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Willis: The three contrarian plays I’m backing this ISA season

16 March 2014

The head of research at Whitechurch Securities says there are still plenty of bargains to be had for investors with the stomach for volatility.

By Daniel Lanyon,

Reporter, FE Trustnet

Investors should make contrarian buys into inflation-linked bonds, emerging markets funds and BlackRock World Mining IT, according to head of research at Whitechurch Securities Ben Willis, who says the contrarian positions will win out in the long-term.

ALT_TAG Willis (pictured) says that due to very low inflation rates and a recent rally in equities, index-linked bonds are undervalued and therefore investors can pick up a cheap hedge against inflation or sell out when the market picks up and make a profit.

“Nobody’s talking about inflation now. It was a big topic 12 months ago but everyone’s inflationary expectations have dampened considerably recently,” he said.

“People were concerned because of QE ending and energy prices were going up, and thought there was going to be an inflation shock somewhere down the line.”

“So, everybody was buying index-linked gilts to protect against an inflation shock but those things haven’t materialised.”

“Now people are more concerned where to value equity markets, what to do with government bonds.”

“So we’ve started to think about buying inflation-linked gilts because the best time to buy them is when nobody’s talking about them.”

“If you get in there early, you can buy these securities at their lowest price.”

Ruffer Investment Company, Capital Gearing and Personal Assets Trust are among the well-known capital preservation-focused trusts to have maintained large weightings to index linkers – more than 20 per cent.

Willis sees inflation as an important consideration for investors, especially because he expects to see it increase in the medium-term. He also says there is a future profit-taking opportunity in the secondary market, because it is out of favour now.

“For a low-risk portfolio you want a hedge against inflation and further on those inflationary shocks will come through,” he said.

“Inflation could be an issue further down the line, not in the short-term, but maybe 12 months away so you can get a decent hedge against inflation further down the line, at a cheaper price.”

“As soon as inflation comes, everybody wants them and the price will go through the roof.”

“But it will be too late then and you’ll be buying inflation protection at such an extreme price it won’t protect your portfolio against inflation efficiently.”

“People have become less concerned in the short-term about holding index-linked gilts compared with 12 months ago."

Inflation-linked bonds are out of reach of many retail investors, but exposure can be obtained by buying into a passive tracker such as one offered by Vanguard.

Vanguard UK Inflation Linked Gilt Index has lost money over 12 months, according to data from FE Analytics, as investors have deserted the asset class thanks to inflationary expectations falling and the upswing in equity markets.

The consumer price index fell to a five-year low of 1.9 per cent in January.


Performance of fund vs sector over 1yr

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Source: FE Analytics

The clean share class ongoing charge for Vanguard UK Inflation Linked Gilt Index is 0.15 per cent and is available through Trustnet Direct.

Willis is also very keen on emerging markets for a contrarian investment as he believes that despite the recent sell-off, the asset class will see stellar growth in the long-term.

“Emerging markets have underperformed recently but as part of a balanced portfolio alongside other funds that have performed well in developed markets or in other asset classes, they make a solid investment.”

“They are out of favour owing to the problems facing China and the fact that the US market has returned to growth and is looking quite attractive.”

“However, the long term dynamics that underpin them have not gone away, it’s just that there is short-term risk aversion and so investors have taken capital out of those markets and bought them back to developed markets – you just need the stomach to ride out the volatility if you invest at the moment.”

He recommends Templeton Emerging Markets and JPM Emerging Markets Income.

Both of the funds have gone off the boil over the past year, with the former down 24.36 per cent and the latter down 19.44 per cent. Both have performed worse than their benchmark and sector.

Performance of trust vs sector over 1yr


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Source: FE Analytics


Performance of fund vs sector over 1yr

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Source: FE Analytics

“We’ve held them for a while and while they have underperformed recently, we’re still buying more and wouldn’t advise clients to sell out of those positions,” Willis said.

“If you’re already holding them, you don’t want to sell out at the bottom and if you’re buying now, equity valuations are at their cheapest levels against history. These are long-term investments.”

“As long as you hold them for the long-term, whether you want to take profits or sell out of the position, you know you’re going to make some money on it.”

Templeton Emerging Markets is currently trading on a discount of 9.59 per cent but this figure has been as high as 12.34 per cent over the past year.

Ongoing charges are 1.31 per cent for the Templeton Emerging Markets trust and 0.93 per cent for the JPM Emerging Markets Income fund.

Willis also backs BlackRock World Mining IT as a contrarian call, which he started buying into in June last year as a bet on a commodities recovery.

“It was on a significant discount because the commodities story was completely out of favour with everybody.”

“So we thought it was a good entry point. Mining companies had started to change their management teams and were adopting shareholder friendly structures and had some stronger capex disciplines.”

“And we thought China still has its woes but emerging markets demand might pick up, we weren’t sure when but thought at these levels it’d be a good time to go into these as a contrarian bet.”

The investment trust has lost money over one and three years but has outperformed its sector average.

The mining and commodities sector has fallen since the beginning of 2011 over fears regarding slowing growth in China and the end of the commodities super-cycle in the 2000s.

FE Analytics data shows the fund has fallen 29.49 per cent over three years compared with a sector average decline of 49.42 per cent.

BlackRock World Mining IT has started to pull away from the sector over the past year, while still losing money. It fell 13.45 per cent compared with an average sector loss of 29.19 per cent.

Performance of trust vs sector over 1yr

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Source: FE Analytics

“We bought it when it was out of favour and it has re-rated quite a bit since then,” Willis said.

The trust is still trading on a discount of 1.89 per cent but has traded on as much as a 15.76 per cent discount over the past year. The ongoing charge for BlackRock World Mining IT is 1.42 per cent.

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