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The funds and sectors that are screaming value

30 June 2014

FE Trustnet asks the experts which areas of the market offer the best value for the long-term investor.

By Alex Paget,

Senior Reporter, FE Trustnet

Emerging market equities, private equity investment trusts and UK mid-cap funds offer the best value to investors in the current environment, according to industry experts.

There is little doubt that there is less value in the market today than there was a few years ago, with the S&P 500 hitting its record high and the FTSE 100 currently flirting with its own peak.

While several leading managers, such as Alastair Mundy, Iain Stewart and Martin Gray, believe that investors should be exercising severe caution at the moment, more bullish commentators say there is value for equity investors if they can stomach the volatility.

With that in mind, we ask the experts which areas of the market offer the most obvious value and represent the best entry point for a long-term investor.


Private equity trusts

Ewan Lovett-Turner, associate director of investment companies research at Numis Securities, says finding opportunities in the closed-ended space is becoming increasingly difficult as discounts have tightened across the board.

However, for those can afford to take a higher degree of risk, he and his team are currently bullish on the IT Private Equity sector.

“It’s definitely harder to find value than in other times in the past, but one area where you are getting good discount value is in private equity,” he said. “It’s the one I would focus on if you are looking for value, as the sector is trading on a double digit discount.”

He says that not only are valuations attractive, but an accommodating environment - which is allowing private equity managers to realise their portfolio and offer their holdings to a wider market - is also making the sector look increasingly interesting.

Lovett-Turner says that Pantheon International Participations IT and Princess Private Equity IT offer good value at the moment. Both are on 16 per cent discounts.

They both invest in other collective vehicles, and have both considerably outperformed the sector over five years with returns of around 250 per cent.

Performance of trusts vs sector over 5yrs


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Source: FE Analytics

If investors are looking for more direct exposure, Lovett-Turner likes the HG Capital Trust, which is on a 13 per cent discount. He rates the management team and says they have a good track record of running money throughout the cycle.

Our data shows it has been the sector’s second best performing portfolio over 10 years with returns of 248.22 per cent.



Emerging market equities

Emerging markets have been hugely out of favour with investors in recent years, with concerns over slowing growth in China, current account deficits and the tightening of US monetary policy all proving significant headwinds.

However Charles Hepworth (pictured), investment director at GAM, says that if investors are looking for a long-term investment, now is the time to buy into them because the growth outlook is still very good.

ALT_TAG “I would say that everything we invest in at the moment represents good value, but that’s a pretty obvious point. However, I think emerging markets are the most ‘screaming’ value now,” Hepworth said.

He added: “Yes, there are still political and macroeconomic risks, but valuations have been so compressed for so long now.”

A large number of multimanagers and wealth managers have said that the time to buy emerging markets is just around the corner, but only a few – like Unicorn’s Peter Wallshave actually taken the plunge this year.

Hepworth has also moved overweight emerging markets and combines the JPM Emerging Markets fund, which offers core exposure, and GAM Star North of South EM Equity, which is more a of satellite holding.

According to FE Analytics, the GAM fund has taken full advantage of the poor market conditions thanks to its ability to short. It has returned 11.21 per cent since its launch in July 2011.

Performance of funds vs index since July 2011

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Source: FE Analytics

Its MSCI Emerging Markets benchmark has lost 5 per cent over that time, while Austin Forey and Leon Eidelman’s JPM Emerging Markets fund has lost 6 per cent.

The JPM fund has, however, been the seventh best performing fund in the IMA Global Emerging Markets sector – and has outperformed the index – over 10 years with returns of close to 250 per cent.



UK mid cap funds

Having massively outperformed last year, mid cap stocks and other domestically facing cyclicals corrected significantly earlier in the year as investors rotated their portfolios into “safer” areas of the market.

Performance of indices since 26 March 2014

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Source: FE Analytics

However, Steve Davies – manager of the Jupiter Undervalued Assets fund – told FE Trustnet last week that the negative sentiment towards that area of the market has been overdone.

“We have been adding to some of our existing positions following the recent rotation in markets. Investors have quite violently moved away from areas which have done well and stocks that are interest rate sensitive,” Davies said.

“We just feel this has left some companies ridiculously cheap.”

Davies isn’t alone in his assessment. In an upcoming article, FE Alpha Manager Alex Wright tells us why he has been upping his exposure to mid-caps in his £2.9bn Fidelity Special Situations fund on the back of attractive valuations.

Funds such as Davies and Wright’s portfolios, as well as FP Matterley Undervalued Assets, MFM Slater Growth and Schroder Recovery, are all overweight mid-caps.

However, if investors want more direct exposure, there are a number of actively managed FTSE 250 funds in the IMA UK All Companies sector. They include Neptune UK Mid Cap, Franklin UK Mid Cap and Royal London UK Mid Cap Growth – all three of which have outperformed the index over five years.

In light of the sell-off, there are a number of investment trusts that are trading on wider discounts than earlier in the year.

One example is Schroder UK Mid Cap, which is run by the FE Alpha Manager duo of Andy Brough and Rosemary Banyard. It currently trades on a 7.55 per cent discount to NAV, having been on a premium within the last 12 months.

It has returned 380.71 per cent over 10 years, beating the FTSE 250 index by more than 130 points in the process.

Energy has also been highlighted by fund managers of late. In an upcoming article, FE Trustnet will look at ways to get exposure to it.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.