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Square Mile’s funds to see you through the second half of 2022

13 July 2022

The research team looks at funds that can protect investors’ cash over the short and long term.

It would be an understatement to say that the first six months of 2022 have proved challenging for investors of all stripes. Pincered between rising bond yields and mounting fears of recession, global stock markets have suffered their worst half-year since the depths of the financial crisis in 2008 and are down by almost 18% year-to-date.

Investors in bond markets fared little better over the past quarter as accelerating inflation and higher interest rates caused yields to rise again and prices to fall further. The broad UK gilt market was down another 7% and has lost 14% year-to-date.

This prevailing mood music has been reflected in retail fund sales.   The Investment Association registered a record quarterly outflow of £7.1bn over the first three months of 2022. Despite a slight ISA season boost in April which saw the trend reversed with inflows of £533m, fund flows were still significantly down on the £1.4bn committed to markets over the same period in 2021.

Investing is, of course, a long-term game and while investors can be forgiven for feeling spooked there are several funds that adopt processes that should meet investor expectations over the long-term.

Six months is clearly too short a period to test the mettle of any investment strategy, but we believe the following funds offering a range of investment outcomes to be compelling propositions.

For investors seeking to grow their capital through an exposure to global equities, Investment research analyst Ajay Vaid points to the AA-rated Dodge & Cox Global Stock fund.

While not widely known in the UK, Dodge & Cox has a solid reputation in the US for adding significant value through active asset allocation in global equity markets.

The highly collegiate management team pays little attention to short-term issues, preferring to maintain a long-term view. The investment philosophy favours stocks whose share prices are deemed undervalued relative to the firm’s future potential, leading to a value bias.

This focus on valuation and the fund’s long-term horizon means it can experience periods of heightened volatility relative to global equity indices. However, this strategy is not completely at the mercy of this style of investing and in more growth-driven markets, it may offer greater consistency in performance than funds with a more overt value focus.

Looking to the UK, research director, John Monaghan, highlights the AA-rated Jupiter UK Special Situations fund as another option for capital accumulation.

Its manager, Ben Whitmore, is a high conviction, long-term contrarian investor with considerable experience of managing money in this way. What marks him out is his highly disciplined ability to remain dispassionate about his holdings and he is prepared to persevere with investments despite the potential for continued short term underperformance.

The fund’s cumulative returns over the longer-term are impressive but given its unconstrained nature and sector positioning, which tends to differ markedly from its benchmark index, there will be periods when it is likely to lag its peers and benchmark. It is therefore more suitable for investors with a minimum five-year investment horizon.

For fixed income investors, Eduardo Sanchez, head of fixed income and absolute return research believes the Square Mile A-rated Invesco Tactical Bond fund to be a compelling proposition, offering combination of capital accumulation and income over the medium to long-term (at least three years).

This is a flexible mandate, and the managers may follow their conviction and invest across government and corporate bond markets worldwide. They may take substantial positions in sectors and could, in theory, be entirely invested in government bonds or high yield debt, although the fund is likely to be diversified across various markets and will usually have a bias towards corporate bonds.

The team's careful process identifies suitable value opportunities which should deliver good risk-adjusted returns, although these can take some time to play out and in the short-to-medium term the fund's performance may differ substantially from that of the wider market.

Senior investment research analyst Paul Angell points to the Schroders Global Cities fund for investors looking for a responsible investment strategy that can deliver both capital accumulation and inflation protection through exposure to the global real estate market.

The fund’s managers apply a thoughtfully constructed two-step process, the first being to identify attractive real estate assets, with the second to determine the best REITs which own these assets. Environmental, Social and Governance considerations are deeply embedded at both stages.

The team has built an impressive quantitative model which underlies the fund and while they can query its output, in reality they use these instances to fine tune the recommendations the model makes. We believe investors in the fund should be rewarded over a three-to-five-year period.

While investors will typically have a longer-term investment horizon, senior investment manager Charles Hovenden believes the Blackrock European Alpha fund has the potential of delivering a positive return with a high degree of capital preservation over any 12-month period regardless of the wider investment backdrop.

The fund's managers, both experienced long/short investors, aim to deliver consistent, absolute returns, with low volatility, through a portfolio with low net market exposure. These returns are driven by stock selection and the fund has an excellent record of alpha generation on both long and short investments.

Since launch in April 2009, the fund has delivered consistent mid-single digit returns and has had only one losing calendar year (2016).

This article as provided by the research team at Square Mile Investment Consulting and Research. The views expressed above should not be taken as investment advice.

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