Taking a long-term approach, managing risk, a focus on dividend growth and a keen sense of valuation are all attributes an investor needs to develop in 2017, according to FE Alpha Manager Hugh Yarrow.
With 2016 almost at an end, managers are preparing for the coming year, which is set to pose further challenges for markets with the inauguration of Donald Trump as president in the US, the triggering of Article 50 in the UK and a number of potentially pivotal general elections in Europe.
Despite some headwinds, 2016 has been largely positive for investors, with both bonds and equities rising throughout the year, as the below graph shows.
Performance of indices in 2016
Source: FE Analytics
However, many investors are concerned that 2017 will be a more testing year, with the return of inflation and the continuing move away from globalisation expected to be key themes.
Yarrow (pictured), manager of the Evenlode Income fund, said: “Looking ahead to 2017 plenty of uncertainties await, not least on the political front: Donald Trump will become US president, there will be several important European elections and Brexit negotiations will continue.” 
“Meanwhile the outlook for economic growth, inflation, currencies, commodity prices and interest rates remains as difficult as usual to fathom.”
To help investors, he has outlined the key factors he will be taking into account before making an investment decision next year.
He said: “Our aim is to protect investors from a wide range of political and economic outcomes rather than make big predictions about the short-term future.”
Firstly, Yarrow says investors need to think long-term, something many people say but is much harder to do in practise.
“When investor time horizons shrink as they have done at several points over the last year - and inevitably will do again in 2017 - it is worth remembering that shares are part stakes in real companies, not just prices on a screen,” the manager said.
“Ultimately, if a company can deliver long-run growth in per share cash flows and dividends, the share price will follow.”
“Patient, business-perspective investment is more relevant than ever in a world that sometimes feels overly obsessed with short-term noise, momentum trends and sector rotation.”
Indeed, had investors sold-off as a reaction to the Brexit vote in June, they would have missed out on the returns made in the subsequent months following the referendum.
Performance of index since EU referendum
Source: FE Analytics
One way investors can make sure they are thinking long term is to focus on dividend growth, as this will likely be an indicator of future returns, says Yarrow.
“Our focus as we head into 2017 will as usual be on asset-light companies with sustainable competitive advantages and long-run growth potential,” he said.
“These characteristics tend to help produce sustainable dividend streams - thanks to healthy, growing free cash flows - and equip companies to cope relatively well in both deflationary and inflationary conditions.”
While the outlook for dividend growth remains murky in the UK, “though much will depend on the outlook for sterling and inflation over coming years,” Yarrow added.
Another long-term measure are those companies that can ‘self-fund’ by investing into research and development, paying dividends while also ending the year with more cash than they started with.
Yarrow said: “They are surprisingly few and far between at present, and are therefore worth cherishing and supporting.”
“Though long-term organic investment costs money today, these investments are the lifeblood of any business and will ultimately drive a company’s long-term competitive strength and cash flow growth.”
Investors should, however, check whether this is being achieved by revenue growth or by debt, which has been relatively cheap to obtain this year thanks to lower for longer interest rates.
“This has created a temptation for companies to borrow money, which can produce a short-term benefit to earnings but ultimately increase risk for long-term investors.”
Finally, Yarrow says he will be looking at valuation-based investment opportunities over the next 12 months.
“In terms of new additions to the Evenlode portfolio, we often find the best valuation opportunities in quality businesses facing short-term industry headwinds, but where cash generation remains strong and long-run growth prospects are good,” he said.
“Or sometimes they may simply be sold off as a result of changing investor sentiment and sector rotation. As the market inevitably gets buffeted around in 2017, we’ll keep an eye out for these opportunities. “
“For the patient investor, unfashionable investments in fundamentally attractive businesses can be some of the most rewarding in the fullness of time.”
Performance of fund vs sector, benchmark and FTSE All Share over 5yrs
Source: FE Analytics
The manager runs the five crown-rated Evenlode Income fund, which has been a top quartile performer over one, three and five-year timeframes.
The £1bn fund has beaten its IA UK All Companies sector by 29.82 percentage points and its IA UK Equity Income benchmark by 28.17 percentage points. Against the FTSE All Share, which has been added for comparison, the fund is 31.09 percentage points ahead.