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The perfect equity funds for 2017’s headwinds and tailwinds

Investment professionals tell FE Trustnet which events could sway markets this year and which funds are best positioned to either benefit from or protect against them.

Lauren Mason

By Lauren Mason, Senior reporter, FE Tru...
Friday March 17, 2017

Schroder US Mid Cap, Schroder Recovery and Liontrust Special Situations are among some of the fund investment professionals believe are set to benefit from potential tailwinds this year.

In contrast, Fidelity Global Dividend, Ardevora Global Equity and Lindsell Train Global Equity are deemed to be well-positioned to fend against any nasty surprises we could encounter, given the high level of macroeconomic and geopolitical uncertainty on the horizon.

This comes following what seems to be a significant divide in investor sentiment. While many believe the election of Trump and global tapering of QE will lead to a growth boost which – in turn – will benefit risk assets, others believe rising markets are pricing in too much positivity with so many potential ‘known unknowns’ on the cards.

Given this backdrop, we asked three investment professionals to share their views on the biggest potential headwinds and tailwinds this year, and how best to play them in a portfolio.


Nick Samuels

Director at Redington Nick Samuels points out that the firm and its client base are very long term investors and, as such, events over a 12-month period should not directly be repositioned for.

Over a longer term view though, he is ensuring clients have sufficient exposure to global equity value funds.

“Because of the prolonged period that the style has been out of favour, we see clients more skewed to quality/growth strategies, which look expensive compared to history, and to alternative styles,” he explained.

“Value made a bit of a comeback in 2016, but remains cheap compared to history and compared to quality and minimum volatility strategies.”

As such, Samuels says Andrew Lyddon and FE Alpha Manager duo Kevin Murphy (pictured) and Nick Kirrage’s Schroder Global Recovery fund would be a good option for those seeking to add a shot of deep value to their portfolio.

The £103m fund was launched in 2015 and, through a concentrated portfolio (which currently stands at 43 stocks), the managers aim to provide growth for the patient investor.

They do so by seeking companies that have suffered a short-term setback but offer attractive prospects over the longer term.

Since launch, the fund has returned 38.36 per cent compared to its sector average and benchmark’s respective returns of 33.25 and 41.08 per cent. It has done so with a bottom-quartile maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 8.32 per cent.

Performance of fund vs sector and benchmark since launch


Source: FE Analytics

However, it must of course be noted that this is only a short track record and the managers have a long-term investment view.

“If that was a bit too much volatility to handle, then a multi-factor strategy looks attractive now, as momentum and value are now quite correlated,” Samuels said.

“Something like Ardevora Global Equity is a good option here as Lang, Pattisson and Fitchew blend value, earnings momentum and quality factors into one portfolio, and their human behaviour focus adds something over a purely systematic strategy.”

The managers of the five crown-rated fund aim to find good stocks that have been incorrectly valued by markets, and do so through watching the behaviour of investors, analysts and company managers and looking for signs of emotional bias.

The £808m fund may be better suited to the more cautious investors as it is also able to short stocks that the team has little conviction in.

Over five years, it has returned 121.72 per cent, outperforming its sector average by 47.64 percentage points and its benchmark by 31.23 percentage points.

It has a top-quartile maximum drawdown of 6.76 per cent over the same time frame.

Adrian Lowcock

Adrian Lowcock, investment director at Architas, warns that a Le Pen victory in France could destabilise the EU, the euro and European markets.

As such, he says Fidelity Global Dividend could be a good option for global equity investors, given manager Dan Roberts’ focus on both capital growth and sustainable income growth makes it more defensive than many global equity funds.

“The types of companies Roberts invests in are well established with a strong management team and are global businesses so whilst there is some exposure to Europe, the companies are not dependent on the region,” Lowcock explained.

“The fund has more in Germany. German shares might well be protected in the event of a break-up of the euro as a deutsche mark would strengthen against the pound once markets calmed down.”

Since its launch in 2012, the £770m fund has returned 120.15 per cent, compared to its sector average and benchmark’s respective returns of 83.56 and 102.82 per cent.

Performance of fund vs sector and benchmark since launch


Source: FE Analytics

In terms of its risk metrics, the four crown-rated fund it in the top quartile relative to its peer for its maximum drawdown, Sharpe ratio (which measures risk-adjusted returns) and annualised volatility. Investors would have earned £1,938.10 in income alone over the same time frame, based on a £10,000 investment.

In contrast, Lowcock says a potential tailwind for global equities this year would be if Trump gets his proposed tax cuts and fiscal spending through congress.

If this were to happen, the investment director expects the US in particular to benefit from another rally, which would be driven by a boost in investor sentiment.

For this scenario, he believes Jenny Jones’s five crown-rated Schroder US Mid Cap fund is positioned to do well.

“Jenny Jones invests in companies with good growth potential which are attractively priced,” he continued. “She focuses on stock value analysis and has a cautious temperament which means she tends to avoid investing in volatile markets.

“Mid-caps should benefit from a combination of tax cuts and fiscal stimulus more so than US large caps.”

The £1.96bn fund, which has a diversified portfolio of 117 holdings, is in the top decile for its total returns over one, three, five and 10 years. It is also in the top quartile for its Sharpe ratio and maximum drawdown the same time frames.

Jason Hollands

Jason Hollands, managing director at Tilney Group, warns that there seems to be a lot of complacency at the moment, given volatility is “eerily low” amid a high level of geopolitical uncertainty.

“A lot of this renewed optimism has of course stemmed from investors getting bullish about the Trump agenda on big tax cuts, deregulation and infrastructure spending, and this platform is certainly pro-growth,” he said.

“It’s now very clear that president Trump really does mean to do the things he advocated on the campaign stump and there seems to be an assumption therefore that these measures will be delivered given the Republicans control congress.

“There is a real risk that failure to deliver and therefore underwhelm could bust some of this exuberance.”

Hollands adds that the scale and velocity of monetary tightening from the Federal Reserve could also pose as a headwind this year, given that the continuation of ultra-loose monetary policy since the crisis has inflated asset pieces.

This, combined with the UK-specific risks of ongoing Brexit negotiations and continuing currency shifts, has led the managing director to favour funds investing in quality businesses with strong cash flow generation, good pricing power and high barriers to competition.

For instance, Hollands likes Liontrust Special Situations, which has been managed by FE Alpha Manager duo Anthony Cross and Julian Fosh since its 2005 inception (the fund’s class launch occurred five years later).

As with all Fosh and Cross’s portfolios, the fund is structured using their Economic Advantage process. This focuses on companies with traits that are difficult for the broader market to replicate, such as having intellectual property or strong distribution channels. Examples of the fund’s largest holdings include Diageo, Unilever and RELX Group.

The £2.3bn fund is in the top decile for its three- and 10-year returns and is in the top quartile for its one- and five-year is in the top quartile for its Sharpe ratio, annualised volatility, downside risk and maximum drawdown over five and 10 years.

Performance of fund vs sector and benchmark over 5yrs


Source: FE Analytics

Other funds Hollands believes are set to do well in the current environment are Evenlode Income and Lindsell Train Global Equity.

This article is for professional investors only. You will be redirected to the News & Research homepage in seconds. If you are having problems getting to the page, please click here
Data provided by FE. Care has been taken to ensure that the information is correct, but FE 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.

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