On the one hand there is the view held by multi-asset manager David Jane, who believes we could be on the verge of a decade-long bull run in risk assets; on the other there is the more sceptical Mark Dampier, who has warned investors against selling defensives in favour of cyclically focused funds. Depending on what side of the fence you are on, here are some options you may like to consider for your portfolio:
Bullish investor
Although it had an extremely tough time of it last year, Sanjeev Shah’s Fidelity Special Situations fund is beginning to find its way back into investors’ buy-lists.
With losses of 13.97 per cent, the £2.4bn portfolio was one of the worst performers in its IMA UK All Companies sector last year. While it was Shah’s overweight in banking stocks – including top-10 holdings Lloyds and HSBC – and other cyclical areas such as media and retail that led to this underperformance, his portfolio is now full of cheap, unloved stocks that many are tipping to rebound significantly if the markets continue going in the right direction.
The fund is up 16.78 per cent in 2012, meaning it has already recovered all of the losses it sustained last year.
Performance of fund vs sector and index since 1 January 2011
Source: FE Analytics
In spite of the fund’s surge, Shah believes many of the stocks in his portfolio aren’t even close to fair value yet – particularly with regard to Lloyds, Pearson and BSkyB.
In a recent interview with FE Trustnet he said: "Everything I see suggests that a significant market sell-off is unlikely in the short-term; all sentiment points to a continued improvement for equities."
"I don’t think the markets will go up in a straight line, I’d take a correction as a reason to add to my holdings rather than as an end to the rally."
According to FE data, Fidelity Special Situations’ biggest overweight is in media & technology, which makes up 11.2 per cent of the portfolio, compared with 6.9 per cent in the average UK All Companies fund. The portfolio is underweight commodities and defensives, including the tobacco sector.
The fund has a minimum investment of £1,000 and a total expense ratio (TER) of 1.69 per cent.
Bearish investor
For investors wary of the sudden spike in risk assets but that still want to maintain exposure to the equity market, Fidelity Enhanced Income is a good option. While Neil Woodford and Francis Brooke’s sector-leading Invesco Perpetual High Income and Trojan Income funds are the more obvious defensive candidates, David Jehan and Michael Clark’s £44m portfolio has turned heads since its launch just over three years ago.
Although it has marginally underperformed its sector average and benchmark since February 2009, the fund's low volatility and high yield make it an attractive option for cautious investors.
The managers’ commitment to keeping the yield at around 7 per cent and defensive outlook led to significant underperformance during the QE-fuelled rally of 2009 and 2010. However, the high level of income and its strong performance last year have seen it close the gap on many of its rivals.
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
According to FE data, it is the least volatile fund in the entire IMA UK Equity Income sector since its inception and was the fifth-best performer in 2011, with returns of 6.36 per cent. Its one-year historic yield currently stands at 7.23 per cent, which is the third-highest in its entire sector.
Unsurprisingly, the fund has a significant overweight in pharmaceuticals, which make up 11.4 per cent of the portfolio, as well as other defensive sectors including tobacco and telecoms. The likes of GlaxoSmithKline, AstraZeneca, Vodafone and Imperial Tobacco Group are all top-five holdings in the fund.
The managers have a relatively high cash weighting at present – around 10 per cent – which again reflects the portfolio’s cautious style.
With £44m assets under management (AUM) the fund is relatively small for a UK Equity Income portfolio – particularly when compared with Woodford’s £12bn Invesco Perpetual High Income fund. However, the benefit of having a proven three-year track record and the growing reputation of Jehan and Clark should see the fund swell in size over the coming months.
Fidelity Enhanced Income has a minimum investment of £1,000 and a TER of 1.78 per cent.