FE Trustnet asked a number of industry experts which high-growth areas of the market they are particularly optimistic about and which funds offer the best methods of accessing them.
It should be noted that none of the experts said these growth plays should make up the core of an investor’s portfolio, but rather represent buy-and-hold funds that will provide alternative methods of increasing capital returns.
Emerging markets
While emerging markets' growth prospects have been well documented, Rowan Dartington’s Tim Cockerill says that there is still massive potential out there for the more optimistic investor.
"For investors looking ahead over the next three or five years, I still feel that emerging markets and Asia will provide the bulk of growth around the world," Cockerill commented.
"Over that time-frame I think there will be plenty of opportunities coming out of that sector, so an alternative way to play it is Templeton Emerging Markets; it is a very good all-rounder in that respect."
According to FE Analytics, the closed-ended Templeton Emerging Markets trust has returned 579.4 per cent over 10 years. This is up an impressive 281.76 percentage points on its benchmark, the MSCI Emerging Markets index.
Performance of trust vs index over 10-yrs
Source: FE Analytics
Cockerill’s views are shared by Jason Hollands, managing director of business development and communications at Bestinvest, who highlights frontier markets as another potentially fruitful sector.
"We feel the key areas of value are the global emerging markets – where we like First State Global Emerging Markets Leaders. That’s a view we have communicated to clients," he said.
"If you want to move into punting territory, then a more aggressive, but high-risk, emerging markets play would be Templeton Frontier Markets. If you are going gangbusters for it, the fund is a good choice as it has exposure to the likes of Vietnam and Kazakhstan."
Emerging market ETFs
Rob Gleeson, head of FE Research, says that one of the dicier plays in his portfolio is the country-specific iShares MSCI All Capped Peru Index ETF, but he is optimistic that it will deliver strong returns over the next couple of years.
"Peru is the best-run Latin American country in my opinion. Its currency – the nuevo sol – has strengthened recently and it has very well-funded banks. Though the country itself is still very poor, it doesn’t have that much sovereign debt compared with other countries in its position."
"I like the iShares MSCI All Capped Peru Index tracker because there is no pure-play way of accessing Peru through funds. You can go with a more general Latin America fund, but they tend to be very Brazil-heavy and don’t have much exposure to the smaller countries like Peru."
The ETF has returned 43.92 per cent over a three-year period.
Japan
Hollands also thinks there is massive upside potential surrounding Japanese equities over the next few years, but can understand why investors have been so wary of the country recently.
"The forward price/earnings (P/E) ratio on Japanese equities is 11.5 times, which is 59 per cent lower than where they have traded on average over the longer-term. In fact you won’t find as big a deviation in any other major market," he said.
"Of course, just because Japan is cheap, this doesn’t mean it won’t stay cheap. You have to believe there may be a catalyst for a re-rating at some point and on that point the jury is still out."
"Many investors will have an instinctive aversion to investing in Japan, which has been such a serial underachiever. Advisers too are wary, as there have been so many false dawns in the past, and there are plenty of reasons for investors to avoid Japan."
However Hollands says that Japanese companies have become more globally diversified in the sources of their revenues, giving companies based in the Asian island nation access to returns in more fruitful areas of the world.
"Funds we rate at Bestinvest are CF Morant Wright Japan, which has a mid cap, value bias, GLG Japan Core Alpha, which has a value style-bias, Schroder Tokyo and, for those wanting a smaller and mid cap biased fund, JOHCM Japan."
Ben Willis, investment manager at Whitechurch, also thinks Japan could be a surprise growth story over the coming years, but prefers a more reserved approach to accessing the perennially struggling country.
"There are a number of areas that could provide real growth over the next three to five years which are higher risk. These might not be popular choices for some investors and investors who already hold them might have lost money recently."
"We think that Japan looks promising, but if you want to invest I would hedge back to sterling because of the weakening yen. The Japanese stock market is cheaper compared to other developed countries, but there is certainly potential there now."
"Despite this, I like the safer option of Jupiter Japan Income, as you are getting potential growth but still receiving some sort of dividend back."
Smaller companies
Although it has performed well recently, Willis believes there is still plenty of value in the UK small cap space.
"Looking closer to home for growth, I still like UK smaller companies," he said.
"They have performed relatively well recently but they still have the scope to deliver very high returns over the coming years. Valuations are currently very attractive so now might be the best entry point."
He tips FE Alpha Manager Paul Marriage’s Cazenove UK Smaller Companies fund as the best way to access the high-growth returns in the sector.
Cazenove UK Smaller Companies has been a top-quartile performer over one, three, five and 10 years.
Over 10 years it has returned 349.48 per cent, considerably outperforming its FTSE SmallCap index benchmark, which is up 116.69 per cent over the same period.
Performance of fund vs sector and benchmark over 10-yrs
Source: FE Analytics
Cockerill says that more risk-on investors should look to global smaller companies funds, as they will be among the big winners when the macroeconomic environment inevitably brightens up.
"Another interesting theme to play for the more optimistic investor is smaller companies – but more specifically on a global scale," he said.
Invesco Perpetual Global Smaller Companies is a good choice for high-growth returns, according to Cockerill.
"As the economic mess sorts itself out, and we are seeing from leading indicators that we can expect some sort of global growth over the next few years, smaller companies are in a good position to benefit from a more positive environment as people start to feel a bit more confident."
"Some may think that it might not be a great time for equities in that period, but there will be winners out there and I think global smaller companies will be one of those," he added.