With the end of the year fast approaching, fund managers and market commentators have been finalising their outlooks for 2021 in recent weeks. However, making predications can be a tricky business: this time last year the Conservatives had just claimed their biggest parliamentary majority since 1987 and the Covid-19 coronavirus was relatively unknown outside China.
Below, Tom Stevenson, investment director at Fidelity Personal Investing, reveals his fund picks that could plug into several broad themes next year.
“Investing statistics can be misleading,” he said. “Look at the performance of last year’s fund recommendations and you would be tempted to think that 2020 had been a boring year.
“I make my selections for 2021 only too aware that none of us possesses a crystal ball,” said Stevenson. “The pandemic has reminded us that the best an investor can hope to do is prepare their portfolio for the unexpected.”
Outlooks published in November are wholly more positive than they were in October, markets bounced as the hope that widespread vaccinations would bring back a sense of normality in 2021.
“There are good reasons to believe that a combination of pent-up consumer demand, a re-opening of shops and restaurants and a renewed desire and ability to travel will be supported by continuing fiscal and monetary support next year,” he said. “That could be a potent mixture for markets.”
The investment director’s picks are broken down into three themes: sustainability; the search for income; and, attractive valuations in less popular markets.
Brown US Advisory Sustainable Growth
Stevenson’s first pick is the $2.3bn Brown US Advisory Sustainable Growth fund, run by David Powell and Karina Funk.
“I expect sustainability to continue to drive performance as it has throughout the pandemic and companies that score highly on environmental, social and governance factors should continue to be rewarded by investors,” he said.
The five FE fundinfo Crown Rated fund holds a relatively concentrated portfolio of 30-40 stocks, which includes Microsoft, Amazon and Visa.
“The managers have a strong valuation discipline, which prevents them paying over the odds,” Stevenson added. “This is an especially important consideration in the US market as it continues to hit new highs.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The fund has made a total return of 96.50 per cent over the past three years, outperforming the Russell 1000 Growth Index (81.52 per cent) and the IA North American sector (45.11 per cent). It has an ongoing charges figure (OCF) of 0.87 per cent.
Stewart Investors Asia Pacific Leaders Sustainability
Staying with the sustainability theme, Stevenson’s second choice is the £7bn Stewart Investors Asia Pacific Leaders Sustainability fund, managed by Sashi Reddy and FE fundinfo Alpha Manager David Gait.
He noted that many market strategists expect non-US market – particularly those in Asia and emerging markets – to outperform in the year ahead.
“This fund focuses on companies that contribute to, and benefit from, economically and environmentally sustainable development,” he said. “It looks for ‘socially useful’ businesses and manages risk by restricting its search to mainly large- and mid-sized companies.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years, the fund has made a total return of 37.29 per cent against a 26.44 per cent gain for the MSCI AC Asia Pacific ex Japan index. It has an OCF of 0.84 per cent.
Foresight UK Infrastructure Income
Stevenson’s third choice is inspired by the environment of continued monetary stimulus as investors will be searching for income amidst low interest rates.
Combining the income with the focus of sustainability, he opted for the FP Foresight UK Infrastructure Income fund which aims for 5 per cent annual income, achieved by investing in other investment companies that own real assets in the renewable energy and infrastructure sectors.
“This is an attractive alternative asset class which should benefit from income investors diversifying their holdings away from shares and bonds,” said Stevenson. “The fund might also provide some protection against inflation, were that to start to return next year.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years, the £517.7m Foresight UK Infrastructure Income fund has made a total return of 28.44 per cent compared with a gain of 1.61 per cent for its FTSE All Share benchmark. It has an OCF of 0.65 per cent and a target net yield of 5 per cent.
Fidelity Special Situations & Fidelity UK Select
“My final pick is a double-header,” said Stevenson. “I am keen to have some exposure to the out-of-favour UK stock market in 2021 because this year we should start to get some clarity about Britain’s post-Brexit future.
“The UK market has underperformed for many years, but most notably since the 2016 referendum and this makes it look interesting from a contrarian perspective.”
This double-pick is in line with his third theme of unloved markets benefitting from their relatively attractive valuations and for the out-of-favour value style to gain ground on the growth stocks which have led the field for so long.
“If value does continue to gain in popularity, then the Fidelity Special Situations fund would be an obvious beneficiary,” he said.
The £1.9bn fund has been run by Alpha Manager, Alex Wright since 2016 and holds companies which are deemed to be undervalued and recovery potential not fully realised by the market.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Fidelity Special Situations has made a loss of 7.95 per cent over three years, compared to a gain of 3.62 per cent for the average IA UK All Companies sector peer and a 1.61 per cent return for the FTSE All Share benchmark. It has an OCF of 0.91 per cent.
Stevenson continued: “If, on the other hand, a more defensive, growth style prevails in 2021 then I can think of no better a fund with which to play the UK than the Fidelity UK Select fund.”
The fund has been run since 2007 by another Alpha Manager, Aruna Karunathilake, who has a focus on quality and growth.
“He wants to own good businesses for the long term and performs best when strong brands and robust balance sheets are in vogue,” Stevenson added.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years, Fidelity UK Select has made a total return of 6.74 per cent compared with a gain of 3.62 per cent for the average IA UK All Companies fund and a return of 1.61 per cent for its FTSE All Share benchmark. It has an OCF of 0.92 per cent.
“I am viewing Special Situations and UK Select as flip sides of one UK recommendation and will be holding both this year. Indeed, I will hold all of the above funds in my ISA and SIPP through 2021,” he said. “I believe in eating my own cooking when it comes to my annual fund picks.”