Jason Hollands (pictured), managing director of Bestinvest, gives FE Trustnet readers his last minute picks for growth and income objectives across a cautious, moderate and adventurous risk profile. Cautious income seeker: PFS Twenty Four Dynamic Bond
Bonds have been increasingly out of favour in the last few years for those seeking an income from their ISA.
Record low interest rates and central bank stimulus programmes have squeezed yields on government and investment grade corporate bonds making them relatively less attractive to investors, Hollands says.
“However, yields have improved since the US Federal Reserve signalled an eventual wind down of its programme of monthly bond purchases last summer and the markets have begun to focus on future interest rate rises in both the UK and US,” he said.
The £252m PFS Twenty Four Dynamic Bond fund has outperformed a tough market over the past three years. It returned 32.22 per cent to investors compared to a sector average of 20.11 per cent, according to FE Analytics and has a five crown rating.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
“[They] aren’t a household name, but are a boutique totally focused on the bond markets, with a team who have many years trading experience at leading investment banks, a good feel for the markets and strong expertise in risk management.”
“We expect yields to rise further over the coming year and therefore favour bond funds with a high degree of flexibility to invest across the credit spectrum and adjust to changing interest rate expectations.”
Cautious growth investor: Jupiter Absolute Return
Hollands says with booming stock markets, an absolute return fund may well suit the more cautious investor looking for a conservative strategy in their ISA.
“We think this might be the right time to look at absolute return funds, those which use hedge fund-like techniques to try and generate positive returns irrespective of the market environment,” he said.
He recommends the Jupiter Absolute Return fund managed by James Clunie, who took the reins in September 2013 but who previously managed a similar strategy at SWIP. The fund aims to achieve returns of 6 per cent PA after costs with low levels of volatility.
It has returned 4.77 per cent over three years, underperforming compared to its sector average of 8.57 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
The £261m fund uses a long/short strategy meaning it takes positions in companies it thinks will perform, as well as betting against those it thinks will not. The fund’s clean share class has an OCF of 0.86 per cent.
Moderate risk income seeker: Standard Life UK Equity Income Unconstrained
For those looking for income but prepared to take on more risk, Hollands recommends an equity income fund.
“Equity income funds target companies with good cash flow that are able to deliver healthy dividend pay-outs to shareholders.”
“Over the long run most of the real return from the UK stock market has come from dividends.”
“While the IMA UK Equity Income sector has long been dominated by some Goliath-sized funds each of which has well over a billion invested in them, we’re always on the look-out for the a David to challenge them.”
He says the Standard Life UK Equity Income Unconstrained fund managed by Thomas Moore fits these criteria.
The £463.4m fund has returned 56.62 per cent to investors over three years, according to FE Analytics, beating its sector average of 38.53 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
“The fund pursues a more aggressive approach than some other equity income funds, by holding a higher proportion of mid and small sized companies than most but in our view these are the parts of the market better positioned to benefit from the domestic recovery,” Hollands said.
“We also believe this is the sort of fund that will eventually decide to limit its size by “soft closing”, so the opportunity to invest may not be available in the future.”
However, several high profile managers have recently told FE Trustnet they doubt the rally in small and mid caps can continue.
The fund’s clean share class has an OCF of 1.15 per cent.
Moderate risk growth investor: Baring Europe Select
Hollands recommends the Baring Europe Select fund for those looking for growth in their ISA.
The £1.13bn fund is managed by Nicholas Williams. It has outperformed its sector over three years, returning 38.12 per cent to investors compared to 33.39 per cent sector average.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
“We think European shares are looking considerably better value than US equities at the moment, though the economic outlook for the Eurozone remains uninspiring with inflation well below the ECB target rate,” he said.
“There are however growing expectations that the European Central Bank will introduce stimulus measures, akin to those seen elsewhere which have helped propel stocks in those markets higher.”
The fund’s clean share class has an OCF of 0.83 per cent.
Adventurous growth investors: Lazard Emerging Markets and Templeton Emerging Markets Investment Trust
For those with a higher risk profile and a longer investment horizon, these two emerging markets funds are Hollands recommendations.
The emerging market sector has fallen out of favour in the past few years culminating in a huge sell off in January 2014.
“Concerns have grown over the massive expansion of credit in China, the unbalanced nature of its economic model and the deceleration in its growth story,” he said.
“Emerging market currencies have also been pummelled as international investors have sucked money back to the developed world and with the wind down of QE in the US, this is leading to escalating borrowing costs across the globe.”
“Additionally, whether it is the street battles in Thailand or the tense situation surrounding the Ukraine, investors have plenty to remind them that these regions can be politically unstable. That has added to the sense of panic confronting investors in emerging markets.”
However, long term investors with a stomach for risk should note these markets demography, as they include most of the world's population, says Holland.
This will propel them to future growth that will surpass the developed markets subject to ageing populations, he says.
“Our top choices are Lazard Emerging Markets fund and the Templeton Emerging Markets Investment Trust which is currently trading on an 11 per cent discount to its Net Asset Value.”
The £636m Lazard Emerging Markets fund has lost 4.0 per cent over three years but has performed better than its sector average, which returned 10.97 per cent, and its benchmark which is down 11.88 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
The Templeton Emerging Markets Investment Trust has also fallen over three years. It’s lost 17.77 per cent, more than its sector average of 1.38 per cent
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
However, its discount coupled with a rebound in emerging markets could make it a cheap bet for the longer term investor, Hollands says.
“Buying at a point of weakness opens up the potential for a bargain,” he said.
Clean share classes for Lazard Emerging Markets and Templeton Emerging Markets Investment Trust are 1.07 per cent and 1.15 per cent, respectively.
