Well, this week is going to be interesting, isn’t it?
Even the most ‘bottom-up’ investor should now be well aware that on Thursday the UK will go to the polls in what is expected to be the most hotly contested general election in a generation with neither the Conservatives nor Labour likely to win an out-and-out majority.
With the increased likelihood of a hung parliament comes uncertainty for financial markets – and this ambiguity within the UK political system is likely to continue after the votes are counted as the various parties attempt to strike-up coalition-forming deals.
Many experts warn that this will cause a poor period for any UK-related assets, be it equities, bonds or sterling, but while studies suggest some private investors have made changes in the build-up to the election, most aren’t taking a huge degree of notice within their portfolios.
Therefore in this article, Fidelity Personal Investing investment director Tom Stevenson highlights five equity funds for varying outcomes of this week’s election – be them positive or negative.
CF Lindsell Train UK Equity – for those who are worried about uncertainty
“Uncertainty is the lot of the stock market investor, of course. If we knew what the future held, our investment careers would be short and successful. But the run up to this election feels more uncertain than most,” Stevenson said.
“The first of our five funds, therefore, focuses on quality and certainty. I have written recently about the increasingly high price which investors are being asked to pay for these characteristics, but it is not surprising that reliable earnings streams should trade at a premium.”
“That’s why I still like Nick Train’s CF Lindsell Train UK Equity fund.”
Thanks to Train’s high conviction, low-turnover approach and focus on high quality companies, with reliable earnings and strong franchises, his five crown-rated fund sits in the top decile of the highly competitive IA UK All Companies sector and has comfortably beaten its FTSE All Share benchmark since its launch in July 2006 with returns of 189.99 per cent.
Those returns have been very consistent as well, given the now £1.5bn fund has been the only fund in the sector to beat the index and boast top quartile returns in each of the last seven calendar years.
Source: FE Analytics
Stevenson added: “A glance at the top stocks in Train’s highly-concentrated, high-conviction fund reads like a shortlist of some of the world’s strongest brands and highest-quality companies.”
“Top of the list is Unilever, followed in the top five by Reed Elsevier, Diageo, Pearson and the London Stock Exchange.”
CF Lindsell Train UK Equity has a clean ongoing charges figure (OCF) of 0.77 per cent.
Liontrust Macro Equity Income – for those who want to avoid politically sensitive sectors
Of course, while market uncertainty is highly anticipated, Stevenson says investors may want managers who have demonstrated an ability to think laterally about what the implications of the vote might actually be.
As a result, his next pick is the £549.7m Liontrust Macro Equity Income fund as its managers, the FE Alpha Manager duo of Jan Luthman and Stephen Bailey, take a thematic approach to the UK market.
“Luthman has highlighted the sectors he expects to be the winners and losers from the latest policy announcements,” Stevenson said.
“He’s avoiding utilities, an obvious victim of Labour’s proposed energy price freeze and a sector that will be hurt by rising interest rates. He also dislikes incumbent high street banks, whose fortunes are being driven by political and regulatory imperatives, but likes the challengers and wealth managers, which will benefit from rising markets and demographic changes.”
He added: “Tobacco gets the thumbs down thanks to smoking bans and squeezed margins while healthcare is a big opportunity thanks to increasing political awareness of the importance and fragility of global health.”
Luthman and Bailey have headed up the Liontrust Macro Equity Income fund, which yields 4 per cent, since October 2003.
Our data shows it has been the best performing portfolio in the sector over that time with returns of 230.06 per cent, beating the FTSE All Share by more than 60 percentage points in the process. It is also outperforming its benchmark over three, five and 10 years. Its OCF is 0.9 per cent.
Artemis Income – for those who think sterling will weaken
One of the more consensual possible outcomes of the election is that the pound starts to devalue due to the political uncertainty.
While this could create a problem for bondholders, he says it present equity funds – especially those run by managers with high exposure to big international earners – with a real opportunity.
“A fall in the pound would play into the hands of UK equity income funds thanks to the increasing value of dollar-denominated dividends, which many of the biggest constituents in these funds pay,” Stevenson explained.
“There is no shortage of good equity income funds but one that consistently performs is the Artemis Income fund, run by Adrian Gosden and Adrian Frost.”
Both Frost and Gosden hold FE Alpha Manager status and their fund is the largest in the IA UK Equity Income sector at £7.3bn. It has also been one of its best performers as Artemis Income sits third in the peer group since Frost took charge in January 2002.
Performance of fund versus sector and index since Jan 2002
Source: FE Analytics
The fund has also outperformed in seven of the last 10 calendar years.
Stevenson added: “This is a big fund, investing in big companies like HSBC, Shell and AstraZeneca so it is likely to appeal to investors who are worried about ongoing uncertainty in the market in the event of a hung parliament or if people start to worry about an EU referendum, for example.”
Artemis Income yields 3.47 per cent and has an OCF of 0.79 per cent.
Fidelity Global Dividend – for those who want to avoid the UK
While Stevenson has so far focused on UK funds, given the upcoming election some investors may want to move their assets out of the domestic market and look for opportunities overseas.
He therefore highlights Dan Robert’s £138m Fidelity Global Dividend fund for those looking to diversify away from the UK.
“The fund has just celebrated its third anniversary, which will put it on the radars of more cautious investors who demand a decent track record before taking the plunge,” Stevenson said.
“During that period, Dan has been comfortably among the top quartile of his peer group and the fund is a great way to tap into the growing number of high-quality companies around the world paying high and sustainable dividends to their shareholders.”
According to FE Analytics, the fund has returned 60.10 per cent since its launch in January 2012, while its benchmark – the MSCI AC World index – and the IA Global Equity Income sector have returned 53.88 per cent and 49.20 per cent, respectively.
Roberts is currently underweight US equities but overweight the liquidity-fuelled European and Japanese markets.
Investors who own the fund do have some exposure to the UK (7 per cent) though no FTSE stocks account for more than 2 per cent of his assets. His UK holdings include GlaxoSmithKline, National Grid, Royal Dutch Shell and British American Tobacco.
Fidelity Global Dividend yields 2.86 per cent and has an OCF of 0.97 per cent.
Old Mutual UK Smaller Companies – for those who want to take risk
Stevenson notes that the while uncertainty seems inevitable, long-term investors who are willing to stomach the volatility may wish to use the doom and gloom to take risk within their portfolios.
“The opposite outcome, greater certainty, seems unlikely but may be the contrarian position to take ahead of the election. The biggest beneficiaries of a majority government might well be the smaller companies which have underperformed in the past year or so and look relatively good value today,” he said.
“We like the look of Dan Nickols’ Old Mutual UK Smaller Companies. He adopts a pragmatic approach, using both top-down macroeconomic and sector analysis together with bottom-up stock analysis.”
According to FE Analytics, the £807m fund has been the third best performing portfolio in the IA UK Smaller Companies sector over 10 years with returns of 279.81 per cent. Its Numis Smaller Companies ex IT benchmark has gained 67 percentage points less over that time.
Performance of fund versus sector and index over 10yrs
Source: FE Analytics
The fund has also beaten the index in eight out of the last 10 calendar years, including the falling markets of 2007, 2008, 2011 and 2014. Its OCF is 1.03 per cent.