Here, head of communications at the firm Patrick Connolly (pictured) shares five high-conviction funds the firm is backing now.
Kames Strategic Bond
Bond fund have begun to fall out of favour as rising yields and rising equity markets have left the asset class behind in terms of both income and total return.
However, Connolly says investors shouldn’t turn their back on bond funds because they can still protect your portfolio if the market takes a tumble. For this he likes the Kames Strategic Bond fund, managed by David Roberts and Philip Milburn.
"We have been wary of fixed interest investments for some time now, but still believe they have an important long-term role to play in most client portfolios," he said.
"With higher-than-usual risks in fixed interest, we have been skewing our exposure to strategic bond funds where managers have the flexibility to hopefully avoid the worst of any fallout."
Connolly says the Kames fund is particularly suited to this because its exposure to investment grade bonds have varied from as high as 80 per cent to as low as 33 per cent, depending on market conditions.
"The fund has been defensively positioned for some months, but has recently increased the amount of risk it is taking," he said.
"While there is, for example, exposure to government bonds in the UK, US and Sweden, this is offset by short positions in other countries, notably France."
"With a high degree of flexibility including the ability to use short positions, this fund should be well placed to guide investors through any tricky times ahead," he added.
The £660.9m fund is yielding 3.32 per cent and has outperformed the IMA Sterling Strategic Bond sector over one and five years, though slightly underperformed over three.
Over five years, the fund has made 46.36 per cent while the sector has gained 37.69 per cent.
Performance of fund vs sector and index over 5 yrs
Source: FE Analytics
It requires a minimum investment of £500 and has ongoing charges of 1.31 per cent.
AXA Framlington American Growth
Solid active management in the efficient US market is often difficult to come by, and by Connolly’s own admission, the AXA Framlington American Growth fund doesn’t look all that attractive by recent numbers.
However, he has a few reasons for backing the £546.1m portfolio over the long-term.
"This fund is ranked exactly 100th out of 100 in the North America sector over the past year. That doesn’t exactly inspire confidence," he said.
"While some investors will, quite rightly, use performance figures to help them make investment decisions, it is important to understand not just how a fund has performed but the reasons behind that and if it is likely to change."
"This is an out-and-out US growth fund as demonstrated by the current stock holdings, with 50 per cent of the fund held in information technology or consumer discretionary stocks. As a result it is likely to be more volatile than many other funds in the sector and also to have periods of outperformance and underperformance."
"We are currently experiencing the latter."
"However, this is in an environment when investors have been looking for more security by investing in established value-based companies producing steady dividends."
"If you take the argument that the US economy is slowly but surely on the road to recovery and that value stocks aren’t particularly cheap and then expand that to consider that negative news is already priced in to many growth stocks, then funds such as this could be positioned to perform much better in the coming months and years."
The AXA fund, managed by Stephen Kelly, has outperformed the IMA North America sector over five and 10 years, and performed in line over three. However, it has lagged the Russell 1000 Growth index over each period.
As Connolly mentioned, the fund has been the worst performer in the sector over the last 12 months, picking up 17.37 per cent.
It requires a minimum investment of £1,000 and has ongoing charges of 1.53 per cent.
JPM Emerging Markets
Now that Aberdeen and First State have soft-closed their leading emerging markets funds, gaining exposure to the region is much more difficult.
However, Connolly likes the four crown-rated JPM Emerging Markets fund, run by Austin Forey and Leon Eidelman.
"There is a great deal of negative sentiment surrounding emerging market equities at present, although when there is negativity, this often proves the best time to invest," Connolly said.
"Investors shouldn’t give up on emerging markets, and for many it should still maintain a role in their investment portfolios."
"This fund has been managed by Austin Foley since 1997 during which time it has done consistently well without trying to ‘shoot the lights out’. Foley is a bottom up stock picking manager but he is also a buy and hold manager, typically taking a five year view on the stocks he holds."
"The fund looks for established quality companies, with a large cap bias, backed by the huge resources of JPM, and it is rare that he holds what could be classified as a more speculative stock."
He says this style does mean the fund will lag if markets race ahead, but given the recent volatility, he believes Foley’s more cautious approach is well-suited to current market conditions.
Over the last decade, the fund has made 312.72 per cent, well ahead of both the IMA Global Emerging Markets sector and MSCI Emerging Markets index.
The fund’s performance has been more in line with both the sector and index over the medium-term, picking up 38.51 per cent over five years while the sector and index made 32.53 per cent and 29.64 per cent, respectively.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.68 per cent.
HSBC FTSE All Share Index
Although the active/passive argument tends to be polarising among financial experts, Connolly says there’s no reason both types of funds shouldn’t be blended to create a well-diversified portfolio.
"There are a number of arguments put forward why investors should ignore passive funds, often these relate to tracking errors or that investing in a passive fund guarantees you under-performance," Connolly said.
"However, the reality is that most actively managed funds underperform. A big advantage of passive funds is that they are much cheaper than their passive counterparts. So, if you aren’t confident of getting outperformance with an active fund, then you should really consider passive."
Connolly likes the HSBC FTSE All Share Index fund, which aims to track the performance of the FTSE All Share index.
The passive fund has performed broadly in line with the IMA UK All Companies sector and the FTSE All Share, tracking the index with an error of 3.16 per cent over five years.
Over that time the fund has made 51.9 per cent while the sector and index gained 54.47 per cent and 54.07 per cent, respectively.
The tracker has ongoing charges of just 0.17 per cent.
Henderson UK Property
Another out-of-favour sector that Chase de Vere is supporting is property, but Connolly says it only invests in funds that hold actual "bricks and mortar" property as opposed to property shares, such as the Henderson UK Property fund.
"Over the longer-term, property has the potential to provide consistent returns, an income stream, and it can provide diversification alongside other assets such as equities and fixed interest," he said.
He says the Henderson fund has been defensively positioned and as a result has produced a consistent, and relatively high, income stream from tenants primarily in the south-east of England.
"This approach has worked well, with the fund's yield of 4.2 per cent and a property void rate amongst the lowest in the sector. The fund managers are looking at taking some more risk as sentiment starts to improve," he said.
The fund has made 10.8 per cent over the last three years. It requires a minimum investment of £1,000 and has ongoing charges of 1.84 per cent.
