Now is a time for investors to exercise caution, according to WH Ireland's John Goodall, who warned there are toppy valuations and heightened levels of geopolitical uncertainty to contend with across developed markets.
That said, the research analyst claimed holding cash is far from the best way to navigate the current backdrop and, as a team, WH Ireland is slightly overweight equities relative to its benchmark.
"On the equity side, we’re underweight the UK and the US. we find the valuations in the US very difficult to get our heads round so we’re taking a cautious approach there," Goodall explained.
As such, for investors who are reticent about the headwinds facing developed markets but want to make their cash work, the research analyst has provided three fund picks across different regions.
Europe
Europe is one of the regions that Goodall is more confident on given the increasing stability of its geopolitical backdrop and ongoing economic improvements.
That said, he doesn't believe investors should rest on their laurels when gaining exposure to the region.
"Valuations are cheaper in Europe but you still have to be a bit concerned about banking exposure," the research analyst warned.
"These are more fundamental problems. It is reflecting the fact that you have an economy that hasn’t been growing very quickly for a long time, you have a problem with demographics and bad loans have built up over the years.
"That’s more of a long-term issue for the banks and we're not going to know the true extent of that until much further down the line."
As such, Goodall likes the BlackRock Continental European fund as he believes its manager's views are in-line with WH Ireland.
The four crown-rated fund is headed up by Giles Rothbarth and Stefan Gries, although investors should note that the managers have only been at its helm since June this year following Vincent Devlin's decision to step down. That said, Gries was a senior director within BlackRock's European Active Equity team long before co-managing the fund. The vehicle also adopts a team-based approach to making investment decisions.
Over five years, the £698m fund has returned 108.4 per cent compared to its average peer and benchmark's respective returns of 103.75 and 103.28 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The managers aim to provide long-term capital growth through bottom-up stock selection, which focuses on P/E (price/earnings) ratios and whether an attractive stock has met the price target that has been set by the team.
BlackRock Continental European has a clean ongoing charges figure (OCF) of 0.93 per cent.
The US
Goodall warned against buying into index trackers in the US, as many will have large proportions in the expensive 'FANG' stocks (Facebook, Amazon, Netflix and Google).
He said these companies – which are already very expensive and widely-held – could soon encounter direct competitors and lose their market leadership, a concern shared by Miton's Hugh Grieves as detailed in an FE Trustnet article published last week.
"If you look at those companies, what are they actually doing? Amazon is very successful but it’s just sucking up business from elsewhere, Netflix is about videos – how is that going to change the economy? Facebook is just a social utility," the research analyst said.
"The danger with these is there are going to be competitor companies popping up which are unlisted. Who knows if these stocks are going to be number one forever?"
As such, Goodall said BNY Mellon US Equity Income presents a good opportunity for investors due to its value-driven approach.
The $171m fund – which is domiciled in Ireland - was only launched in February this year and aims to provide a combination of income and capital growth. It has an active share, which shows the percentage of a fund's holdings which are different from its benchmark – of 79.5 per cent.
As shown by its active share, the fund is unafraid to take punchy bets away from the index. For instance, it currently holds twice the weight of financials relative to the S&P 500, with JP Morgan Chase & Co its largest individual weighting at 4.9 per cent.
BNY Mellon US Equity Income has a clean ongoing charges figure (OCF) of 0.9 per cent and yields 1.03 per cent.
Japan
Goodall said that, from a valuation perspective alone, Japanese equities are relatively attractive. He also cited improvements in corporate governance and a greater emphasis on investors. However, he would favour global-facing stocks in the country.
"Japan could be interesting but not from the domestic side of things because they have so many problems with demographics – there are around a million people retiring every year," the research analyst explained.
As such, he likes Baillie Gifford's closed-ended Shin Nippon trust, which has five FE crowns and has been headed up by Praveen Kumar since 2015 following the departure of John MacDougall.
The £312m trust aims to provide long-term capital appreciation through small Japanese companies boasting higher growth potential than their larger peers. Kumar also has an emphasis on value when selecting stocks.
The portfolio will consist of between 40 and 75 companies at any one time and many of these will offer innovative business models, potential disruption to traditional Japanese practices or will be able to achieve growth from overseas.
Over five years, the trust has outperformed its average peer and benchmark by more than 100 percentage points with a total return of 287.87 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Baillie Gifford Shin Nippon is trading on a 2.8 per cent premium to NAV, is 12 per cent geared and has an ongoing charge of 0.96 per cent.