Investors could be forgiven for thinking that the search for value is fruitless as we head into the New Year, according to the team at Brewin Dolphin.
The investment management firm says that the markets remain murky following a series of global tailwinds throughout the year including the collapse in commodity prices, the China slowdown and and the anticipation of a rate rise from the Federal Reserve.
The team adds that emerging markets look cheap on a valuation basis but are higher risk, while high-yielding equities offer attractive levels of income but in many cases are dependent on distressed areas of the market. Meanwhile, those areas of the market that look fundamentally attractive, such as US equities, have valuations that many deem to be stretched.
In light of this, Brewin Dolphin provides five recommended funds across different areas of the market that it believes could do well over the coming year.
UK - Liontrust Special Situations
Managed by FE Alpha Manager duo Anthony Cross and Julian Fosh, the £1.6bn fund aims to provide long-term value growth through UK stocks spanning across the market cap spectrum.
It has performed well since its launch, having achieved top-quartile total returns in seven out of 10 years over the last decade. As a result, it is top-decile over the last decade and outperforming its peer average by very comfortable margin.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“As markets continue to deal with earnings growth disappointments, fund managers are targeting companies with robust pricing power. This is often achieved through superior intellectual property, recurring cash-flow streams or well established distribution networks. Returns should remain resilient by shielding earnings from these headwinds,” the team at Brewin Dolphin said.
“Liontrust, via Anthony Cross and Julian Fosh, has developed a proprietary approach called ‘Liontrust Economic Advantage’ to target these characteristics. This forms the bedrock of the Liontrust Special Situations strategy and has helped the fund through the market cycle, demonstrating both its resilience in down markets, outperforming 80 per cent of the time, and its impressive capture of returns in rising markets too.”
The fund aims to invest in high-quality stocks but, because of its ability to invest across the cap spectrum, the team warns that it could lag behind a cyclically-driven rally as different sized-companies respond will respond differently in varying marketing conditions.
Liontrust Special Situations has a clean ongoing charges figure (OCF)
Europe – F&C European Small Cap ex UK
Europe has been a popular markets for investors this year as a result of improving economic data in various countries, a low euro and the ECB’s QE programme.
The team at Brewin Dolphin believe that the region will remain a bright spot as we head into 2016, and that any depressed company profits in the region could well reverse.
Because of its positive view on Europe, the team believes that a small-cap play on the region could benefit investors, and as such would recommend F&C European Small ex UK as a means to capitalise on under-researched areas of the market.
“The fund has high exposure to strong European consumers and to a range of sectors, such as travel and leisure and German mortgage finance,” it said.
“The fund focuses on companies with long-term competitive advantages and only invests in management teams that have a history and culture of allocating company money for the benefit of shareholders.”
Managed by Lucy Morris and Sam Cosh, the fund aims to deliver long-term growth through any companies that are in the bottom 25 per cent of the total market capitalisation of all publicly-listed companies in Europe.
The fund was launched in March this year and it has since returned 5.38 per cent, outperforming its Euromoney Smaller Europe (ex UK) index by 2.15 percentage points. It remains behind its sector average though, which has returned 7.44 per cent over the same time frame.
Its largest holdings currently consist of shipping and transport group ICG, Irish agricultural business Origin Enterprises, German banking company Aareal Bank and Swiss financial institution Leonteq.
F&C European Small ex UK has an ongoing charge of 1.85 per cent.
US – Artemis US Select
While many investors have been deterred by high valuations in the US, the Brewin Dolphin team says that it shouldn’t necessarily be discounted as a hunting ground for opportunities, as its economic performance is strong and the performance of its listed companies is encouraging.
As such, it recommends Cormac Weldon’s Artemis US Select fund, which was launched last year.
“The fund is highly pragmatic in its approach to building portfolios, such as its substantial stake in Amazon where standard valuations look eye-watering but have been justified by its apparently limitless growth potential,” the team said.
“At the other end of the scale, the fund is buying companies such as Reynolds Tobacco where the earnings profile looks more certain and, given its bond like characteristics, is a hedge against further delays in interest rate rises.”
Since its launch, the £316m fund has returned 20.09 per cent, almost doubling the performance of its peer average in the IA North America sector. It is also in the top decile for its alpha generation and its Sharpe ratio, which measures risk-adjusted performance, over the same time frame.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Almost a third of the fund is weighted in the telecom, media & technology sector, and the likes of Amazon, Alphabet, SanDisk and Apple are in its top 10 holdings.
Artemis US Select has a clean OCF of 0.91 per cent.
Japan – Baillie Gifford Japanese
Japan has been a popular area of the market among investors recently as a result of prime minister Shinzo Abe’s implementation of his economic reform policy dubbed ‘Abenomics’.
“We have a favourable view on Japanese equities heading into 2016. Initially our positive stance was predicated on the aggressive monetary policy pursued by the Bank of Japan, which weakened the currency and propelled the equity market higher,” The Brewin Dolphin team explained.
“More recently, our positive opinion has increasingly relied on the government’s third arrow of structural reforms and the renewed focus on corporate governance and profitability.”
“For investors wishing to access this positive domestic story, the Baillie Gifford Japanese fund is a good option. The fund is run by the highly-experienced and well-resourced Japanese equity team headed by Sarah Whitley. It invests in high-quality businesses with attractive industry backgrounds, strong competitive positions, high-quality earnings and management with favourable attitudes towards minority shareholders.”
Baillie Gifford Japanese is managed by both Whitley and Matthew Brett, and over both managers’ tenure it has returned 53.58 per cent, outperforming its peer average and its benchmark by 28.03 and 28.15 percentage points respectively.
Performance of fund vs sector and benchmark over management tenure
Source: FE Analytics
The £953m fund consists of 61 holdings, almost a third of which are in the industrials sector. It also has an 18.7 per cent weighting in services, 13.1 per cent in hardware, 12.6 in telecom, media & technology and 11.1 per cent in financials. It also has smaller weightings in distributors, pharmaceuticals and real estate & construction.
Baillie Gifford Japanese has a clean OCF of 0.68 per cent.
Asia – First State Asia Pacific Leaders
“Asian equity markets suffered a volatile year in 2015, largely as a result of the Chinese stock market bubble and ensuing crash. We expect this volatility to continue into 2016, as the Chinese economy struggles with its uncomfortable transition to a lower growth trajectory,” the Brewin Dolphin team continued.
“In this environment we would favour the defensive, long-term, high quality approach used by Stewart Investors (previously First State) to navigate these difficult markets, and, specifically, their Asia Pacific Leaders fund.”
The four crown-rated fund is managed by FE Alpha Manager duo Angus Tulloch and David Gait, although there will be a transition process as Tulloch hands over to Gait and new manager Sashi Reddy – this is expected to be completed by July 2016.
However, the company says that the investment process is set to remain largely unchanged, and that the managers will continue to carry out detailed, company-specific research to maximise opportunities in the region.
Over Tulloch’s 12-year tenure, the fund has returned 357.02 per cent compared to its sector average’s return of 194.12 per cent and its MSCI AC Asia Pacific ex Japan benchmark’s return of 200.6 per cent.
First State Asia Pacific Leaders has a clean OCF of 1.55 per cent, but is soft-closed and only available on certain platforms.
