World index over one and three years, more than doubling the returns of the index over each period.
Since launch in July 2010, the fund made 70.57 per cent, well ahead of the sector, which made 46.27 per cent, and index, which picked up 42.2 per cent, according to FE Analytics.
Performance of fund vs sector and index since 2010
Source: FE Analytics
De Tusch-Lec has a collection of little-known companies in his top-10 including German telecommunications service provider Drillisch, US rental truck company Ryder System and Israeli bank Mizrahi Tefahot Bank.
The manager is more cautious on the remainder of the market rally, having recently told FE Trustnet that we have already seen the best of the bull run.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.64 per cent.
Growth – River & Mercantile World Recovery
A fund Gutteridge thinks can continue to capture further upside in the markets is the recently launched R&M World Recovery fund, headed up by Hugh Sergeant.
“For anyone seeking to add risk to their portfolios, we would suggest investors consider the River & Mercantile World Recovery fund,” he said.
“This fund is as pure a play on global recovery as one is likely to find, with Europe and Japan dominating the exposure.”
“More broadly, this strategy invests in ‘out of favour’ areas within the market that stand to benefit the most from an improved global environment.”
“Companies are not selected on valuation grounds alone, however. A catalyst for a re-rating must also exist, such as management change or industry consolidation.”
The £112.9m fund is yielding 2.5 per cent and has shot the lights out in the IMA Global sector since launch in March last year.
Over that period, the fund made 47.91 per cent, outstripping the sector and FTSE World index by more than 40 percentage points.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund holds a mix of international stocks, tipped towards the financials and services sectors, with roughly a quarter of the fund invested in each.
It is available on select platforms.
