The analyst thinks UK equity income and emerging markets funds will sell particularly well in 2013; the former as a result of investors selling out of bonds and the latter as a result of bullish investors upping their risk exposure.
Equity income
"I’d be very surprised if you didn’t see some equity income funds in there," said Troue (pictured).
"Interest rates don’t look like they’ll be going anywhere next year, let alone this year, which makes this yielding asset class attractive. Moreover, many of the people moving out of bonds may look at equity income as an alternative.""I think it will be the same old suspects to be honest – the likes of Neil Woodford’s two income funds at Invesco, and Adrian Frost’s Artemis Income fund, which have all proven themselves time and time again. They’ve pretty much become default options now."
Invesco Perpetual Income and Invesco Perpetual High Income, which both have five FE Crowns, and the four crown-rated Artemis Income fund, are all top-decile performers over 10 years, and top quartile over five.
Performance of funds versus sector and index
| Name | 3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|
| Invesco Perp - High Income | 32.77 | 19.67 | 201.61 |
| Invesco Perp - Income | 31.51 | 18.76 | 200.5 |
| Artemis - Income | 29.6 | 24.53 | 176.72 |
| FTSE All Share | 25.19 | 20.99 | 139.42 |
| IMA UK Equity Income | 27.76 | 17.19 | 126.83 |
| JOHCM - UK Equity Income | 38.06 | 57.77 | N/A |
Source: FE Analytics
All three have also beaten their sector and benchmark over three years, but are only second-quartile performers.
They have been significantly and consistently less volatile than their peer group; however, with a yield of 4.3 per cent, Adrian Frost’s Artemis portfolio is better from an income-perspective.
It is also cheaper, charging a total expense ratio (TER) of 1.55 per cent, compared with 1.68 per cent from the two Invesco funds.
"For a little bit off the radar, I’d tip JOHCM UK Equity Income," continued Troue. "Like many investors, I like its mid cap tilt and I think you’ll see a lot of people drawn in by its performance and yield."
Performance of funds vs sector and index over 5-yrs
Source: FE Analytics
With returns of 38.06 and 57.77 per cent over three and five years respectively, James Bowen and Clive Beagles’ JOHCM portfolio has returned significantly more than all three of its higher-profile rivals, albeit with more volatility.
The £1.4bn fund has a TER of 1.28 per cent, but has a performance fee attached.
Emerging markets
"I think you’ll get some funds at the top of the sales charts right at the other end of the risk scale, which will be bought by those who have a renewed risk appetite," said Troue. "Asia Pacific ex Japan and Emerging Markets should sell very well."
"Sorry to be boring, but again it’s the same old names – the likes of First State Global Emerging Market Leaders and Asia Pacific Leaders."
"Even in the emerging market sectors, I still think you’ll see the income theme though; a lot of companies in Asia now have a proven track record of transparent and growing dividends, which Jason Pidcock over at Newton has really taken advantage of."
"His fund [Newton Asian Income] has a good balance of capturing dividend growth and capital growth, which has been reflected in performance."
The Newton Asian Income fund has returned 160.63 per cent since its launch in November 2005, beating its IMA Asia Pacific ex Japan sector average and FTSE Asia Pacific ex Japan benchmark by 48.39 and 33.13 percentage points respectively, with less volatility.
Performance of fund since launch vs sector and index
Source: FE Analytics
Only four funds in the sector – including the First State Asia Pacific Leaders portfolio – have returned more over this period.
The £2.9bn fund is currently yielding 4.5 per cent, has five FE Crowns and a TER of 1.66 per cent.
Global Equity income
Patrick Connolly, head of communications at AWD Chase de Vere, anticipates a sizeable chunk of assets going into global funds with an income focus this year.
"It’s an area we’ve been recommending to our clients, as its always a good idea to diversify your risk away from the UK market," he explained.
"This time a year ago you wouldn’t have had much choice, but recently there have been launches of some single-country income funds – for example with a US or European focus – which may take some money away from the 'big boys'."
"However, I’d still expect Newton Global Higher Income and M&G Global Dividend to be at the top."
The £3.1bn Newton Global Higher Income and £4.1bn M&G Global Dividend funds are yielding 4.34 and 3.36 per cent respectively.
They both have a TER of around 1.6 per cent, and are top-decile performers in their respective Global Equity Income and Global sectors since launch; however, Newton Global Higher Income has been consistently less volatile.
The Newton fund has returned 80.69 per cent since its launch in November 2005, while the M&G fund has returned 63.92 per cent since July 2008.