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The ‘aggressive’ funds the experts are backing for 2016

23 December 2015

A panel of regular FE Trustnet commentators provide their fund picks for the more bullish investor as we head into the New Year.

By Lauren Mason,

Reporter, FE Trustnet

This year has certainly given investors a turbulent ride thanks to the plummet in commodity prices, the run-up to the UK general election, the China slowdown and the rate hike from the Federal Reserve, to name but a few headwinds.

While this may lead to heightened levels of caution for some investors as we head into the New Year, those with a more contrarian bent may decide to up the ante and adopt a more aggressive approach to boost returns.

As such, we asked a panel of five financial experts which funds could be good picks for the more bullish investor in 2016.

 

Neptune Russia & Greater Russia

Ben Willis, head of research at Whitechurch Securities, says Robin Geffen’s £129m Neptune Russia & Greater Russia fund is not for the faint-hearted and should only be a modest position even for those who can stomach the risk.

The growth fund, which focuses on large stocks in the region, has performed strongly over the long term, having outperformed its MSCI Russia Large Cap benchmark significantly over the last decade to provide a total return of 16.2 per cent.

Performance of fund vs benchmark over 10yrs

 

Source: FE Analytics

However, the fund’s area of focus means it can be quite volatile. It has also underperformed over the last five years as a result of heavy falls in 2011 and 2014, when it lost 28.36 and 46.56 per cent respectively.

“Given the extremely low levels that the market is trading on, this fund does provide the potential to rally strongly in the short term,” Willis said.

“It appears that things are improving from a top-down perspective – there has been a thaw in relations between Putin and the West recently and the recent further decline in the oil price did not affect Russia’s energy-dominated market. The fund does come with a health warning and even though the short-term potential is there, investors in this fund should be holding it for the long term at least.”

The fund has a concentrated portfolio of 44 holdings, with 39.29 per cent of assets in the basic materials sector. The rest of the portfolio is 19.86 per cent in telecom, media & technology, 18.8 per cent in consumer products, 13.97 per cent in financials and 4.86 in industrials, with the remainder being held in cash.

Neptune Russia & Greater Russia has a clean ongoing charges figure (OCF) of 1.53 per cent and yields 3.36 per cent.

 

Fidelity Emerging Markets

The five crown-rated Fidelity Emerging Markets fund is headed up by FE Alpha Manager Nick Price and aims to provide a strong return through companies in regions that are experiencing rapid economic growth, including the likes of Africa, the Indian sub-continent, Latin America, south-east Asia, Europe and the Middle East.

“This is a contrarian stance but after five years of underperformance from emerging markets relative to developed markets, I believe the Fidelity Emerging Markets fund is well placed to benefit from an eventual recovery in these markets,” Meera Hearnden, senior investment manager at Parmenion, said.

“While rising interest rates in the US would act as a headwind for emerging markets in the short term, these markets have fallen significantly in recent years and are arguably attractively valued. The fund has a disciplined bottom-up process focusing on quality growth stocks and is managed by an extensive and experienced team.”

The £880m fund was launched by Price in 2010 and has significantly outperformed both its sector average and its benchmark over this time, providing a total return of 18.9 per cent compared to the MSCI Emerging Markets’ 4.88 per cent fall and the IA Global Emerging Markets’ average loss of 5.86 per cent. It also achieved a top-decile return in 2013 in the throes of the taper tantrum.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

“I would expect the fund to outperform in uncertain market conditions and when there is a gradual recovery in emerging markets which could finally begin sometime in 2016,” Hearnden added.

Currently, the 81-stock portfolio has its largest regional weighting in the Pacific Basin at 47.5 per cent, followed by South Africa at 17.63 per cent, Asia Pacific at 14.69 per cent and North America at 7.89 per cent.

Fidelity Emerging Markets has a clean OCF of 1.07 per cent.


HMG Global Emerging Markets

Simon Evan-Cook, senior investment manager at Premier, believes that Marc and Paul Girault’s €14.8m HMG Global Emerging Markets fund could be an interesting option for those who are feeling brave.

“It was launched last year into terrible conditions for its style and focus, and the returns so far reflect that. That hasn’t put us off though, and we bought into the fund for the first time in September: we are paid to pick funds for the future, not for the past, and we believe there is significant value locked up in this portfolio,” he said.

Since its launch in November last year it has indeed lost 30.85 per cent, compared to an average loss of 16.96 per cent in the FO Equity Emerging Markets sector and its MSCI Emerging Markets benchmark’s loss of 16.52 per cent.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

The fund adopts a quality focus and invests in the emerging market subsidiaries of well-established developed market companies that have a history of successful overseas expansion.

“The reason the fund does this is that these companies typically offer developed market standards of corporate governance and can benefit from the expertise of the parent company,” Evan-Cook explained.

“When sentiment finally turns less sour on emerging markets (which it may or may not be in 2016) we think this is a fund that will fare well.”

Since launch, the fund has managed to achieve a top-quartile downside risk ratio, which measures its potential to decline in price during negative market conditions, as well as a top-decile annualised volatility.

It is in the bottom decile for its maximum drawdown and its Sharpe ratio, which measures risk-adjusted return, over the same time frame though.

HMG Global Emerging Markets has a clean OCF of 1.9 per cent.

 

Charlemagne Magna Latin America

It won’t have escaped investors that Latin America has endured a torrid time over the past couple of years, particularly in relation to Brazil as a result of plummeting commodity prices and the Petrobras scandal.

Rob Morgan, pensions and investment analyst at Charles Stanley Direct, says that although things are unlikely to get better in the region very quickly, they are unlikely to get too much worse.

As such, he has chosen the four crown-rated Charlemagne Magna Latin America fund as his aggressive play for next year.

“This fund has been overweight Mexico so it has escaped the very worst of the pain, but it is still significantly down,” he explained.

Morgan says that shares in large institutions in the region aren’t necessarily the most appealing investment propositions as many of the businesses do little to capture the opportunities presented by the region’s favourable demographics.

As such he believes there are more exciting opportunities further down the cap scale and says that emerging market specialist Charlemagne Capital has an edge over other funds investing in this area.

Headed up by Ian Simmons since 2009, the €22.1m fund has outperformed its MSCI Emerging Markets Latin America 10/40 index over three, five and 10 years, and has more than doubled its benchmark’s performance over the manager’s tenure.

Performance of fund vs sector and benchmark over management tenure

 

Source: FE Analytics

Charlemagne Magna Latin America has a clean OCF of 1.81 per cent.


Downing UK Micro-Cap Growth / Livingbridge Wood Street Microcap

Ben Conway, fund manager at Hawksmoor, doesn’t think there is such a thing as a fund that is suitable for only one type of risk-adjusted portfolio, as he believes portfolio construction is as important as fund picking in terms of risk levels.

However, he is keen on micro-cap equity space as it is currently trading on a discount relative to the rest of the listed market, which he says is large relative to history and is unjustified by its significant array of growth prospects.

“Both Downing and Livingbridge are specialist micro (note: not small) cap investors,” Conway said. “It’s hard to split these two funds, hence the joint recommendation. There is a very particular set of skills required when investing in very small companies – not dissimilar to private equity.”

“It is therefore no coincidence that Livingbridge is home to the UK largest specialist private equity teams. Both funds will cap their sizes at relatively small amounts of assets (Downing at just £30m and Wood Street will pause at £80m), meaning they are out of reach for large fund of funds investors – another attractive quality.”

The £21.2m Downing UK Micro-Cap Growth fund has a five-crown rating and has been managed by Judith MacKenzie since 2011. Over this time it has returned 91.88 per cent, outperforming its peer average in the IA UK Smaller Companies sector by 25.68 percentage points.

The £37.8m Livingbridge Wood Street Microcap fund also has five FE crowns, and has been managed by Ken Wotton since 2009. It is also benchmarked against the IA UK Smaller Companies sector average and has outperformed it over manager’s tenure, returning 194.73 per cent against its sector’s return of 181.47 per cent.

Downing UK Micro-Cap Growth has a clean OCF of 2.35 per cent and Livingbridge Wood Street Microcap has a clean OCF of 1 per cent.

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