Investors who want to gain exposure to some of the major market-moving trends of 2021 could consider 10 funds highlighted by Chelsea Financial Services’s Darius McDermott.
“When it comes to investments, the first half of 2021 has been characterised by five significant trends,” he said.
“Value has continued to outperform growth; inflation has gathered pace; energy equities have bounced back; UK smaller companies have risen like a phoenix from the Brexit and pandemic ashes, and bonds have struggled.”
McDermott revealed two funds to consider for these five important trends that have unfolded over the year so far.
Value outperforming growth
According to figures from FE Analytics, the MSCI AC World Value index has returned 15.29 per cent so far in 2021 – easily beating the 11.49 per cent return of MSCI AC World Growth.
This performance was even more extreme in emerging markets (EM) where the MSCI Emerging Markets Value index return of 10.92 per cent almost doubled the 5.73 per cent return from its growth counterpart.
“As more economies reopen, value should continue to do well, and rising inflation could also be a boon,” McDermott explained.
With that in mind, he highlighted two value funds to gain exposure. The first is the £241m Ninety One Global Special Situations fund, run by Alessandro Dicorrado and Steve Woolley.
The strategy runs a high conviction, contrarian value approach, focused on buying companies that are cheap and out of favour. It holds roughly 30 names.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
The other value strategy McDermott pointed to is the £1bn Schroder Global Recovery fund, run by Andrew Lyddon, Nick Kirrage and Simon Adler.
The fund’s well-known value managers take a long-term view, looking for companies with turnaround potential. It typically holds around 50 names.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Inflation on the rise
Rising inflation has been well reported. Consumer prices in the US started the year at 1.4 per cent but reached 5 per cent in May.
Prices are also rising in both Europe and the UK, where inflation is now 2 per cent or above. China started the year in a deflationary environment but is now at 1.3 per cent inflation.
McDermott said: “Market commentators are split – some think it is a transitory phenomenon, others believe inflation will remain higher and become more embedded than it has been for some years. I am in the second camp although I don’t think inflation will rise high enough to become a problem.”
However, for investors who do think inflation may not be as transitory as central bankers would suggest, McDermott highlighted two funds.
The first is the £1.6bn First Sentier Global Listed Infrastructure fund run by Peter Meany and Andrew Greenup.
According to FundCalibre, the portfolio is focused on more economically-sensitive assets as a way of insulating it from the potential impact of rising interest rates.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
The second fund was the $1.2bn Jupiter Gold & Silver fund run by Ned Naylor-Leyland.
It invests in gold and silver mining companies, as well as a physical bullion gold holding. Naylor-Leyland combines physical gold and silver positions with mining companies that offer good relative value.
It can invest in up to 70 per cent in silver which offers the potential for higher returns but is usually neutrally positioned at a 50 to 50 split between gold and silver.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
UK smaller companies shine
The UK equity market - which was lagging other markets for some time - has finally had its moment in the sun, led by its smallest firms.
Year to date, IA UK Smaller Companies is the best performing sector, up 20.30 per cent. The IA UK Equity Income sector is the second highest performer with a total return of 12.93 per cent. The IA UK All Companies sector was in fifth place with a return of 12.52 per cent, just behind IA Property Other and IA North America.
McDermott said: “UK equities remain attractively valued. As overseas investors return to the asset class and M&A activity picks up, I think UK equities will do well.”
He highlighted the £1bn Murray Income Trust managed by Charles Luke, as one way to gain exposure to UK income paying equities.
The FE fundinfo four-crown rated trust aims for high and growing income as well as capital growth by investing in UK equities. Its largest positions are in FTSE 100 giants such as AstraZeneca, Diageo and Rio Tinto.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
When it comes to UK small-caps, McDermott pointed to the £1.6bn Liontrust UK Smaller Companies fund, headed up by FE fundinfo Alpha Rated managers Anthony Cross and Julian Fosh.
The investment process focuses on firms with strong positions within their respective industries, with a small-cap bias. The strategy’s emphasis on quality and avoiding cyclical stocks has worked particularly well with smaller companies, according to FundCalibre.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Bonds struggle
So far in 2021, bond markets have not had a good run. Only the global high yield index is in positive territory for the year after a major sell-off in US Treasury bonds on inflation fears earlier in the year.
Similarly, the IA Sterling High Yield Bond sector was the best in the asset class with returns of 3.32 per cent, followed by the IA USD High Yield Bond sector at 2.13 per cent and the IA Global High Yield Bond at 1.97 per cent.
The only other bond sector in positive territory is IA Sterling Strategic Bond with average returns of 0.39 per cent.
McDermott highlighted two bond funds he thought might be best placed to navigate this difficult environment.
The first was the £2.7bn M&G Corporate Bond fund run by Richard Woolnough and Ben Lord.
M&G has a strong reputation in the fixed income space and Woolnough's investment approach is to work top-down, looking at the outlook for economic growth, inflation and interest rates before getting to security selection.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
The second bond fund McDermott suggested is the £1.3bn Baillie Gifford Strategic Bond fund, run by Torcail Stewart and Lesley Dunn.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Chelsea noted that this fund has the opposite approach to many of its peers and the fund above: “Unlike other peers in the strategic bond sector, the managers aim to add value almost exclusively through their stock-picking prowess and do not aggressively manage the interest rate exposure.”
Brazilian and energy equities surprise
Within the IA Specialist sector, McDermott noted that Brazilian equity funds have experienced a rapid rise in the second quarter of the year, with 15 out of the top 20 performing funds either Brazilian country-specific funds or Latin American funds.
This could be due to the fact that the region is still very heavily commodity-based and has benefited from price rises in agricultural products and metals.
Additionally, of all the funds available in the IA sectors, energy funds posted the best performance in 2021 so far– with eight of the top 10 funds being specialist energy offerings, with returns of over 30 per cent.
McDermott said: “The key driver of strong returns from global energy funds this year has been rising oil prices. The Brent spot price, for example, is up by around 50 per cent from $51/bl at the start of 2021 to $75/bl today. This drives higher earnings for oil & gas producers across the globe.”
The £110m ASI Latin American Equity fund, managed by the Aberdeen Standard Investments emerging markets team, was one strategy he said investors could consider for exposure to Latin America.
It looks for quality companies with strong management and balance sheets (although they have to be trading for less than they should do), which Chelsea said results in a cautious approach that "lends itself particularly well to these volatile and less-researched equity markets".
Performance of fund vs sector & benchmark over 3mths
Source: FE Analytics
The $187m Guinness Global Energy fund was the energy fund McDermott pointed to for exposure to rising oil & gas prices.
Performance of fund vs sector & benchmark in 2021
Source: FE Analytics
This fund can look for investments in the oil, natural gas, coal, nuclear, alternative energy and utilities spaces, although the portfolio has a clear bias towards oil & gas. This has led to strong returns in 2021 as commodities rallied, but has led to more volatile performance over the past decade when the oil price was falling.