Investors could consider adding to funds that focus on value stocks, equity income, financials and high yield bonds in the wake of the stimulus announced by the Bank of England yesterday, according to professional fund pickers.
In a keenly awaited announcement, the Bank unveiled a series of measures designed to support the UK economy after the vote to quit the European Union. These included a cut in the base rate to a new historic low of 0.25 per cent, an expansion in the quantitative easing programme to £435bn and a new Term Funding Scheme to help the impact of lower rates reach the real economy.
The stock market responded positively to the news with the FTSE All Share climbing after the announcement was made – although the prospect of looser monetary policy meant that sterling took a fresh tumble against the dollar. FE Trustnet covered the experts’ reactions to the news in an article yesterday but in the below we asked five fund pickers to highlight the portfolios they think are likely to benefit the most.
UK growth - Aurora Investment Trust
Tom Yeowart, manager of Troy Asset Management’s Spectrum fund, says that the response from the Bank of England “clearly highlights” that the UK’s economic outlook is becoming more challenging. However, he argues the short-term turmoil stalking markets at the moment could create good long-term opportunities.
One fund he thinks is well placed to take advantage of this is Aurora Investment Trust, managed by Phoenix Asset Management.
As the chart below shows, the trust has outperformed its average peer since Phoenix took over at the start of the year, although it is lagging the FTSE All Share. Manager Gary Channon has a strong track record on his offshore Phoenix UK fund and uses a value philosophy inspired by the teachings of Warren Buffett, Charlie Munger, Benjamin Graham and Phillip Fisher.
Performance of trust vs sector and index under Phoenix
Source: FE Analytics
“The trust follows a value based approach to investing and had over 20 per cent in cash prior to ‘Brexit’. Since the referendum result, much of that dry powder has been deployed in companies such as Bellway and Lloyds on valuations that are at a significant discount to Phoenix’s assessment of the companies’ intrinsic value,” he explained.
“Although the share price performance of these companies is likely to remain volatile in the short term, greater dispersion does create good opportunities for long-term focused value investors like Phoenix.”
Aurora Investment Trust has a 2.38 per cent ongoing charge and is trading on a 7.2 per cent premium to net asset value. It is not geared.
UK equity income - Threadneedle UK Equity Income
Adrian Lowcock, investment director at Architas, points out that equity income investing has become increasingly popular in the post-financial crisis world, especially after rate cuts and QE pushed bond yields down to historic lows.
While 2016 has seen many UK companies have been cutting dividends or paying them out of previous year’s profits, Lowcock expects further falls in interest rates to make equity income more attractive – particularly as the style tends to have a defensive bias.
“Threadneedle UK Equity Income manager Richard Colwell combines his economic outlook with detailed company analysis to decide where to invest,” he said. “The portfolio has exposure to defensive companies such as pharmaceuticals and tobacco. He supplements this core portfolio with exposure to more contrarian investments and tends to have a bias towards mid-cap stocks.”
Performance of fund vs sector and index over
Source: FE Analytics
As the chart above shows, Threadneedle UK Equity Income has outperformed both its average peer and the FTSE All Share over the past five years with a 77.87 per cent total return. The fund has shown itself able to outperform in rising, flat and down markets during the past decade.
The fund has a 0.82 per cent clean ongoing charges figure (OCF) and yields 4.10 per cent.
International equity income - Jupiter Asian Income
Richard Troue, head of investment analysis at Hargreaves Lansdown, says the main message for investors should be that ultra-low interest rates will be here for some time to come and a rise will not be seen for at least the rest of this decade, and possibly longer. Against this backdrop, he agrees that equity income is likely to benefit, although investors might want to consider broadening their exposure to beyond the UK.
“All in all, investors are going to have to get used to earning very little on their cash for much longer than they ever thought. A consequence of this is that investors in search of a return on their capital are being forced into riskier assets. Money is like water – it always flows somewhere. In my view its destination for the foreseeable future will be the stock market – and in particular equity income,” he explained.
“Exposure to UK equity income funds will probably be vital for most UK investors, but some geographic (and currency) diversification is likely to prove useful too. Jupiter Asian Income could be a good option in this regard. It offers exposure to Asia’s developed and emerging economies where prospects are not linked to the UK or the actions of Mark Carney. The region includes companies with exciting growth prospects and potential to grow dividends over time; and those which are more established and already able to sustain high dividends.”
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund only launched in March this year, which means it has a very short track record; it is outperforming over this time. Manager Jason Pidcock, however, has a long track record in Asian equity income investing and his 99.56 per cent return over the past decade is higher than both his peer group composite and the index.
Jupiter Asian Income has a 0.98 per cent clean OCF and is yielding 3.40 per cent.
Financials – Aptus Global Financials
Rob Morgan, pensions & investments analyst at Charles Stanley Direct, concedes that the new historic low base of 0.25 per cent does not do banks any favours but adds that other measures announced by the BoE could prove beneficial. For this reason, he highlights Aptus Global Financials as a potentially attractive fund.
“In order to ease the pressure on the banking system and to help the transmission of monetary policy, the Bank of England has announced a Term Funding Scheme, which will enable banks to access funding at levels close to the bank rate. This is a key measure, because unlike the previous Funding for Lending Scheme, there seem to be no strings attached,” Morgan said.
“So although banks do not benefit from low rates on the savings side this should help them. Aptus Global Financials is a fund we like specialising in this area, it’s had a tough time but should hopefully now make the most of value in the sector.”
Performance of fund vs index since launch
Source: FE Analytics
While the £199.7m fund has lagged the MSCI AC World Financials index by around 8 percentage points since launch, this is a relatively recent development and the fund was ahead of the index (which is not its benchmark) for most of this period.
It currently has around 30 per cent of its portfolio in the UK although its largest geographical weighting is to Europe. There’s also 14 per cent in US financial companies and just under 10 per cent in stocks in Brazil, Russia, India and China.
Aptus Global Financials has a 1.27 per cent clean OCF and is yielding 5 per cent.
High yield bonds – Royal London Sterling Extra Yield
Another area of the market that Morgan thinks could perform well in light of the Bank’s move is high yield bonds. Here, he likes Eric Holt’s £1.3bn Royal London Sterling Extra Yield fund.
He said: “High yield bonds are less sensitive to interest rates than sovereign/high quality bonds and more dependent on economic health. These should benefit from a benign environment of low rates and low corporate defaults, which given regular stimulus amid a turgid economic environment the yields on offer of 5-6 per cent plus seem decent. My fund pick is Royal London Sterling Extra Yield given Eric Holt’s experience and wide investment remit.”
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund resides in the IA Sterling Strategic Bond sector and has been a top-quartile performer over the past three, five and 10-year periods.
It is in the peer group’s bottom quartile over 12 months; the chart above shows how the higher-risk nature of the fund means it can suffer in more risk-adverse markets, such as the crash of 2008. However, it has also tended to make high returns when markets rally from such testing times.
Royal London Sterling Extra Yield has a 0.84 per cent clean OCF and is currently yielding 7.23 per cent.
