Last week’s surprise move by the Bank of Japan to expand its quantitative easing programme has given one reason for cheer, while yesterday’s ECB meeting was well received as the central bank promised it will do more to revive the eurozone economy if it needs to.
We also covered a wide range of investment related issues, including how some bond funds might be yielding too much and why one of the team has bought Invesco Perpetual Global Targeted Returns.
Some of our favourite stories are rounded up below. The FE Trustnet team wishes you all a great weekend.
The funds that should come with a health warning
Torcail Stewart, who runs the five FE Crown-rated Baillie Gifford Corporate Bond fund, warned this week that investors should be asking questions of their strategic bond manager if their portfolio is yielding more than 6 per cent.
Stewart argues the reach for yield has seen some funds in the IMA Sterling Strategic Bond sector invest more heavily in the CCC-rated part of the market but adds that this “not an area where this fund would go fishing”.
“You may have heard of the search for yield going on in the credit markets currently and there has been a move into non-traditional areas by certain funds and so if I were sitting on [the investor’s] side of the fence, and I saw funds with 6 per cent plus yields, I would really be asking some questions,” he said.
In a future article, FE Trustnet will take a closer look at the IMA Sterling Strategic Bond to see what yields are on offer and how the managers are generating these returns.
Why the most popular fund on FE Trustnet could be in for a rough ride
The most viewed factsheet on FE Trustnet is the £431m Axa Framlington Biotech fund, which is also its universe’s best performing portfolio over three years.
One of the reasons behind this curiosity is its past returns - it’s up around 200 per cent over three years - but as investment experts consistently warn, buying on past performance alone is rarely a good strategy.
Performance of fund and indices over 3yrs
Source: FE Analytics
In this article, FE Trustnet reporter Daniel Lanyon looked at the high valuations currently being seen in biotech stocks and examined some potential headwinds that could lead to increased volatility in the sector.
Brenda Kelly, IG’s chief market strategist, said: “Valuations may be a bit stretched but as long as there are fears of Ebola there will be an attraction for biotech stocks given the demand we have seen over the past six months. However, given a 40 per cent gain over the past six months there could be a correction due.”
Five recent underperformers you shouldn’t rush to sell
A short-term focus on performance often works the other way as well - some investors can sell out of a longstanding holding when performance turns sour for a few months.
In this article we looked at five UK equity funds which are currently in the fourth quartile of their respective sectors but have achieved first-quartile returns over three, five and ten years and asked whether investors should be in a rush to sell.
Performance of funds over 1yr
Source: FE Analytics
Richard Troue, head of investment analysis at Hargreaves Lansdown, said: “It can be tempting to react to a short-term bout of underperformance, but even if you manage to sell at the right time, it’s virtually impossible to buy-back in at the bottom.”
“Similarly, it is all too easy to give up on a fund manager too early and it is important to try and understand the reasons for poor performance before making a snap decision.”
Take another look at the article to see Troue’s reasons why it might be worth hanging onto these funds.
The global funds putting more cash in your pocket than their UK rivals
FE Trustnet has been focused on income over recent weeks as we pursue our ongoing campaign to improve income transparency among funds.
As part of this, we took a look at the IMA Global Equity Income sector to see how much income has been earned over the past market cycle.
Between 1 January 2007 and 31 December 2013 four funds paid out more than their typical rival in the IMA UK Equity Income sector, which had an average income earned of £287.51 on an initial investment of £1,000.
FE Alpha Manager Andy Headley and Charles Richardson’s Veritas Global Equity Income fund led the pack, paying out £376.28 on an initial £1,000.
In the UK equity income space, only Thomas See’s Schroder Income Maximiser performed better with £480.63 in income on an initial £1,000.
Global equity income funds from Newton, Sarasin and Liontrust also paid out more than the average UK fund over the past market cycle, our research showed.
Why I’m selling out of Personal Assets and buying the new GARS
FE Trustnet editor Joshua Ausden took us into his personal portfolio earlier this week to reveal why he’s sold Sebastian Lyon's Personal Assets IT to invest in Invesco Perpetual Global Targeted Returns, which is managed by David Millar and his team.
As Josh explained: “I want an insurance policy – something that protects me through thick and thin.”
“The problem I’ve found, however, is that Lyon’s ultra-bearish views are themselves aggressive and can lead him to lose significant amounts of money over short periods. Millar, on the other hand, invests with a number of macro scenarios in mind and attempts to deliver a positive return regardless of which one plays out.”
Performance of funds, trust and index since Sept 2013
Source: FE Analytics
We might be revisiting this subject in the coming weeks, as some of the team believes Lyon’s Trojan fund and GTR can sit very nicely next to each other in the defensive part of a portfolio…
