Funds such as Polar Capital Healthcare Blue Chip, Fidelity Global Inflation Linked and Odey Odyssey could be attractive options to consider for the year ahead, according to Psigma Investment Management chief investment officer Tom Becket. 
Last year, the firm highlighted a number of themes (such as long-term equity, emerging market growth and hunt for yield) that could power returns over the rest of the decade. It thinks they still have “plenty of potential” in 2017, despite some of them already making strong returns this year.
“Having a clear view of markets, such as that we had at the start of 2016, when we felt that many asset markets were undeservedly cheap, is now perilously difficult,” Becket said. “That being said, we have a high degree of confidence in our positioning and strategy and are excited by the investments that we hold.”
In the following article, we look at the key investment themes being followed by Psigma and some of the funds they are using to take exposure to them.
Long-term equity – RWC Nissay Japan Focus
For long-term exposure to equities, Becket sees the most opportunities in Japan. The country has been a relative underperformer in 2016, which Psigma thinks is “undeserved” given the changes taking place.
“Investors have slavishly obsessed with the direction of the yen, whilst ignoring positive long-term corporate fundamentals, which have transformed Japanese equities from ‘uninvestable’ a decade ago to an exciting opportunity now,” Becket said.
“Improving corporate dynamics remain in place and it is becoming clear that many companies are changing; dividends and buybacks are soaring and many company managements are pursuing governance changes that are vital to changing investors’ perceptions of the Japanese equity market.”
Performance of fund vs sector since launch
Source: FE Analytics
He adds that RWC Nissay Japan Focus plays this theme by working with their underlying holdings to ensure improving shareholder value with company managements
“Having just come back from Japan and seen first-hand the changes that are taking place, we are increasingly bullish on this fund’s prospects and enthused by how cheap Japanese equities are compared to their global peers,” he said.
Equity recovery – Polar Capital Healthcare Blue Chip
Becket says there is hope of a “golden age of healthcare investing” and says the sector seems to be one of the best long-term themes he can see in global financial markets, especially after its underperformance in 2016.
He notes that one in five members of the global population will be over the age of 60 by 2050, providing a powerful demographic driver for healthcare investing, while the industry itself is benefitting from major structural changes.
Performance of fund vs index since launch
Source: FE Analytics
“Government indebtedness is well known, likely to deteriorate further and means that future governments who are strapped for cash will do all they can to keep patients out of hospital,” he said.
“We have looked to exploit this theme by working with Polar Capital to create a specific strategy where the fund will focus on the opportunities in the pharmaceutical industry, healthcare services and medical technology companies. The team are highly experienced and specialists in healthcare investing with over 60 years’ industry experience and currently have the opportunity to buy great companies, with healthy profits growth at historically reasonable valuations.”
Emerging market growth – Macquarie Asian All Stars
Psigma Investment Management has been more optimistic than most on Asian equities for some time and added to emerging market assets and resources investments in 2015, as it considered them to be too cheap.
While conceding that the move was too early, it has paid off over the past 10 months and the firm has reshaped its emerging market investments to focus on the Asian consumption theme and intra-Asian tourism.
Performance of fund vs sector and index since launch
Source: FE Analytics
“The good news is that such investments have lagged badly in 2016, as regional banks, materials and industrial companies have soared. We believe that now is a great time to be buying into an exciting growth theme at sensible valuations, which the excellent Macquarie team will be doing on our clients’ behalf,” Becket said.
“A big surprise next year could be that Asia outperforms and investors flock back to the region, as China continues to rebalance its economy and Donald Trump doesn’t derail the Asian economic juggernaut.”
The hunt for yield – Airlie Strategic Focus High Yield
While many investors went into the year thinking that US high yield credit was to be avoided because of plummeting commodity prices, Psigma believed that the “blow-out” in spreads in 2015 gave potential for a capital recovery and healthy income opportunity. The firm is also positive on US high yield for the coming year.
“Fortunately, our view turned out to be correct and our position in the Airlie Strategic Focus High Yield fund has provided a return in excess of 20 per cent this year,” Becket said.
“The Airlie fund that we own has a specific structure that only invests in bonds that mature before a set date three years out, so we have some predictability over returns, as long as the companies that the managers select do not default.
“Given Airlie’s expertise in the sector and the quality of their credit research, we expect them to be able to continue to avoid defaults and envisage attractive income returns of around 8 per cent in the coming years, which will come in handy in a world where interest rates will remain low by historical standards and higher quality bond yields seem set to be very volatile.”
Inflation protection – Fidelity Global Inflation Linked Bond (currency hedged version)
Becket argues that it is “obvious” inflation will be significantly higher in the UK and the US this time next year, given rising commodity prices and reflationary promises from Donald Trump.
“Investors should be more worried and recognise that inflation is a sure-fire way to erode your purchasing power. Inflation protection is always vital, particularly to those like us that see inflation as a clients’ real benchmark, but arguably it is now more important than it has been this decade,” he added.
Performance of fund vs sector since launch
Source: FE Analytics
“The problem is that most ways of protecting against inflation are either very expensive, volatile or, in the case of inflation-linked bonds, currently very inefficient. Our favoured way of providing some effective and moderately priced inflation protection is through inflation breakevens and the Fidelity fund does that on our behalf, in particular by exploiting more efficiently insurance in the US market and avoiding the structurally-expensive UK market.”
Defence – Odey Odyssey
Becket’s last pick is a fund to add some defence to the portfolios. With defensive assets becoming ever scarcer (reflected by rising yields in government bond markets), Psigma has opted for “go anywhere multi-strategy fund” Odey Odyssey.
Performance of fund vs sector since launch
Source: FE Analytics
“The managers of the fund, Tim Bond and Dip Shewaram, have strong opinions that asset markets are broadly overvalued and that stalling economic growth, lofty valuations and rising bond yields are large obstacles that markets will struggle to overcome,” he said.
“While markets have broadly disagreed with the managers’ view since the inception of our position in Q1 2016, they remain net short equities, short credit and with a very negative view on government bonds. Basically they are bearish on everything.
“In buoyant markets, we would expect to see some capital loss in the fund, but during periods of uncertainty the fund has the potential to achieve a reasonable level of upside. Despite the fund being down since the inception of our position, we feel that there are very few true alternatives available in the market and the Odey fund allows us to diversify and reduce risks we have elsewhere, particularly in markets that are presently highly correlated.”