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Toogood: Three funds to hold for the upcoming crisis

23 August 2016

Peter Toogood, investment director at City Financial, details three funds to hold for the inevitable upcoming financial crisis.

By Jonathan Jones,

Reporter, FE Trustnet

Value funds offer the best opportunities and downside protection as financial markets head towards a crisis that will make 2008 look like a ‘picnic’ according to Peter Toogood, investment director at City Financial.

The controversial commentator warned last week that the world could be flung into another financial crisis, with central banks around the world continuing to pump money into their respective economies to little avail.

Defensive stocks are on increasingly high valuations, government and corporate bonds yield next to nothing due to low interest rates and quantitative easing but debt levels remain high.

Toogood says companies with reliable earnings streams are being re-rated constantly, making them difficult to quantify, while those with growth potential are being pushed to astronomical levels. As such, he says companies that focus on the ‘real economy’ are the only ones that look attractive and have a chance to outperform if the market tumbles – as he expects.

“If they target the real economy that’s when value works – the only thing that value managers now own is things directly related to an improvement in the real economy that’s why there’s so few of them left,” he said.

With this in mind Toogood suggests three funds he would own in the current climate that are poised to benefit from a pick-up in value, or that hold companies that already so lowly-rated that they have less far to fall if the market does correct.

 

Artemis Global Income

Run by Jacob de Tusch-Lec, Toogood says the Artemis Global Income fund is set up for the same world that Toogood envisages, where value is the only protection for investors.

“That opportunity set works either way - value is not going to go down as much (in a recession) and if the bond yields go roaring they outperform relatively by some distance,” Toogood said.

The £3.1bn fund, which currently has a yield of 3.3 per cent and an ongoing charges figure (OCF) of 0.8 per cent, differentiates itself from many of its peers by steering away from the more traditional income stalwarts and by taking consideration of the macro-economic backdrop.

The fund has been a top quartile performer over three years, and is the top performer in its sector over a five-year period, but has struggled recently compared to its peers.

Despite the EU referendum in June causing an aversion to risk, the fund rose steadily, as de Tusch-Lec said in his latest update that he has tempered his enthusiasm for value, and added a number higher-quality stocks to be resilient in a range of scenarios.

However, it lagged its sector (IA Equity Income) in the aftermath of the vote and is still behind its benchmark (MSCI Global Income), as the below graph shows. 

Performance vs sector and benchmark since the EU referendum

 

Source: FE Analytics

The fund trades on a lower price-to-earnings (PE) ratio that the global market, meaning it still somewhat of a value play. de Tusch-Lec adds that since the referendum, “some of the biggest bounces were in ‘value’ stocks, companies whose shares trade on lower multiples of their earnings than the wider market”.

“Our fund has a significant degree of exposure to value, so this helped its relative performance,” he said.

“If July’s rotation into value stocks continues, and if that buying broadens away from the very cheapest, lowest quality stocks, the fund should benefit.”


 

JOHCM UK Dynamic

Toogood’s next suggestion is JOHCM UK Dynamics fund run by FE Alphas Manager Alex Savvides, as it is moving into the “real economy and value”.

Fund manager Savvides believes misunderstanding of corporate change by the stock market regularly presents opportunities for the “patient, disciplined and unemotional investor”.

He aims to profit from investing in high quality, unloved and under-researched UK companies where there is the highest probability of success but with the highest cash-based valuation support.

The relatively concentrated portfolio (it holds 42 stocks) includes underloved sectors including banks (HSBC and Lloyds), oil (Shell and BP) and supermarkets (Morrisons) in its top ten holdings.

Performance vs sector and benchmark over 5yrs

 

Source: FE Analytics

Over five years, the £334m fund has been a top quartile performer, and it has performed better than its peers in the aftermath of the EU referendum, with value picking up in recent months.

In fact, over the last month the fund, which has a yield of 3.42 per cent and an OCF of 0.86 per cent, has been in the top quartile of its sector returning more than five per cent to investors.

As the graph shows, the fund has returned 105 per cent in the last five years, compared to 77 per cent for the sector (IA UK All Companies) and 70 per cent of the benchmark (FTSE All Share).

However, over a five-year period, the fund has been one of the most volatile, and is in the bottom quartile for maximum drawdown –the most an investor could have lost if buying and selling at the worst possible times – the potential volatile nature of the strategy.


 

Investec UK Special Situations

Last on the list is the Investec UK Special Situations fund run by Alastair Mundy, which Toogood says is a “true contrarian”.

“It is not going to own bond proxies and it is not going to own the high ratio companies because they are too expensive,” he said.

“It’s a nuts and bolts thing. They can see [value] in banks and industrials,” Toogood says, industries that have been unloved for some time.

The £1bn fund, which has a current yield of 2.46 per cent and an OCF of 0.85 per cent, includes the likes of Shell, HSBC, BP and CRH among its top ten holdings.

Performance vs sector and benchmark over 5yrs

 

Source: FE Analytics

The fund has underperformed over three years, and has lagged its sector and benchmark over five years, albeit by a small margin.

Value investing has been out of favour for a number of years, and while the market has performed well, the fund, which takes a contrarian approach – meaning it invests in a different way to general market consensus – has struggled.

Among the sectors that have struggled are the banks, where the fund is overweight, and supermarkets, with the fund owning both Tesco and Morrisons in its top ten holdings.

Square Mile Research said: “Given the contrarian philosophy and long term focus of the fund, investors should be aware that there may be times when its performance deviates substantially from the benchmark, particularly over short to medium time frames.”

If the market collapses, however, the fund could be in-line for a resurgence – as was shown during 2008 when Investec UK Special Situations was a top quartile performer and protected against the downside better than the wider UK equity market.

 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.