Inflation-proofing, the ‘America First’ era and Asia’s changing demographics are ‘big picture’ ideas that investors could consider taking exposure to in their portfolios, according to Architas investment director Adrian Lowcock. 
While there are any number of over-arching ideas that investors could latch onto when building their portfolios, Lowcock highlights the return of inflation sweeping across the globe, the election of US president Donald Trump and young, growing population of Asia as ones that look especially attractive at the moment.
In the following article, we find out the driving forces behind these themes as well as the funds that Lowcock (pictured) thinks could be well placed to benefit from them.
Inflation-proofing – John Laing Infrastructure
Recent years have been marked by a lack of inflation and investor attention was more focused on the risk of deflation. However, this has started to change more recently – the Bank of England thinks UK inflation will peak at 2.8 per cent by 2018 and official figures yesterday showed that the consumer prices index has climbed to 1.8 per cent.
Lowcock notes that factors such as the rising oil price and the fall in the value of sterling, which took hold after the UK voted to leave the EU, are expected to continue to push inflation higher over the coming months.
Performance of fund vs sector since launch
Source: FE Analytics
He adds that traditional inflation-proofing assets such as index-linked gilts have already priced in this outlook but alternative income assets such as infrastructure tend to respond more slowly. With this in mind, he highlights the £1.2bn John Laing Infrastructure investment trust.
“This fund invests directly in the equity of a globally diverse range of PFI projects. For example, it owns a 35-year concession to operate and maintain 23 service stations in Connecticut. The assets have leases with McDonalds (30 years), Mobil, Subway and Dunkin’ Donuts (15 years each),” Lowcock said.
“This is a defensive fund and has a diversified portfolio which should pay a predictable, inflation-protected yield. Investors should expect steady, low-risk income with some small potential for capital growth.”
As the performance chart shows, the trust has made a 74.75 per cent total return since launch in November 2010, outpacing the return of its average IT Infrastructure peer. While it has been slightly more volatile than the average infrastructure trust, it does have a lower maximum drawdown and has experienced fewer negative months.
John Laing Infrastructure has ongoing charges of 1.30 per cent, is trading on a 12.6 per cent premium to net asset value and is yielding 5.1 per cent. It is not geared.
America First – Schroder US Mid Cap
One of the biggest events of 2016 – and one that will keep running in 2017 – is the election of Donald Trump as US president and his pledges to “make America great again”.
“At present we have seen little action from Trump on his election promise to spend $1trn on infrastructure and cut personal and corporation tax,” Lowcock said. “If he is successful in achieving even some of his promises it would be beneficial for US companies.”
He adds that US medium-sized and smaller companies are likely to benefit cuts to corporation tax as they tend to pay a higher rate than larger firms. Furthermore, domestically focused mid-sized American business are likely to benefit most from an increase in infrastructure spending.
Performance of fund vs sector and index under Jones
Source: FE Analytics
One fund that could be well placed to take advantage of these factors is the £1.8bn Schroder US Mid Cap fund, which holds five FE Crowns and is managed by FE Alpha Manager Jenny Jones. Since Jones took over the fund in April 2005, it has outperformed its average peer and benchmark with a 389.91 per cent return.
“This is a US small- and mid-cap fund managed by a very experienced and well-resourced investment team led by veteran investor Jenny Jones. Jones is a cautious investor and believes avoiding losses is essential for growing capital over the long term,” Lowcock said.
“This approach will cause the fund to lag during strong bull markets but over time has proved successful. The team conduct bottom-up analysis to find companies that fit into one of three categories: steady eddies, turnarounds or under-appreciated growth.”
Schroder US Mid Cap has a clean ongoing charges figure (OCF) of 0.91 per cent.
Asia’s young, growing population – Hermes Asia ex Japan Equity
Lowcock notes that the long-term demographics of Asia are still very attractive as it has a young population and growing middle classes. Both of these factors have historically been a key driver of stock market returns.
What’s more, the investment case for Asian equities looks more solid than it did at the start of 2016, following the recovery in commodity prices and increased investor confidence in the global economy.
While Trump’s election and his protectionist ideas have prompted some to remain wary of Asia, the investment director points out that stock market valuations are attractive relative to the developed world and economic growth remains strong.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund that he thinks could be a good choice for exposure here is FE Alpha Manager Jonathan Pines’ Hermes Asia ex Japan Equity fund. Since launch in December 2012, the $2.3bn fund has made the IA Asia Pacific ex Japan sector’s highest return after delivering 120.84 per cent.
Lowcock said: “The managers are willing to invest in a wide range of companies and are looking for value opportunities. They are conservative and often take profits earlier than their peers to avoid getting caught up in the momentum rally. This should provide excellent protection in falling markets.
“The managers are a team of accountants, the process is accounts driven, and they construct conservative bull, base and bear scenarios for each stock. The process is very thorough and the fund tends to have a mid- and smaller companies bias.”
Hermes Asia ex Japan has a clean OCF of 0.85 per cent.