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Funds for the market most investors are approaching with caution

01 May 2015

The Share Centre’s Andy Parsons runs through his top three US ‘all-weather’ fund picks in light of the market’s disappointing performance this year.

By Lauren Mason,

Reporter, FE Trustnet

Earlier this week, FE Trustnet explored the pros and cons of investing in the US equity market and whether there are enough positives to counteract its high valuation.

However, there are concerns that the S&P 500’s six-year bull run is under threat, following the negative effects of the stronger dollar, weak export markets and the plummeting oil price.

In fact, returns have been disappointing since the start of 2015, with the index accumulating half the total returns of the MSCI World index and nearly a third of those of the FTSE All Share.

Performance of indices over 2015

 

Source: FE Analytics

Andy Parsons, head of research and advisory services at The Share Centre, has been approaching the world’s largest economy with caution.

“In terms of the US market overall, we’re slightly wary. We’re sitting, holding and waiting. We think markets are a little high. There’s been some real strength in the US over the last few months and valuations are not massively stretched, but there aren’t huge pockets of value out there,” he explained.

“In the key areas we like out there, we’re a little bit more apprehensive. It wouldn’t surprise us if we saw a bit of a pull-back.”

However, Parsons isn’t selling down his exposure and believes he has found a select few funds which have the potential to navigate a slowdown in the market’s performance.

In light of this, Parsons gives FE Trustnet his top three US fund picks in the below article.

 

 

AXA Framlington Biotech

Biotechnology is a US sector which Parsons is particularly interested in, despite admitting that the valuations of some stocks are slightly stretched.

However, he believes that biotech is a strong long-term investment theme and has benefitted from a series of mergers and acquisitions within the sector so far this year.

As such, Parsons and his team particularly like the AXA Framlington Biotech fund, managed by Linden Thomson since 2012.

“We like how she manages the money and what she does, and she has such a strong background in that area of technical expertise – if you have a background in the sector you invest in, then that always helps. She has a microbiology background, so this helps her to understand this type of investing environment.”

Over one and three years, as well as over three and six months, the fund has outperformed its NASDAQ OMX Biotechnology benchmark, which is no mean feat seeing as the index has outpaced the MSCI World dramatically over recent years.

Performance of fund vs indices over 5yrs

 

Source: FE Analytics


What’s more, the fund has a maximum gain of 76.74 per cent over three years, which is 20.56 percentage points more than its benchmark. However, the fund also posted higher maximum loss and annualised volatility over this time frame.

“If you look back at past performance over the last couple of years, you’ll see that her fund has done phenomenally well – the performance is absolutely exceptional,” Parsons said.

“I think you just have to be very careful. It’s already up 21 per cent this year, she did 45.5 last year, 63.5 the year before – it’s staggering. Long may it continue, but there does have to be a slight pull-back.”

While Parsons acknowledges Thomson’s strength as a stock-picker and her ability to grasp good opportunities in the market, he would only drip-feed into the fund because of the uncertainty of the sector’s future and whether the biotech market will undergo a correction.

AXA Framlington Biotech has a clean ongoing charges figure (OCF) of 0.83 per cent

 

 

Legg Mason ClearBridge US Aggressive Growth

Parsons has always been a firm believer that active US funds are better investment vehicles than US passives, despite many investors believing that it’s too difficult for active managers to outperform in such an efficient market.

“Passives do have their place and I would not disagree with the use of a passive, but I’m firmly in the ‘active camp’,” he said.

“The only reason I say this is that an active manager has the ability to become very sector-orientated in their selection – they don’t have to hold everything across the board, so their funds can surge.”

“Opinion is very evenly split generally on whether passives are better. I just think there are managers out there who can demonstrate that they can outperform.”

For a more aggressive form of investing, Parsons particularly likes the Legg Mason ClearBridge US Aggressive Growth fund, managed by Evan Bauman and Richie Freeman since 2007.

“These are guys who stick to what they know and use a tried and trusted investment approach. I think the management team there have done a stellar job over time, I really do,” Parsons added.

The five FE Crown-rated fund, which is $4.9bn in size, has achieved total returns of 111.22 per cent over five years, outperforming its sector average by more than a third.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics


Bauman and Freeman will invest in companies of any size that have the potential for above-average growth over the long term. Their portfolio currently holds its largest weighting in healthcare at 33.78 per cent, with information technology and consumer discretionary stocks being allocated 20.44 per cent and 13.5 per cent respectively.  

The management duo pays little attention to the benchmark and are high-conviction investors, holding between 50 and 70 stocks at any one time.

Legg Mason ClearBridge US Aggressive Growth has a clean OCF of 1.13 per cent.

 

Schroder US Mid Cap

As a lower-risk option, Parsons likes the Schroder US Mid Cap fund, managed by FE Alpha manager Jenny Jones since 2005.

“What I like about Jenny, and what people have to appreciate, is that when markets are just gently moving along and ticking over with no substantial momentum, this fund will perform,” he explained.

“If the market suddenly rallies even higher, it won’t keep apace. She has stocks in there that she likes to call ‘steady Eddies’ and I like to call this fund a good ‘steady Eddie’.”

The £1.2bn fund has achieved a top-decile performance of 236.36 per cent over 10 years, which is 88.76 percentage points more than its peer average in the IA North America sector and 29.5 percentage points more than the Russell 2500 index.

Performance of fund vs sector and benchmark over 10yrs

 

Source: FE Analytics

The fund has also made it onto the FE Research Select 100 list for being held in high regard by the AFI panel of leading financial advisers and its track record.

FE’s analysts said: “Performance in 2012 was disappointing and Jones spent some time analysing the reasons why. Too many stable earnings companies, a large cash allocation and a few stock-specific errors saw the fund return half the sector average.”

“Jones has learnt the lessons and is letting the mispriced growth bucket drift to capture most of the US rebound. We are a bit disappointed to see the number of holdings is currently high at around 120. This may provide the fund with better liquidity but it also means each company held in the fund has a lower impact on the overall performance.”

Despite the fund’s quirks, Parsons likes its ability to perform gently and “tick over”.

Schroder US Mid Cap has a clean OCF of 0.91 per cent.

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