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Psigma: Our best fund and sector ideas for investors thinking differently

12 July 2017

Investment strategists Rory McPherson and Daniel Adams outline the sectors and funds they recommend for investors in the current environment.

By Jonathan Jones,

Reporter, FE Trustnet

Investors should embrace the power of thinking differently and consider assets that perhaps aren’t so familiar to them, according to Psigma Investment Management investment strategists. 

Positioning defensively but also looking further afield in areas including Japanese equities and thematic funds could be the way for investors to drive a higher return, according to Rory McPherson, head of investment strategy.

Both bonds and equities have been on a strong run over the last decade, with valuations in both asset classes largely accepted to be high relative to their own history.

Indeed, the MSCI All Countries index and Barclays Global Aggregate indices have returned 124.23 and 124.01 per cent over the last 10 years, just 22 basis points difference.

Performance of indices over 10yrs

 

Source: FE Analytics

McPherson said: “One of the key messages we are trying to get across to our clients is that owning those traditional investments – bonds and equities – is going to set you up for a fall because expected returns are very low and valuations are very high.”

“We think given the shift in monetary policy from central banks to take their foot off the brake, at the same time as politicians probably can’t put the accelerator down as quickly as they would like, that we are in a period of moderate growth with the balance tilted towards the downside.

“With valuations high and growth rates low it gets us to returns for global equities of about 4.7 per cent over the next five years or so and emerging equities of just shy of 6.5 per cent.”

As such, the investment strategist said investors need to “embrace the power of thinking differently”. Below FE Trustnet highlights some of the funds the Psigma investment team suggest are worth considering.

McPherson said Psigma is defensively positioned adding that, with overall equity returns likely to be low and the forecast skewed to the downside, taking risk off the table seems prudent.

Psigma senior investment analyst Daniel Adams added: “It’s not necessarily the downside benefits but really about maximising return whilst minimising risk.”

The first fund recommended by the team is the TwentyFour Focus fund, which has a highly flexible investment approach in the fixed income space.

“This was a mandate that we constructed and set up in 2002 exclusively for our clients,” Adams said.

The portfolio is made up of short-dated high quality bonds, but allows the managers flexibility to hold high cash weightings when bonds are redeemed if they do not wish to roll them forward, Adams said.

“Having this interaction with the management, being short duration and having that liquidity has really helped,” he added.


The £75m fund has yet to make a loss in a calendar year, as the below graph shows, and has outperformed its Libor benchmark in each of the last four years.

Performance of fund vs benchmark over 4yrs

 

Source: FE Analytics

“In 2012 and 2016 it managed to keep pace with the rising bond market but at the same time in 2015 when it had a more challenging period in markets the portfolio held up particularly well which is the real value added in a strategy like this,” Adams said.

The other fund recommended by Adams that follows Psigma’s defensive approach was the £1.2bn Jupiter Absolute Return fund managed by James Clunie.

“This is a fund we added earlier this year and is another that adds defensive characteristics,” he noted. “Markets are frothy at the moment, we believe, so finding investments that perform well in tough environments is absolutely key to strategies.

“Amongst the peer group this fund stands out as predominantly mitigating downside risk, it offers genuine diversification and James Clunie really does have a speciality in shorting.

“The sector generally has underperformed and has had a lot of bad press but there is a lot of IP in this shorting and it has really added value.”

Indeed, Jupiter Absolute Return has made a positive return in six of the past seven years, though is currently 97 basis points lower on the year so far.

The four crown-rated fund is 31.5 per cent short on 119 positions and 34.8 per cent long with 86 positions held, according to its latest factsheet.

Away from positioning defensively, Adams said another key area for the firm is Japan, where it sees long-term benefits from improving corporate governance as well as on a valuation and sector specific basis.

“As a starting point we like it from a valuation perspective – on an absolute and relative basis it is attractive – but the real attraction for us is the level of corporate governance change that is going on,” he said.

The number of Japanese listed companies with at least two independent directors, which can be used as a proxy for corporate governance generally, has seen a material increase across all areas of the market since 2011, said Adams.

Coinciding with this increase in independent directors, the analyst said more cash is being returned to shareholders by way of share buybacks and dividends which has been a key driver of returns.

“From a Japan point of view we would also point to its attractive position in the investment cycle,” he added.


“The Topix has been a phenomenal performer since 2012 but when you break it down most of that has come from earnings growth. And because there has been genuine growth in that area, the price-to-earnings ratios haven’t moved.”

“Earnings per share increases has led to an explosion in margins and we think that is particularly attractive.”

The fund Psigma has backed for its Japan exposure is the £191m RWC Nissay Japan Focus, which has beaten both the IA Japan sector average and Topix index since its launch in 2015.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

“This fund is exclusively focused on corporate change in Japan which we believe is still largely underappreciated by investors,” Adams said.

“It has a fully flexibly mandate so the managers are investing in those companies that they see offering short-term value but long-term restructuring potential.

“The fund is highly concentrated which means the managers can take an active role in the companies they are investing in.”

The final investment area Adams recommended is centred on themes rather than geographical equity markets with RobecoSAM Smart Materials an example of this.

“This is an area which we believe in a secular growth opportunity. Smart materials is difficult to get your head around but it is a combination of innovative tech and innovative materials,” Adams said.

“What the manager does is he invests across the whole supply chain of innovation.

“If you take the electric car for example it might invest in the lithium miners, the battery makers and the technology that maximises the layout and performance of the car or it might invest in the robots that assemble the car.

“It is really that whole distribution so it gives us that technology exposure to our portfolio, which we think is increasingly important, while avoiding the excessive valuations in the mainstay Apples and Googles.

“We consider RobecoSAM to be at the forefront of this area of expertise and we see this as a very attractive secular growth story.”

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