My three funds for next year cover a wide range of opportunities for next year, from the US to Asia, value to growth and dividends to capital growth.
And while investing should always be about the long term, I’m particularly interested to see how the themes in the following portfolios play out, with these funds touching on recent issues like trade tensions, Chinese consumption and the nascent shift from value to growth.
Starting with the US
Of the US-based funds on our list, Vulcan Value Equity stands out as one that, from a relative standpoint, we think is likely to perform well going forward.
The Alabama-based manager seeks a combination of attractive valuations as well as inherent underlying company growth, leading to a higher quality portfolio holding more traditional value names alongside growth names that have significantly de-rated.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Historically, the fund has done relatively well in falling markets, and whilst we are not predicting a major correction in the US, we think the combination of downside protection and being willing to take advantage of share price declines will make this a good environment for the fund.
The manager tracks the level of discount that the fund is trading at, based on his view of the upside in each of the underlying holdings, and that discount is now as wide as it has been since 2011.
Whilst Vulcan is perhaps a lesser known manager, they are well established, having been set up in 2007 by C.T. Fitzpatrick. Vulcan has a large team of highly experienced analysts who have been successful since launch.
Indeed, at their 10-year anniversary in 2017, they were the leading US value manager over that period. We think the fund offers a differentiated approach for those looking to invest in the US and one which we expect to do well in 2019.
Don’t neglect the Asian consumption story
Asia as a whole has suffered in recent months, particularly China. Our second pick is the Veritas Asian fund, a pragmatic fund with a very strong track record.
The manager has a bias towards larger consumer-focused companies, particularly high quality ones with barriers to entry and often those offering faster growth. A number of the Chinese technology and internet companies are representative of this bias, including Tencent and Alibaba.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
A key element in our conviction is the manager himself. Ezra Sun has a distinguished track record over the last 14 years and we think his in-depth research and robust process have been key to his success.
The fund increased its cash position over the summer, and is now in a good position to take advantage of market declines. Whilst the ongoing trade war between US and China has impacted share prices across the board; that in itself may provide an entry point for long-term investors.
An innovative way to capture growth in Japan
Staying in Asia, our third choice is a Japanese equity fund, namely the Baillie Gifford Japanese Income Growth fund. This is one we seeded when it launched in 2016 and has performed well so far. As the name suggests, the fund combines Baillie Gifford’s traditional growth focus with an income bias.
We were attracted to the strategy as a way to tap into improving corporate governance in Japan. Rather than hoarding cash on the balance sheet, increasingly companies are paying this out, although Japan still has a long way to go to fully catch up with much of the rest of the developed world.
We found that this strategy was not limited by the income requirement and that it could invest in attractive growth companies at cheap valuations that also generated sufficient cash to pay a dividend.
Performance of fund vs sector and index since launch
Source: FE Analytics
If we compare that to the UK or US for example, companies tend to either hold on to cash for reinvestment or are at a later stage where they find fewer investment opportunities, and paying higher dividends makes more sense for shareholders. In Japan it appears you are able to combine the two.
Japan remains a market that has seen little re-rating since the financial crisis, unlike the US, with returns primarily driven by improving earnings. With the backdrop of an ongoing improvement in the corporate structure, the discount to the US looks unjustified.
Nick Wood is head of fund research at Quilter Cheviot. The views expressed above are his own and should not be taken as investment advice.