Younes (pictured) doesn’t think investors should sell out of their current fixed income holdings, but says 2014 is a year to increase exposure to stockpicking equity funds.“It’s going to be hard to invest in bonds this year,” he said. “I would only invest in a strategic bond fund but investors should focus on equities. I would not add more to bond funds now.”
With this in mind, Younes tips three funds he thinks are well suited for a 2014 ISA.
Henderson UK Absolute Return
Younes likes the five crown-rated Henderson UK Absolute Return fund, which is a new entrant on to the FE Select 100 list of recommend funds.
He says this is a particularly good play for investors who are concerned the UK equity market is overpriced.
“This is an investment for people who are cautious about the valuations of the UK large cap market,” he said.
“Most of the UK equity market, particularly the large cap end, is fully priced.”
The fund, headed up by FE Alpha Managers Ben Wallace and Luke Newman, is a long/short strategy that Younes says is able to take advantage of short-term volatility and mispricing in the market, especially in the large cap space.
“[Wallace] has a long time experience as a stockpicker. He’s able to be long but also short some of the most expensive stocks,” he said.
“He also doesn’t try to assess the economic situation. His allocation is driven by the number of long and short ideas he has. There’s no macro in his process, which I like.”
Younes adds that the portfolio is split between core stocks and a more tactical book, which he uses to trade over the short-term.
“He should be able to profit from short-term volatility,” he said.
The fund is close to its five-year anniversary, having been launched in April 2009.
It has made 37.21 per cent since then, well ahead of the IMA Targeted Absolute Return sector and more than 35 percentage points ahead of cash.
Performance of fund vs sector and index since launch
Source: FE Analytics
The portfolio’s largest long position is in financials, with 17.5 per cent in the sector. HSBC and Legal & General both feature in its top-10 holdings.
The fund has ongoing charges of 1.07 per cent.
Ruffer Equity & General
A solid long-term bet, in Younes’ view, is the £221.6m, five crown-rated CF Ruffer Equity & General fund, managed by FE Alpha Manager Alex Grispos.
“This is a long-term play because the manager is currently running the portfolio with a 30 per cent allocation to cash,” Younes said.
“He’s a very cautious manager and he thinks valuations in global equity markets are too high.”
“Everyone is very bullish, so it’s a good idea on a long-term basis to have a contrarian investor. People are so bullish on global equity markets that I feel like you need to be cautious and if there is some fall in the market, this is the perfect manager to do it.”
Younes says the manager’s focus on capital protection is one of the biggest reasons investors should consider adding it to their portfolio now, when markets have rallied strongly and are likely due a dip.
“This manager hates losing. This is why I like him. He really wants to protect capital,” he added.
The fund has a long history of outperforming its peers in the IMA Flexible Investment sector.
It had consistently returned more than the FTSE All Share, until a lag in performance in 2009 and 2010 when markets bounced back from the doldrums of 2008.
It is worth noting that the fund’s returns have been positive in every single calendar year since Grispos took the helm in March 2007, while the sector and index both sustained losses in 2008 and 2011.
It has made 93.6 per cent in this time, more than doubling the returns of the FTSE All Share and more than tripling the gains of the average fund in the IMA Flexible Investment sector.
Performance of fund vs sector and index since 2007
Source: FE Analytics
As Younes pointed out, the largest weighting in the portfolio is currently cash and cash-related assets.
The manager also favours North American equities, which make up 29 per cent of the portfolio. The UK is the next largest regional weighting, at 21 per cent.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.26 per cent.
Jupiter European
Taking a value approach, Younes thinks now is the time to buy into Europe on the belief companies in the region are on the road to recovery, but currently sit at cheaper valuations than the rest of the developed world.
The perfect manager to do this, he says, is FE Alpha Manager Alexander Darwall, who runs the four crown-rated Jupiter European fund.
“You just don’t want to invest in a random fund. If you want to pick up a proven stockpicker in Europe at a cheap price, this is the perfect time to do it,” he said.
Younes says the manager is currently picking up very good global companies that will keep benefiting from global growth and growth in global trade.
“This is a no-brainer type of investment for 2014. I’m very confident in [Darwall’s] stockpicking ability,” he added.
The fund has delivered returns well ahead of the IMA Europe ex UK sector and the FTSE World Europe ex UK index over the past one, three and five years. It has returned 242.67 per cent over the past decade.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
However, the fund has lagged behind its peers and benchmark over the past 12 months, which is why Younes thinks it is time to pick up the fund at a lower price.
The fund has made 7.77 per cent over the past year while the sector and index have made 12.16 per cent and 11.09 per cent, respectively.
Among Darwall’s top holdings are major European pharmaceutical companies Novo Nordisk and Bayer.
Industrials are the largest weighting in the portfolio, at 30.86 per cent, followed by healthcare stocks.
The fund has ongoing charges of 1.03 per cent.
