Europe was the region most heavily tipped to be the best performer next year, with 24 per cent of fund managers choosing it over the others.
As many as 19 per cent of managers tipped the UK, with the US in joint third and Asia fourth at 14 per cent.
There was a split of opinion on smaller companies, with 50 per cent of managers saying they would continue to outperform and 45 per cent saying they would not.
The smaller companies sector was the most tipped by the managers, with 38 per cent saying it would do the best in 2014 while just 24 per cent said blue chips would. This is up from just 4 per cent last year.
Property was favoured by 10 per cent of respondents, a huge uptick – even in 2007 only 3 per cent said it would be the best-performing sector.
The bullish sentiment towards the UK was one of the major changes from this time last year.
Performance of index over 2yrs
Source: FE Analytics
The fund managers cited better than expected economic growth in the UK and an improving economy in the US – along with attractive valuations – as reasons to be optimistic heading into next year.
However, there are plenty of highly regarded managers who disagree with that view.
FE Alpha Manager Mark Barnett, who will replace Neil Woodford as manager of the Invesco Perpetual Income and High Income funds, recently told FE Trustnet that he expected equity returns in 2014 to be lower than they have been in recent years.
“To my mind, conditions aren’t as upbeat as many portray,” Barnett said.
The manager is concerned that the recent rally has been born out of money printing from the world’s central banks, instead of fundamental economic and earnings growth. He says that when the Fed does eventually begin tapering, it will cause equity markets to pull back.
Andrew Bell (pictured), who runs the Witan Investment Trust, says investors would be wrong to get carried away with the positive sentiment surrounding equities and that bulls should revise their expectations for next year.
“2014 may be the first year for some time when economic growth is better than expected, but it may prove harder going than 2013 was for equity markets,” Bell said. “This is partly because rallies in 2013 have raised hopes and partly because better news on economic growth will lead to (possibly exaggerated) fears that monetary policy will be tightened.”
“Rather as the antelope on the Serengeti can sense coming rainfall long before it falls on their head, financial markets tend to look ahead and may already have factored in the good news. Crowded trades, like crowded plains, can be vulnerable to disappointment (lions),” he added.
Bell’s £1.2bn Witan Investment Trust has been one of the best-performing portfolios in the IT Global Growth sector over three years, with returns of close to 40 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Witan also sits in the top quartile over 12 months.
Despite his scepticism surrounding the improving risk sentiment, Bell’s closed-ended fund is almost fully invested. His largest regional weighting is to the UK, which makes up 40 per cent of AUM. Bell also holds 23.8 per cent in the US and 14.8 per cent in Europe.
Although the Witan Investment Trust has performed well, investors can still buy it at a 7 per cent discount. It is 7 per cent geared and has ongoing charges of 0.73 per cent, though that figure does not include its performance fee.
Jeremy Thomas, manager of the Brunner Investment Trust, has a more cautious outlook for 2014 than Bell.
He says that the challenges facing investors next year will be caused by tighter monetary policy and uncertainty over whether or not companies will be able to deliver enough earnings growth to justify their current valuations.
“There will also be unexpected challenges and these will come against a backdrop of rising confidence and higher valuations. We must remember to be fearful when others are greedy and construct portfolios accordingly,” Thomas added.
Alex Crooke, who manages the Bankers Investment Trust, has a slightly different opinion, however.
He says that the changing macro conditions will mean that while some companies may disappoint, companies that are showing good earnings growth will be able to outperform.
“Equity markets are in a transition,” he said.
“In recent years we have been witness to global markets propelled by sentiment; 2014 should usher in change as they switch to become driven by fundamentals anchored in the business cycle revival,” Crooke added.
His views are similar to those of FE Alpha Manager David Coombs.
Coombs recently told FE Trustnet that he felt the general indices, such as the FTSE All Share and S&P 500, are overvalued and so are likely to underperform.
