Investors seeking the best risk/reward balance might want to look to the Brexit premium in UK bonds, those with a more patient mindset need the best long-term stock pickers and defensive investors have an “outstanding” opportunity linked to gold.
That’s the view of experts at wealth manager Psigma Investment Management, who have given their fund picks for investors with five different aims in mind.
As investors consider what themes are worth looking at in 2019, FE Trustnet takes a look at five funds that might be on the brink of strong long-term returns.
The Attractive Risk/Reward Investor
For investors seeking the most attractive balance between risk and reward, Psigma chief investment officer Thomas Becket highlighted the Brexit premium present in UK corporate bonds.
UK companies are being charged around 1 per cent higher to issue debt than their global peers because the market is worried about Brexit and the risk of a government led by the Labour Party’s Jeremy Corbyn. However, while Becket conceded that these political factors are a potential threat to profitability, he does not see them as structural solvency risks – keeping UK corporate bonds attractive.
Performance of funds over 5yrs
Source: FE Analytics
“Indeed, some of the pricing of bonds in the recent turbulence around a global economic slowdown and our domestic political mayhem has become nonsensical and allows nimble investors outsized rewards, which we have aimed to take advantage of in our specialist fixed interest mandate the TwentyFour Focus Bond fund (they can also be found in the TwentyFour Dynamic Bond fund),” he said.
“These opportunities can currently be found in the financial sector, in particular. The important messages for investors in fixed interest markets now are to be short in terms of duration, be in funds that will not come into challenges over liquidity and are very selective in the bonds they buy. I cannot personally understand why investors are still happy to keep outsized positions in very large bond funds, which is something we shall continue to avoid doing.”
TwentyFour Asset Management is a boutique that specialises in fixed income; it was founded in September 2008 and now runs more than £14bn. The firm has a strong reputation as a bond investor and oversees a number of specialist mandates.
The Contrarian Investor
Psigma senior investment analyst Daniel Adams argued that Asian equities seem to be one of the best long-term opportunities in today’s market. Asian equities trade on a price-to-earnings of just over 11x, a dividend yield over 3 per cent and a price-to-book of 1.3x.
“The ongoing trade war between China and the US has led to a significant de-rating of Asian equities over the past 12 months,” he said. “Although there remain obvious risks around trade, we believe that anyone who can ‘look through the noise’ will be handsomely rewarded over the long term.”
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Adams highlighted the BlackRock Asian Growth Leaders fund as an attractive way to access the asset class. He suggested that manager Andrew Swann’s flexible style and strategy – described as opportunistic with a macro overlay – is “particularly well placed” for the ever-changing market environment and the accompanying bouts of volatility
“While the fund is not wedded to a particular style, it currently has a value and cyclical tilt to the portfolio, which is unsurprising given the huge performance differential between growth and value over the past decade,” he added.
While the trade war and slowing global growth are near-term headwinds for Asian equities, Adams pointed out that “the world’s most potent economic engines” are in the region and BlackRock Asian Growth Leaders is well-positioned to benefit from this theme over the long term.
The Activist Investor
Investors who have an activist mindset could consider the RWC Nissay Japan Focus fund, according to Adams, as it specialises in this approach and seeks to benefit from corporate change.
While the Japanese market continues to suffer swings in sentiment as investors pay close attention to the direction of the yen and the progress made in its economic stimulus programme, Psigma considers the “slow but steady change” in Japan’s corporate culture to be a much more important factor over the long term.
Performance of fund vs sector and index since launch
Source: FE Analytics
Many of these changes focus on shareholder returns, but global investors continue to be averse to Japanese equities. As a result, the Topix is trading on a forward price-to-earnings of just 12x and a dividend yield of 2.5 per cent.
“We are beginning to see the fruits of these changes in some companies’ share prices, but feel there is plenty of value on offer for the contrarian investor, supporting our long-term commitment to the region which began in 2011,” the analyst said.
“The RWC Nissay Japan Focus fund directly exploits the corporate governance theme, working with a concentrated number of companies that trade at attractive valuations, but also offer scope to increase returns by engaging with management to help improve the companies’ operations and drive better shareholder returns.”
The Patient and Considered Investor
Senior investment analyst Martin Ward said that investors with a patient and considered stance will want to entrust their money with managers that are able to ignore today’s information overload, look through the noise and take a long-term view. An attractive option for them could be Loomis Sayles Global Growth Equity.
“This strategy does exactly that, with Aziz Hamzaogullari and his team being genuine long-term investors, aiming to find quality growth companies that are trading at significant discounts to the teams’ view of intrinsic value,” he said.
“Quality is defined as difficult to replicate business models with protective ‘moats’, while the company must be able to demonstrate sustainable and profitable potential for growth, with a particular focus on long-term secular drivers.”
Performance of fund vs sector and index since launch
Source: FE Analytics
Hamzaogullari and his team are pure bottom-up stockpickers, who take a private equity approach when choosing their investments. This has resulted in a high conviction portfolio of 38 names while long-term annualised turnover is always expected to be below 25 per cent.
“We have been hugely impressed by the team’s thorough and detailed approach to research, with each stock owned known ‘inside and out’, Ward concluded. “This is a strategy where you trust the process employed by the team, take a long-term view and let the manager deliver genuine alpha over the medium-to-long term.”
The Panicking Investor
Rory Mcpherson, head of investment strategy at Psigma Investment Management, was tasked with a fund pick for investors seeking a defensive tilt to their portfolio and highlighted BlackRock Gold & General. Psigma owns this fund as part of the alternatives allocation in its defensive strategies.
“Gold mining stocks have been pretty insipid since their big bounce in 2016, but we are of the belief that the tide has turned and that 2019 could well be their time to shine,” he said.
“Gold was swimming against the tide for much of 2018; suffering from consistent outflows from US investors who saw no need for safety, as they were enjoying a strong economy and a surging stock market.”
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, Mcpherson argued that this dynamic has now “clearly changed” as global investors look towards more defensive assets in light of increased market volatility. With this, the outlook for gold and funds that invests in gold miners has also changed.
He added that BlackRock Gold & General, which is managed by Evy Hambro and Tom Holl, is one of the best ways to exploit what Psigma sees as “outstanding” long-term opportunities within this asset class.