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The funds the experts are backing for 2015: Part 2

31 December 2014

FE Trustnet looks at the funds David Coombs, Adrian Lowcock, John Monaghan and Marcus Brookes think could prove interesting in 2015.

By Gary Jackson,

News Editor, FE Trustnet

It’s the last day of 2014 so we’ve brought you four more experts’ fund picks for the year ahead, with three focusing on the possibility of increased volatility in markets but one for those who want to keep buying UK equities. 

I think we’d all agree that 2014 has been a ‘challenging’ year for investors, to put it mildly. From next week FE Trustnet will roll out some in-depth analysis of what went on, along with the experts’ view on the fund picks you all kindly submitted earlier in the month.

It was also interesting to see your comments on the bottom of ‘The funds the experts are backing for 2015: Part 1’ - especially the negative views on RobecoSAM Smart Materials. I was due to take a look at this fund as part of a series on my SIPP, so I’ll be sure to take your views into account when researching it - and when I’m deciding to invest or not.

Our experts’ four 2015 picks are below. Everyone in the FE Trustnet team wishes you a happy New Year - see you all in 2015!


David Coombs - Henderson UK Absolute Return

When asked where investors should be looking for diversification, Rathbones head of multi-manager investments Coombs (pictured) thinks they should consider absolute return funds next year.

He said: “I think there’s some very good funds like Henderson UK Absolute Return. Long/short equity, I think, will be a good place to be next year. Some of the hedge funds I’ve been holding have done very well this year and I think they could again next year.”

Henderson UK Absolute Return, headed up by the FE Alpha Manager duo of Ben Wallace and Luke Newman, has returned 4.56 per cent over 2014, compared with a 0.85 per cent gain in the FTSE All Share. The average fund in the IMA Targeted Absolute Return sector is up 2.93 per cent.

Since launch in April 2009, the five FE Crown-rated fund has handed investors a 42.10 per cent return.

While this is below the 99.72 per cent made by the FTSE All Share, absolute return funds are not held in the hope of making high returns. Its annualised volatility since launch is less than a third of the All Share’s at 4.18 per cent as is its 5.03 per cent maximum drawdown.

Performance of fund vs sector and index since launch
   

Source: FE Analytics

It also appears on the FE Research team’s Select 100 list of preferred funds, where it is highlighted for investors who want to invest in the stock market while limiting risk. Its ability to short also means it can protect capital, and even make money, in falling markets.

Henderson UK Absolute Return has a clean ongoing charges figure (OCF) of 1.07 per cent.
 


Square Mile - Newton Real Return

John Monaghan, senior investment research analyst at Square Mile Investment Consulting & Research, has picked out another absolute return fund, saying those seeking capital preservation could consider Newton Real Return in 2015.

Run by FE Alpha Manager Iain Stewart, the £9.5bn fund is popular with advisers, appearing in the aggressive, balanced and cautious AFI portfolios built by FE’s panel of leading investment advisers. It also features on the Select 100 and holds an ‘AA’ rating from Square Mile.

Monaghan said: “As we move into 2015, we could well see an increase in volatility for reasons far closer to home. Next year is an election year in the UK and many commentators have remarked that the election result is far from clear.” 

“Couple this with the fact that, aside from a 3.5 per cent fall in 2011, the FTSE All Share has posted double-digit returns in each calendar year from 2009 and looks to remain in positive territory for 2014.”

“Investors therefore may deem it appropriate to preserve some of their capital following such a strong run in the UK market during what could be a challenging period.”

“We believe the Newton Real Return fund is well suited to meet investor needs within our capital preservation outcome.”

“It is run by experienced fund manager Iain Stewart, who uses Newton’s global thematic investment process in order to meet the fund’s objective of exceeding one month cash returns and providing a positive absolute return on a rolling three-year basis.”

Over the eight years of the last market cycle the fund has returned 66.02 per cent, significantly outperforming its average peer and its one-month Libor plus 4 per cent benchmark. As a point of comparison, its returns are also better the FTSE All Share’s over this time, but with less than half the volatility.

Performance of fund vs sector and indices over 8yrs



Source: FE Analytics

Newton Real Return has clean ongoing charges of 1.11 per cent.
 

Adrian Lowcock - Old Mutual UK Alpha

Although 2015 is expected to be a difficult year for UK equities, owing to factors such as the general election in May and the spillover from continued weakness in the eurozone, many investors will still want to maintain a decent weighting to home shores.

For this Adrian Lowcock (pictured), head of investing at AXA Wealth, thinks Richard Buxton’s £1.7bn Old Mutual UK Alpha fund could be a good option. The fund tends to focus on large caps, which differentiates it from peers that have relied on small and medium-sized companies for recent returns.

Lowcock said: “Buxton has an enviable track record. He runs a concentrated portfolio of his best ideas. He is a classic contrarian manager, buying early into unloved sectors such as mining companies where he started building up a position as early as December 2013. It is his patience in investing that allows him to take a longer term view and wait for sentiment to change.”

Old Mutual UK Alpha is currently first quartile over three and five years but has slipped in the second quartile in 2014.

Since Buxton took over in December 2009 it has outperformed both the IMA UK All Companies average and the FTSE All Share with an 85.79 per cent return.


Performance of fund vs sector and index over manager tenure



Source: FE Analytics

The fund’s largest holding is HSBC at 4.94 per cent of the portfolio, followed by Lloyds, International Consolidated Airlines, Barclays and Royal Dutch Shell. Its largest sector weightings are to financials at 32.80 per cent, consumer discretionary at 22.48 per cent and energy at 13.72 per cent.

Old Mutual UK Alpha has a 0.78 per cent clean OCF.
 

Marcus Brookes - JPM Income Opportunity

FE Alpha Manager Marcus Brookes (pictured) highlighted three funds he thinks will do well in 2015 in an article on FE Trustnet earlier this month and one pick stood out as being suitable for investors concerned about the future of the bond market

As its name suggests, Bill Eigen’s JPM Income Opportunity fund is an “opportunistic” portfolio that can move across fixed income markets. It is domiciled in Luxembourg and sits in the offshore FO Absolute Return sector.

More than 55 per cent of the $8.6bn fund is in cash, positioning for bear flattening of the yield curve in the US as the country moves into a monetary tightening cycle. Eigen is extremely cautious on his outlook for bonds, arguing that years of central bank-fuelled liquidity has pushed it to a “really dangerous” point.

Highlighting his reasons for liking the fund, Brookes said: “Bonds were badly hit during the ‘credit crunch’ leading to them being oversold and very cheap. Bill and his team did an excellent job at investing in these bonds and made good returns for investors in the fund.”

“Moving six years forward to today and most bonds have done very well, and it could even be argued that they are looking fully valued. Bill and his team have already reduced their holdings in these bonds and are waiting for cheaper prices, before reinvesting.”

FE Analytics shows the JPM Income Opportunity fund has outperformed its average peer since launch in July 2007 with a 34.06 per cent gain. However, Eigen’s cautious positioning means it has slipped into the fourth quartile in 2014, when bonds surprised many with another year of strong returns.

Performance of fund vs sector since launch



Source: FE Analytics

The fund has an OCF of 1.2 per cent.


 
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