Mahindru, chief investment officer of international equity at Goldman Sachs Asset Management, is relatively bullish in his outlook for 2015. While he believes volatility will be a consistent theme next year, as it has been so far in 2014, he expects decent corporate earnings growth to drive the market.
That being said, Mahindru says investors must think hard about who they choose for their equity exposure. Although there will be more opportunities for active funds, it will be a much harder environment to outperform as managers won’t be able simply shift between cyclicals or defensives to beat the market – like they have been able to since the period after the financial crisis.
“We think the world is becoming more complicated. Correlations are coming down though, interestingly, they spiked up again in the recent sell-off,” Mahindru said.
“What matters now is stock selection. I would say this, wouldn’t I, but it is more the time for active stock selection than it has been in the past because you will see bigger differentiations. There will be differences between good companies that can generate growth and companies that can’t.”
Because of that, Mahindru says that alpha generation will be a much more significant part of an investor’s return in 2015 than it has been over recent years.
“When markets are going up 20 per cent plus a year, it’s only really the beta call that matters. Going forward, if market returns are 7, 8 or 9 per cent, then alpha can be a more important component to that,” he explained.
“Again, you have to think about, who are your active managers? Who do you want to invest with? Who do you have the confidence, when they are underperforming, to give more? That’s how I look at it.”
With that in mind, we ask the experts which funds would focus on if they want an active stock-picker within their portfolios.
Mark Barnett
Thomas McMahon, fund analyst at FE Research, says investors should be wary of the argument that they should only focus on active managers in 2015 as many people thought this year would be a stock-pickers market.
“Managers didn’t expect the violent rotation into defensive stocks in March, and they didn’t expect the outstanding performance on long-dated and safe-haven bonds,” McMahon said.
“Two popular value picks with many managers were oil and gas and mining, neither which have come off, and it has been extremely hard for managers to add alpha. Macro concerns have dominated the markets, and could well do for some time.”
Nevertheless, while he isn’t fully convinced, he says one manager who does have the ability to outperform through alpha generation is FE Alpha Manager Mark Barnett (pictured).
“Invesco Perpetual Income has generated most of its outperformance from stock selection rather than sector allocation. We would expect Barnett’s style to see individual stocks driving returns more than sector positions, in contrast to his predecessor Woodford,” McMahon. “This year in particular, positions in Shell and AstraZeneca were boosted by takeover approaches, while he also made good money by buying Shell over BP and picking the right tobacco stocks.”
Barnett took over the five crown-rated Invesco Perpetual Income fund in March 2014, over which time it has been the second best performing portfolio in the highly competitive IMA UK All Companies sector with returns of 5.07 per cent.
The FTSE All Share has gained just 0.15 per cent over that time.
Performance of fund versus sector and index since Mar 2014
Source: FE Analytics
He has a longer track record on the five crown-rated Invesco Perpetual UK Strategic Income fund, as he took over the portfolio in January 2006, and it has been a top quartile performer for its total return and its alpha generation, relative to its benchmark, over that time.
Invesco Perpetual Income has a yield of 3.19 per cent and an ongoing charges figure (OCF) of 0.91 per cent.
Ben Wallace and Luke Newman
Though they operate in a different sector, McMahon also rates FE Alpha Managers Ben Wallace and Luke Newman’s stock-picking abilities.
They head up the five crown-rated Henderson UK Absolute Return fund, which sits in the IMA Targeted Absolute Return sector, and unlike the majority of their peers the two managers try to generate outperformance via both their long and short positions.
“Another fund to consider could be Henderson UK Absolute Return, a long/short fund run with 60 per cent in stocks held for a year or more and 40 per cent in a shorter-term tactical book,” McMahon explained.
“Newman and Wallace try to second-guess the market and pick companies which will do better than expected and those that are undervalued and riding for a fall. Newman himself says it has been extremely hard for stock-pickers this year thanks to the macro environment and the huge amount of hot money sloshing around the markets as a result.”
“His fund had a tough summer, with his long-term positions struggling, but he and Wallace made good money form their short-term stock-picking. In recent months it has held up well and is significantly ahead of the FTSE.”
The £400m fund has returned 40.21 per cent since it was launched in its current form in April 2009.
Performance of fund versus index since April 2009
Source: FE Analytics
While that is a much smaller return than the FTSE All Share’s gains over that time, its annualised volatility and its maximum drawdown, which measures how much an investor would lose if they bought and sold at the worst possible time, has been three times lower than the index over the period.
The fund is also up against the index so far in 2014 with its returns of 3.16 per cent. Its OCF is 1.07 per cent.
Nigel Thomas
Killik & Co’s Gordon Smith says that if investors want a stock-picking manager for their UK exposure, they can’t go too far wrong with the £4.4bn AXA Framlington UK Select Opportunities fund, which is headed up by FE Alpha Manager Nigel Thomas (pictured).
“The one that always stands out for us is Nigel Thomas,” Smith said. “His long-term track record is very good but it is the consistency of his outperformance which is the most impressive part. If you were to chop it up, you can see he has done a good job at outperforming in different points during the market cycle.”
“He is the prime example of an active stock picker for us. He tends to have a quite different portfolio to the index and often takes a theme based-approach.”
Thomas took over AXA Framlington UK Select Opps fund September 2009. It has been a top decile performer in the IMA UK All Companies sector over that time with returns of 292.02 per cent, beating the FTSE All Share by more than 100 percentage points in the process.
Performance of fund versus sector and index since Sep 2002
Source: FE Analytics
The fund has also beaten the sector in nine of the last 10 calendar years, outpacing the FTSE All Share in eight of those years – the exceptions being in 2007 and 2012. AXA Framlington UK Select Opps has been top decile for alpha generation, relative to the index, over five, seven and 10 year periods.
Its OCF is 0.83 per cent.
