Funds taking an absolute return to the UK equity market, small-cap portfolios looking at the UK and oil stocks, and a fund of funds are some of the investments that the editorial team behind FE Trustnet are positive on for the coming year.
As is now a Christmas tradition – although not one we’re expecting to replace the turkey roast, piles of presents or even the Seinfeld-inspired Festivus celebration – the journalists in FE Trustnet team have compiled their 2016 fund picks and given some insight into why they will be buying them in the months ahead.
It’s clear by now that 2015 has been a rocky year for investors, with worries over the timing of the Federal Reserve’s first rate increase and a slowing Chinese economy prompting a jump in volatility. It’s fair to say that most predictions for next year centre on little other than this rough ride continuing.
Next week we’ll be taking a look at how our picks for the past year have done (spoiler alert: someone is up about 15 per cent but someone else has lost a similar amount) but here we will have our eyes facing firmly forward.
Along with the standard disclaimer that past performance is no guide to future returns, we’d like to add that these are the funds that we think will work best for our particular circumstances. Please don’t rush to buy any just because a fund-obsessed journalist is!
Gary Jackson – Henderson UK Absolute Return
Editor Gary said: “You’re probably going to hear this phrase a lot in the following article, but I really don’t know what is going to play out in markets over the coming 12 months. But one thing I do think likely is that we can expect to see continued volatility across the 2016, as the bull run in equities seems to be slowing and concerns such as weakening growth in China dominate the headlines.”
“I’ve decided to stick to home shores for my fund pick this year but was split between two of my existing holdings – CF Miton UK Value Opportunities and Henderson UK Absolute Return. But while I think the Miton offering could well have another strong year – it’s made about 20 per cent over the 2015 so far – I’ve opted for Henderson UK Absolute Return.”
“While I don’t expect this fund to be the highest returner during 2016, given my concerns about the future direction of markets I’ll be judging the success of my portfolio more on downside protection rather pure returns for the foreseeable future. Its aim to produce double-digit returns on average each year while taking as little risk as possible is therefore very attractive to me.”
“Since launch in April 2009, Henderson UK Absolute Return – which is run by FE Alpha Managers Ben Wallace and Luke Newman – has made a total return of 57.40 per cent. This is a higher return than the average absolute return fund, it is significantly below the FTSE All Share’s 108.15 per cent advance.”
Performance of fund vs sector and index since launch
Source: FE Analytics
“But in more difficult years, the fund’s ability to short (and unlike many of their peers, the managers use the short book to generate alpha not just to hedge out risk) comes into its own. In 2011 it made a small positive return when the FTSE All Share fell 3.46 per cent, while it is up 7 per cent this year when the index lost 1.84 per cent.”
“The graph above shows how smooth a ride it has given investors since launch; its annualised volatility has been just 3.99 per cent while its maximum drawdown was 3.42 per cent. In short, I expect Henderson UK Absolute Return to stand up okay if 2016 turns out to be a decent year for equities and deliver on its real job of bringing down my UK equity volatility should conditions remain more challenging.”
Alex Paget – Fidelity UK Smaller Companies
News editor Alex said: “Frankly, I have absolutely no idea what will happen to markets next year. Therefore choosing a fund which I think will outperform over the next 12 months is incredibly difficult so I’m going to pick one that I already own and just pray it doesn’t lose me too much money – namely FE Alpha Manager Alex Wright’s Fidelity UK Smaller Companies fund.”
“Yes, picking a UK fund seems a tad dangerous given there is likely to be the in-out referendum on the European Union at some point in the next two years. Also, choosing one that solely focuses on small-caps could seem equally silly given the bull run in equities is looking increasingly tired and smaller companies have form for falling a long way when sentiment is negative.”
“The fact the fund hasn’t really ever underperformed could also be a concern.”
Performance of fund under Wright
Source: FE Analytics
“Of course, I’m planning on holding it for a very long time indeed because I believe in the manager but I also think Fidelity UK Smaller Companies has the ability to deliver good returns next year and that is because Wright is a value/contrarian investor.”
“Wright has made very strong gains over the years, but more recently he has been fighting an uphill battle in the fact that growth (as a style) has considerably outperformed value stocks. Who’s to say this dynamic is going to change any time soon, but if it does and people start to realise they may be over-paying for the relative ‘safety’ of high quality companies with reliable earnings, then this should turn into a nice tailwind for him.”
“Cue a small-cap crash…”
Daniel Lanyon – MFM Junior Oils Trust
Senior reporter Daniel said: “Like almost everybody on the planet apart from a few select members of the House of Saud I have little insight into where the oil price is going be in 2016 but I expect the current oil oversupply to inevitably diminish at some point in the not-too-distant future. That is why I am buying this high octane small-cap focused fund, which should there be a recovery even to a modest $60-70 range per barrel is likely see a decent return – if history is anything to go by.”
“Of course it is more than likely that this will not happen immediately and so I will be drip-feeding in on a monthly basis rather than a lump sum and I see this as a small position acting as a kicker in a well-diversified portfolio.”
“Managed by Angelos Damaskos since 2004, the £10m MFM Junior Oils Trust has seen strong performance in times of recovery in the oil price following a rout.”
“For example, our data shows MFM Junior Oils Trust more than tripled the FTSE All Share index’s gain between December 2008 to March 2011, and performing in the top decile of all funds within the Investment Association universe. It returned 191.35 per cent over this period.”
Performance of fund and index from Dec 2008 to Mar 2011
Source: FE Analytics
“What I haven’t decided yet is my floor and ceiling for losses or returns. If the fund were to lose or gain a substantial amount – more than 25 per cent, for example – whether I’ll cut my losses or bank my profit depends on how far through the year we are and the explicit oil outlook, as well as that of the broader equity market and global economy.”
Lauren Mason – Unicorn Mastertrust
Reporter Lauren said: “I don’t expect this fund to shoot the lights out over the next year, but this will be my first ever investment and as such I wanted to play it safe with a fund-of-funds such as Unicorn Mastertrust.”
“The fund of investment trusts has been managed by Peter Walls since launch, and while it bombed during the financial crisis under when James Carthew’s took the reins temporarily, Walls quickly managed to turn the fund’s performance around when he took charge again in 2008 with a top-decile return the following year as a result of making punchy calls on trusts trading at discounts.”
“The fund has performed well under Walls, although past performance is of course no indication of future returns, and he has managed to generate top-decile alpha and a top-decile Sharpe ratio over his tenure.”
Performance of fund vs sector since launch
Source: FE Analytics
“The fund consists of 52 holdings, which in my opinion is concentrated enough that the manager can dedicate sufficient time to researching his chosen investment vehicles but isn’t too high-conviction, which suits my relatively cautious stance as an investor.”
“Unicorn Mastertrust also sits in the IA Flexible sector, which allows Walls greater asset class flexibility compared to funds that sit in the other IA Mixed Investment sectors. For instance, the fund currently only has 5.4 per cent invested in non-equity holdings as a result of the blows that bonds have suffered over the last year or so.”
“Walls isn’t afraid to invest across the cap spectrum either and holds the likes of Henderson Smaller Companies Investment Trust and North Atlantic Smaller Companies, which again means he has a broader range of opportunities open to him and this also adds further diversification to the portfolio.”
Anthony Luzio – CF Woodford Equity Income
Trustnet Magazine editor Anthony said: “You’re probably thinking ‘well, this is a boring choice’ and you’d be right.”
Performance of fund vs sector and index since launch
Source: FE Analytics
“But every year that I have been asked to pick an investment in the run-up to Christmas, I have always gone for the raciest option available, whether that was a micro-cap tech stock or a specialist emerging markets fund. It is five years since I started investing and having experienced some spectacular gains, even more spectacular losses and the odd sleepless night, my portfolio has registered a slight positive return.”
“Had I practiced what FE Trustnet preaches and gone for a fund that has delivered consistent if unspectacular gains, regardless of the market conditions, I would be sitting on returns of approximately 70 per cent.”
“I doubt I can tell you anything about Neil Woodford you haven’t heard already, but although his fund is unlikely to be the best performer in the Investment Association universe next year, it is a lot less likely to be one of the worst. And if I have learnt one lesson over the past five years of investing, it is that if you temper your expectations, you are more likely to get what you wished for.”