The Federal Reserve concluded its two-day rate setting meeting on Wednesday, resulting in an increased expectation that the central bank will hike interest rates in December.
This unsurprisingly put a stop to the recent rebound in the FTSE and the index is ending the week down.
The first of our favourite stories of the week looks at which active funds did the best in this mini rally. From all the FE Trustnet team, have a brilliant weekend.
Active UK funds take a hammering in October, but which have bucked the trend?
Active UK funds’ aversion to natural resources-related sectors has stood them in good stead so far this year and meant they held up much better than the FTSE when ‘Black Monday’ hit markets towards the end of the summer.
However, it also means they have missed out on much of the rebound since the start of September. As a result, canny investors who took advantage of depressed prices after the crash would have been much better off putting their money in a tracker than an IA UK All Companies or IA UK Equity Income fund.
That is unless of course they opted for one of the seven funds highlighted in this article, which have all managed to beat the market since the start of September.
Source: FE Analytics
Standard Life Investments UK Equity Recovery topped the charts, delivering 14.76 per cent in less than a month.
What investors may find even more surprising is that a fund that has done so well in a rebound of cyclical, lower quality stocks, has also beaten the market and its sector since launch in 2009.
M&G Optimal Income: Are its outflows a cause for concern?
Many commentators have long cited the size of the M&G Optimal Income fund as a cause for concern, but its outflows this year have been even more worrying.
In the past six months, the fund has shrunk from £24.5bn in assets under management to £18.4bn, with outflows accounting for £4.7bn of this, or 19.3 per cent of its original amount.
Source: FE Analytics
Martin Bamford, chartered financial planner and managing director at Informed Choice, believes that the outflows appear to have been driven by the fund’s recent underperformance and also concerns about its large size, as well as a wider move by investors from bonds to equities.
“As an investor, I still believe £17bn is far too large for a fund in the IA Sterling Strategic Bond sector. Any future bond sell-off could trigger even greater outflows, but performance is the biggest concern due to the difficulty surely faced by the manager in allocating such a large portfolio in an evolving investment environment,” he explained.
Apollo’s Ryan Hughes added that investors need to be conscious of what is happening to the size of every fund they hold, as a significant change in size could affect the manager’s investment strategy.
Nick Train: Why I’ve just bought more shares in our most painful stock
On Wednesday of last week, shares in education company Pearson put in their worst one-day performance since 1987’s Black Monday, shedding 16 per cent as worse-than-expected book sales in North and South America initiated a profit warning.
Some analysts have cited structural concerns over its business model – in the past, students have been willing to spend $200 on a textbook, but this market is drying up fast, with more now choosing to rent. There’s also a cyclical aspect in play, with an improved US economy meaning fewer college enrolments.
However, FE Alpha Manager Nick Train, who holds the company in his Finsbury Growth & Income Trust, is reluctant to give up on the stock.
He said one reason he remains invested is that Pearson is transferring vital educational data from analogue into a digital format, which he says should be a lucrative venture.
“If Pearson can make this digital transition in the US and then start exporting that know-how globally, as it is uniquely positioned to do, then we’re going to see this as a great growth business. We bought a few more shares [yesterday] in fact, but it’s frustrating,” he said.
Jupiter Merlin: Stick with equity and bond funds – you don’t need exotic alternatives
In this article, John Chatfeild-Roberts, manager of the Jupiter Merlin fund-of-funds range, expressed his concern at the growing popularity of alternative assets, saying they weren’t suitable for the vast majority of investors.
“You have to look really carefully at alternative assets and you have got to know what your risks are,” he said.
“Paul Volker, the esteemed ex-head of the Federal Reserve, made a quip some years after being asked about financial innovation when he said the only useful innovation in finance over his time had been the ATM. What he was taking aim at was derivatives, structured products and other niche things. I know little about ligation funds and aircraft leasing, but they sound pretty flaky to me.”
Chatfeild-Roberts’ funds are overwhelming populated with stock and equity portfolios, with hardly any exposure outside of these mainstream asset classes.
For example, Jupiter Merlin Income – his largest fund, with assets of £3.9bn – has 94.2 per cent of its portfolio in either equity or bond funds; there’s also 0.4 per cent in cash and 5.4 per cent combined in commercial property and gold.
Mark Barnett trust tops UK Equity Income sector for dividend growth
Over on Trustnet Direct, Anthony Luzio looked at research from Winterflood that showed Mark Barnett’s Perpetual Income and Growth Investment Trust has delivered the strongest dividend growth in the UK Equity Income sector over the past 10 years.
The research group added there is no reason why the trust can’t maintain this impressive record, as its most recent financial accounts show it has one of the highest dividend cover ratios in the sector, at 117 per cent.
Barnett has a relatively cautious outlook on the UK economy at present and believes that corporate earnings progression is likely to become more challenging for a number of companies.
As a result, he believes the ability to grow dividends is becoming more and more highly prized.
“He highlights companies such as Reynolds American as an example of a company that has demonstrable pricing power,” Winterflood added.
“Barnett therefore believes that the market is likely to remain ‘range bound’ and, with a number of companies having already announced dividend cuts, he thinks this may be part of a trend.”
“He acknowledges that small- and mid‐cap companies have been positively re‐rated over recent years and believes that there is now a number of large‐cap companies that offer some value.”
Trustnet Direct is offering the chance to win an iPad Air 2 – to be entered into the prize draw, simply complete this short pensions survey.
