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Ben Willis: Three funds to keep an eye on in the second half of 2016

06 July 2016

Whitechurch Securities’ head of research tells FE Trustnet which funds appear to be trading on attractive valuations and look appealing from a risk/reward perspective as we head into the third quarter.

By Lauren Mason,

Reporter, FE Trustnet

Infrastructure, financials and European value funds are areas of the market that could be appealing for long-term investors at the moment, according to Ben Willis (pictured).

The head of research at Whitechurch Securities says that, while the outcome of last month’s EU referendum has led to a wide variety of ‘unknowns’ across markets, it has resulted in some areas dropping to attractive valuations.

Since the start of the year, there has been a marked divergence between the global and domestic-facing UK stocks as a result of Brexit-related fears.

Performance of indices in 2016

 

Source: FE Analytics

Following the shock announcement of a ‘leave majority’, sentiment towards certain areas of the UK market has suffered further, with companies and property-related stocks coming under immense amounts of pressure.

While Willis believes that it is prudent to hold some steady positions - particularly at such a turbulent time - he points out that investors shouldn’t ignore potential value plays either.

In the below article, he talks through three of the funds that he will be keeping a close eye on as we head into the second half of the year:

 

Legg Mason IF RARE Global Infrastructure Income

This fund was officially launched yesterday but is managed by the experienced and specialist team at RARE Infrastructure.

“One area of the market that we’ve increased our allocation to over time is infrastructure. We’ve just allocated to Legg Mason’s new launch, which is targeting a yield of around 5 per cent,” Willis said.

“We’ve seen that, even though we have monetary policies across several economies, it hasn’t really had the desired effect when it comes to kick-starting growth, but one of the ways you can do that is via fiscal structure.”

“We think infrastructure spending is one way to generate GDP growth so we see that as being an increasing area for investment, that’s why we’ve allocated to this new fund. Plus, it’s giving a hefty yield and we’re still in this ‘lower for longer’ interest rate environment, so yielding assets are going to remain in demand.”

The fund is headed up by RARE’s Nick Langley and Richard Elmslie, who combine a combination of bottom-up stock-picking and top-down macro analysis to shape the fund’s portfolio.

It will hold between 30 and 60 high quality holdings at any one time, which are chosen based on their risk-adjusted return to equity, which the managers calculate through a stock’s expected and required return over a five-year period.

The £26m fund will predominantly hold stocks that resides within the water, gas and electricity areas of the market – in terms of region, these will be spread across Europe, North America and Asia Pacific as well as other developed markets. While it is able to invest outside of developed regions, this allocation is limited to 20 per cent at any one time.

Given the fund was only launched yesterday, ongoing charges data has not yet been released.


Neptune European Opportunities

Managed by FE Alpha Manager Rob Burnett since 2005, this one crown-rated fund has endured a torrid time over the years, having found itself in the bottom quartile over one, three, five and 10 years as well as over the last one, three and six months.

Over the last five years, in fact, it has made 3.94 per cent while its sector has returned 33.79 per cent.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

Given its drop in valuation recently though, Willis says that this could be a good fund to keep an eye on as we head into the second half of the year.

“I wouldn’t be recommending this fund to somebody who is looking over a 12-month view, but now could be a good entry point for value areas of the market from a long-term perspective,” he explained.

“The European value space is good for beaten up, cheap, domestically-focused and cyclical areas of the market; they’re going to have a torrid time now and they’re probably going to have a torrid time over the next six months.”

“But, if you buy them at these levels there’s a good chance you’re buying them when they’re completely out of favour. It’s a good entry point and, if you hold them for the long term, you could see some exceptional returns because we know the markets will recover, economies do recover, but how quickly that is going to happen who knows.”

The head of research describes Burnett’s £355m fund as “super punchy” due to the number of binary calls he has made over the years.

Currently, the fund has a 33.33 per cent weighting in financials, 22.29 per cent in basic materials, 19.94 per cent in industrials and smaller weightings in consumer products, utilities and telecom, media & technology sectors. Its largest individual holdings include the likes of Societe Generale, Royal Dutch Shell and Spanish banking group Banco Santander.

As to be expected from this 62-stock fund, it has a higher-than-average annualised volatility over the last five years. It also has a bottom-quartile Sharpe ratio, which measures risk-adjusted returns.

Neptune European Opportunities has a clean OCF of 0.86 per cent and yields 1.06 per cent.


Jupiter International Financials

Willis bought a small position in this fund a while ago to gain exposure to financials, following the expectation that the Federal Reserve would raise interest rates at the end of last year.

While the Fed only hiked once and the UK looks less likely than ever to follow suit though, the head of research still believes that now could be a good time to enter into this area of the market.

“You would think that financials is a bad environment to invest in now - how can banks and insurance companies generate margins when we’re in a cycle whereby there are no interest rates so they can’t generate money through savers?” Willis continued.

“It’s not a conducive backdrop but that’s reflected in their prices and they haven’t had a strong rally for several years, even though we’ve seen the banking sector going through this restructuring phase since 2008.”

To play this area of the market, Willis has opted for FE Alpha Manager Guy de Blonay’s four crown-rated Jupiter International Financials fund, which is £37m in size and consists of 66 holdings.

The manager invests predominantly in stocks in developed markets – 41.3 per cent of the portfolio is in North America, 38.1 per cent is in Europe and 24.4 per cent is in the UK. It also has smaller weightings in Asia Pacific ex Japan, the Caribbean & Latin America and emerging Europe.

The fund has underperformed its MSCI ACWI/Financials benchmark over one, three and six months. However, it has outperformed both its benchmark and the MSCI AC World index over the longer term, beating both by 28.66 and 7.56 percentage points respectively with a total return of 65.3 per cent.

Performance of fund vs benchmark and index over 5yrs

 

Source: FE Analytics

The fund also boasts strong risk metrics, having outperformed its benchmark in terms of annualised volatility and Sharpe ratio over the same time frame.

“Again, this [fund] is a bit contrarian and I wouldn’t expect it to outperform or deliver any meaningful returns over the next 12 months or so, but it’s a long-term play because I like to think that we’ll move back into a normalised monetary cycle and interest rates will go up eventually,” Willis added.

Jupiter International Financials has a clean OCF of 1.13 per cent and yields 1.4 per cent.

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