Adrian Lowcock (pictured), head of investing at AXA Wealth, believes four investment themes that look appealing at the moment and explains that there are a number of compelling reasons for investors to take exposure to them.
In the below article, we put these themes under the spotlight and look at the funds Lowcock thinks are well placed to play them.
Equity income: Good things come to those who wait
Lowcock is a strong believer in looking to the long term. He said: “Equity income is widely believed to be one of the best long-term investments around; investing in companies which have strong cash flows and can grow their businesses, profits and dividends.”
“For those who don’t need the income now, reinvesting dividends has the potential to have a huge impact on the long-term total returns.”
To illustrate this, Lowcock highlights the Barclays Equity Gilt 2014 study, which found that £100 invested in UK equities in 1899 would be worth £14,915 today. Had the dividends been reinvested, this figure would have soared to £2.2m.
According to Lowcock, the £711.1m Schroder UK Alpha Income fund is appealing for this theme because of its current focus on sectors which are less sensitive to economic changes.
“Manager Matt Hudson believes that different stocks perform depending where we are in the economic cycle,” Lowcock explained.
“He thinks the UK is in the later stage of economic expansion and is therefore investing in defensive companies such as pharmaceuticals as well as financials, which tend to perform at this stage in the economic cycle.”
Total return of fund over five years compared to index and sector
Source: FE Analytics
According to FE Analytics, the five FE Crown-rated fund has delivered a total return of 96.06 per cent over five years compared to the FTSE All Share’s 54.51 per cent gain. It’s also top decile in its peer group over this time.
Schroder Alpha UK Income has a clean ongoing charges figure (OCF) of 0.95 per cent and yields 3.76 per cent.
Europe: Stock markets are different to politics
Lowcock believes it is prudent to recognise that stock markets should not be tainted by politics in investors’ minds. Factors such as the recent Greek election and debt negotiations combined with deflation seem to have overshadowed Europe, in his view.
“There is plenty for investors to be concerned about,” he said. “However, the European Central Bank has acted and in March they began quantitative easing in earnest.”
“Stock markets had already risen both ahead of and after the initial announcement. Even so valuations of European equities still look good value compared to their own history and remain at a significant discount to their US peers.”
Lowcock explains that this is why Europe is an interesting investment opportunity for cash-rich American companies.
He added: “The economic outlook has also started to stabilise in the eurozone and it looks likely to improve over the next 12 months.”
Lowcock believes Henderson European Selected Opportunities is attractive because FE Alpha Manager John Bennett (pictured) invests primarily in large companies and looks for businesses which have pricing power, or the ability to raise prices and not suffer falling demand.
He said: “Bennett looks for themes and invests in change, anticipating inflection points in markets and taking advantage of these changes in sentiment.”
Total return of fund over five years compared to index and sector
Source: FE Analytics
According to FE Analytics, Bennett’s £2.1bn fund returned 57.12 per cent including any reinvested dividends over five years, while the FTSE Europe Ex UK index delivered a 43.88 per cent return.
Henderson European Selected Opportunities has a clean OCF charge of 0.85 per cent.
Asian equities: Young, growing population
South Asia is sensitive to a strengthening US dollar and as a result there are risks involved in investing in Asian equities at the moment. However, while Asian shares performed poorly following the 2013 taper tantrum and stability concerns regarding countries such as India and Indonesia, along with the other ‘fragile five’ economies, there are now signs of improvement in the region.
Lowcock said: “Many of these ‘fragile five’ reacted quickly to the US Fed’s plan to begin reducing monthly QE, or tapering. Economic growth is still strong and stock market valuations are now attractive compared to developed markets of the UK and US.”
“There are still risks, but the long-term demographics of Asia are still very attractive, it has a young population and growing middle classes which, historically, has been a key driver of stock markets.”
Tipping Newton Asian Income, Lowcock said: “Jason Pidcock believes dividends focus a company’s management and encourage disciplined capital investment and profit generation.”
“The fund takes Newton’s global thematic approach based on the belief that no company can be considered in isolation, and the manager identifies key themes which he expects to play out over the longer term.”
Pidcock applies a strict dividend yield requirement, which is a 35 per cent premium to the yield of the FTSE Asia Pacific ex Japan index, with each potential investment being subjected to a rigorous analysis.
Total return of fund over five years compared to index and sector
Source: FE Analytics
According to FE Analytics, the fund has returned 74.83 per cent including reinvested dividends over five years, while its benchmark has returned 39.99 per cent. It’s also the third best performer in the sector over this period.
The fund currently has a yield of 4.56 per cent and has an OCF of 0.82 per cent.
US equities: Strongest developed economy
The US economy has reached escape velocity and as such the Fed has stopped QE, following a strong stock market in 2014, Lowcock notes.
As economic growth in the region continues, he believes it is a sound idea for investors to add US equities to their ISA portfolios.
“The US stock market defied many experts who disregarded it as too expensive,” he said.
“Company earnings are supportive and we are seeing a pick-up in capital expenditure, increased business activity and confidence. Merger and Acquisitions are back on the agenda as cash-rich companies look to invest.”
However, Lowcock warns that investors should tread with some caution as valuations are high. The strong US dollar is also likely to have an impact at some point as it makes the country less competitive globally.
“At the moment we favour large companies with a focus on the US economy,” he added.
The JP Morgan US Select fund, which is currently in defensive sectors such as pharmaceuticals, aims to invest for capital growth without any distribution target. One of its co-managers, Thomas Luddy, is an FE Alpha manager.
Lowcock said: “Managers Thomas Luddy, Susan Bao and Helge Skibeli use a combination of statistical analysis and qualitative research to understand and remove the human emotion out of investment decisions.”
Total return of fund over five years compared to index and sector
Source: FE Analytics
Over five years, the fund delivered a total return of 104.92 per cent compared to 96.34 per cent for the S&P 500.
JP Morgan US Select also has an OCF of 0.93 per cent.