With interest rate hikes looming on the horizon and the threat of a Greek exit hanging over investors’ heads, you would be forgiven for adopting a more bearish stance until markets become more settled.
In fact, in an article last week, FE Trustnet explored the surging popularity of developed markets such as Japan and Europe, as investors take shelter under the reassuring umbrella of quantitative easing.
However, blindly following the herd into a trade is rarely a good idea and it’s often worth searching for more overlooked areas of the market to offer some diversification from where everyone else is investing.
In light of this, AXA Wealth’s Adrian Lowcock (pictured) provides three potential fund ideas in the more unloved areas of the market.
Old Mutual UK Alpha
Old Mutual UK Alpha, which has been run by Richard Buxton since 2009, holds various sectors that aren’t exactly flavour of the month, including financials, which is his largest weighting, basic materials, industrials and utilities.
However, Lowcock believes that the £2.1bn fund is most likely to benefit from its holdings in oil stocks, which have been unloved since the price of the resource started plummeting last year, and mining stocks.
“I think [oil] could be a little premature to consider but, in that vein of thought, the mining sector is starting its road to recovery and it’s still not fully appreciated, so you could look at that,” Lowcock said.
“You can either get a commodities fund or you could go for a fund like Old Mutual UK Alpha, which has got an exposure to that part of the market. [Buxton] caught it a bit early but he’s waiting for the restructuring and the recovery to come through.”
The five FE Crown-rated fund is perhaps for the stronger-stomached investor as, over five years, it has a bottom-quartile annualised volatility of 13.73 and a third-quartile maximum loss of 16.27 per cent.
It has delivered a strong performance, however, delivering a total return of 78.96 per cent compared to its FTSE All Share benchmark’s 59.55 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund holds a concentrated portfolio of between 30 to 40 stocks at any one time and Buxton aims to choose investments that have been damaged by short-term noise, meaning their share prices do not fully represent the long-term value they hold.
To choose these companies, the star manager looks for cheap shares or those that are experiencing a dip in performance, as well as companies that are undergoing change or a transition process.
The growth fund has been awarded an ‘AA’ rating by Square Mile for Buxton’s long-term approach and bottom-up stock selection process.
The Square Mile research team said: “Over the years, the manager has gradually refined his investment process and philosophy to develop his position as one of the more highly regarded managers investing in larger capitalised UK companies.”
“The focus on larger capitalisation companies differentiates it from many other UK equity funds, a number of which have relied upon the recent strength of smaller and medium-sized companies to outperform. The manager’s approach is far sighted and it can take time for his ideas to be rewarded.”
Old Mutual UK Alpha has a clean ongoing charges figure (OCF) of 0.78 per cent.
Emerging markets have been unloved for a while due to slowing growth economic growth and geo-political tension, as well as the risk created by the prospect of higher US interest rates.
At the moment, Lowcock says investors are likely to be more bearish on the sector than ever due to the macro headwinds in the markets at the moment.
“[Emerging markets] are probably a contrarian call because investors are nervous about how the interest rates rise in the US will impact them,” Lowcock explained.
“They got a bit over-valued and they’ve just been unloved. It’s certainly out of favour at the moment and people are simply waiting for the rate rises to be moved forwards.”
For this area of the market, he recommends JPM Emerging Markets, which is managed by Leon Eidelman and Austin Forey.
While the fund’s performance looks somewhat lacklustre over the last few years, it has managed to outperform its average peer in the IA Global Emerging Markets sector by 9.72 percentage points over the managers’ tenure.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
However, investors find the fact that JPM has one of the longest running associations with this sector appealing, as it means the management team are highly experienced.
What’s more, the team can utilise their large global resource for country-specific knowledge.
The £1.1bn fund consists of 50 to 70 stocks at any one point, meaning that there are enough stocks for Eidelman and Forey to diversify across regions.
The largest weighting in the portfolio is currently to the Pacific Basin, which makes up 36.7 per cent of asset. Other geographical weightings include Asia Pacific at 20.3 per cent, South Africa at 17.2 per cent, the Americas at 14 per cent and Europe at 9.4 per cent.
JPM Emerging Markets has a clean OCF of 1.18 per cent.
Neptune Russia & Greater Russia
As an oil-exporting country that’s embroiled in the Ukraine crisis, Russia isn’t at the top of every investor’s list at the moment.
However, for the very contrarian investor, Lowcock says that the region should be considered as a low-cost investment opportunity.
“Country-wise, somewhere like Russia is cheap, arguably cheap for a reason but it is cheap. It’s recovered somewhat so it’s no longer the bargain that it once was, but it’s probably valuing in a lot of the risks and those things change. They can change quite rapidly sometimes and the change isn’t necessarily foreseen, so it would be a consideration,” Lowcock said.
He says investors would be better off going with a highly-experienced manager, such as Neptune’s Robin Geffen, if they are considering investing in the troubled region.
“Robin Geffen knows that market very well. It’s a very specialist fund so you wouldn’t be able to hold too much of your portfolio in there, perhaps 1 or 2 per cent I’d say,” Lowcock added.
Over 10 years, the £170.1m fund has more than doubled the performance of its MSCI Russia benchmark, achieving total returns of 93.6 per cent.
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
The growth fund mostly consists of large-caps, which are chosen through bottom-up stock selection. Geffen aims to ensure that no more than 30 per cent of the fund’s market value is invested in any one sector and ensures that stock weightings remain between 1 and 4 per cent.
Geffen’s investment process takes into account five principles, which include a global economic overview, global sector views, asset allocation and stock selection, in-house research and portfolio construction. This ensures that top-down investment methodology is incorporated into the stock-specific selection process.
Neptune Russia & Greater Russia has a clean OCF of 1.53 per cent.