While no one’s crystal ball is better than anyone else’s, it might still be worth listening to the most successful fund managers in the financial industry when they speak about their expectations for the future.
To have a hunch of what their investment strategies could look like in the next 12 months, Trustnet spoke to the most acclaimed names in the money management industry and asked them if the new year is going to be a happy one.
Nick Train: The FTSE All Share has plenty more to go for
It’s good tidings from Nick Train, manager of the £4.8bn LF Lindsell Train UK Equity fund, who said that when any index or individual share price has been depressed or out of favour for a long period, it’s bound for a comeback.
Performance of fund year-to-date against sector and index
Source: FE Analytics
“Everyone who wants to sell has already sold, sentiment is terrible and there is attractive value everywhere you look. Suddenly and apparently randomly, prices rally. In November 2022 alone the index was up 7% and for no apparent reason,” he said.
Prices could carry on rising “for a long time” simply if the news is not as bad as expected. If this is the case, Train spoke of a possible multi-year bull market.
“The UK stock market is home to some fine companies: Shell and Rio Tinto in resources; Astra and Glaxo in healthcare; Burberry and Diageo in luxury and premium brands; Experian, London Stock Exchange Group and RELX in data and analytic services; and many more,” he said.
Of the above stocks, Burberry, Diageo, Experian, London Stock Exchange and RELX all belong to Train’s top 10 portfolio holdings in the LF Lindsell Train UK Equity fund.
“We see no structural reason why the UK stock market shouldn’t deliver attractive absolute and relative returns in 2023 and beyond. That would be a surprise. But it is virtually the definition of financial markets that they deliver returns that confound consensus,” he said.
Richard Woolnough: Central banks will win the war against inflation
Richard Woolnough, who manages three of M&G’s flagship fixed-income strategies, including the £1.4bn M&G Optimal Income, was also bullish on the UK fixed-income market.
Performance of fund year-to-date against sector
Source: FE Analytics
“On the bond market and corporate debt in particular, there are many opportunities to grasp, probably more than there have ever been in the past 10 years,” he said.
“So, after having applied the utmost caution for some time, we have now increased the duration of our portfolio to the extent that it has reached neutrality with our benchmark index, i.e. its highest level in a decade.”
The reason for this optimism is the conviction that central banks will win against inflation (“investors only need a little bit of patience”) and too much bad news being already priced in in valuations.
“Bonds are currently pricing in a severe recession, which is a scenario we do not adhere to. Employment is an excellent barometer of the state of the economy, and we believe it is in better shape than is generally thought. Market observers are tending to ignore the good news, both in the US and in Europe,” said Woolnough.
“Our portfolio is currently overweight investment grade corporate bonds but also high yield bonds. The yields on offer offset any credit risk.”
James Henderson: UK manufacturing is a good opportunity for investors
James Henderson, portfolio manager of Henderson Opportunities Trust and the £321m Lowland Investment Company was slightly more cautious in his outlook, with “plenty of things for investors to be thinking about” going forward.
Performance of trust year-to-date against sector and index
Source: FE Analytics
“Cost control will certainly be a primary focus, as we watch to see how businesses respond to continued inflationary pressures in terms of setting both their prices and their wages,” he said.
“Interest rates will also remain central to decision-making, depending on how much further they will go in the face of the slowdown. Equally, there are other external factors to consider, such as the potential escalation of war and subsequent appreciation of raw materials.”
Nevertheless, the year ahead still presents ample opportunities across markets and in many sectors, according to the manager, who also thought that the main thing for investors to consider is that, at some point, the economy will return to provide steady growth and that recovery “could well lead to some really promising increases in earnings”.
“In my experience, the businesses that fare best in the context of an economic slowdown are those that are both well-disciplined and well-prepared to tackle a difficult environment. The UK’s manufacturing industry is a great example of this,” Henderson said.
“It is already very competitive as a result of self-help and the depreciation of sterling in recent years but, crucially, management teams are well prepared for operating in times of economic slowdown.”
Duncan MacInnes: The key is to be active and un-benchmarked
Duncan MacInnes, co-manager of the £1.8bn LF Ruffer Diversified Return and the Ruffer Investment Company, was more sceptical, suggesting investors brace for higher inflation volatility.
Performance of fund year-to-date against sector
Source: FE Analytics
“At Ruffer, we believe that the world has entered a new economic regime post-Covid, one of inflation volatility, which is different from a purely inflationary world and opposite to the benign low and stable inflation world we enjoyed for the past decade,” he said.
“This distinction should be writ large in 2023 as we expect to see a recession and falling inflation.”
To invest in this environment, the first step to take is to make sure you know the difference between investing for inflation and investing for inflation volatility.
“They are not the same thing. An inflation portfolio would not have fared well in 2022. Inflation volatility requires a nimble, tactical and opportunistic approach,” MacInnes said.
Secondly, today, you can lock in 4% in US or UK government bonds or inflation +1.5% over 30 years in US inflation-linked bonds, so why should anyone take any risk when they don’t have to?
“As a result, we are worried about a global, synchronised de-risking of investor portfolios. The key is to be active and un-benchmarked,” the manager said.
“Bonds tend to do well in a recession and we believe the Fed hiking cycle and inflationary impetus are nearly complete – at least cyclically. By contrast, equities earnings estimates remain too optimistic and the equity risk premium has shrunk despite markets falling.”
Investors will get better opportunities in the future and in the meantime, for the first time in a decade, investors are paid to wait, he concluded.
Alex Wright: Banks, life insurers and tobacco companies could be solid choices
Finally, Alex Wright, portfolio manager of the £2.8bn Fidelity Special Situations fund and the £909m Fidelity Special Values PLC, believes that challenging environments throw out the best investment opportunities, as market participants get overly preoccupied by anticipated headwinds.
Performance of trust year-to-date against sector and index
Source: FE Analytics
Investors should therefore aim “to stay agile and continue to be on the lookout for the opportunities” that the rising rate environment will generate in some sectors.
“Indeed, profits for banks such as NatWest [which makes up 3.3% of Wright’s portfolio] could double next year, which is a compelling story in an environment where markets are seeing earnings downgrades and fears of more,” he said.
The backdrop is also favourable for life insurers, whose earnings have proved resilient during the pandemic. They should benefit from an acceleration in the pace of pension fund re-risking, according to Wright.
The third area is companies that can hold up well in a recessionary environment, such as government outsourcing business Serco or tobacco firm Imperial Brands, the top two holdings at 4.4 and 4.1%, respectively.
“These should be relatively unaffected by an economic downturn,” said the manager, who also warned that highly leveraged companies such as real estate and utilities, may come under pressure.
“We have also meaningfully trimmed our UK housing exposure on concerns momentum in the residential market will slow and consumer-facing stocks given the cost-of-living crisis,” said Wright.