Let’s be honest now, did anyone really see that election result coming?
Despite months of warnings that a hung parliament was an inevitability, David Cameron and the Conservatives managed to win a narrow majority which has caused the FTSE 100 to rally and sterling to strengthen sharply this morning.
While it was expected that the SNP would do well at the polls, their performance has ripped the heart out of Labour’s influence in Scotland with high-profile names like of Jim Murphy and campaign leader Douglas Alexander casualties of the political sea-change.
There was even more doom and gloom for Labour though as they lost out on a number of battle-ground constituencies in England and Wales, meaning that Ed Miliband is has stepped-down as party leader.
While markets have initially reacted well to the Tories’ victory, attention will no doubt quickly turn to the EU referendum and future of Scotland’s position in the union.
Though politics has understandably dominated the headlines this week, elsewhere there have been worrying developments in fixed income markets as yields on UK, US, Japanese and European government bonds have all spiked – leading some experts to question whether a bubble in the asset class is bursting.
All told, it’s been an interesting week to be a financial journalist. With that in mind, here are our favourite stories of the week. From all of the FE Trustnet team, have a great weekend!
What Woodford and other fund managers think of the Tory win and SNP land slide
Firstly, we start with reporter Daniel Lanyon’s round-up of the initial reaction to the election from leading industry experts. 
Neil Woodford (pictured), head of investment at Woodford Investment Management and an FE Alpha Manager says the results were a shock but positively so, although a Tory win has opened up a Pandora’s box in the shape of a referendum on the UK’s membership of the European Union.
“The result of the election looks much better than expected – that isn’t a politically inspired statement but one that is based on the fact that such a decisive result removes the risk of the prolonged period of political uncertainty that we had expected to prevail,” Woodford said.
“That is reflected in the surge in the pound that greeted the BBC exit poll which provided the first indication of such a strong conservative showing and the positive opening for UK equity markets this morning."
“Nevertheless, it certainly doesn’t remove all of the political uncertainty. The performance of the Scottish Nationalist Party gives them a significant voice in parliament but no power.”
Star manager Richard Buxton also thinks the result is positive for markets, but says could breed further uncertainty.
“The scale of the Scottish National Party’s victory in Scotland, though, together with the scale of UKIP’s share of the national vote (at over 12 per cent), confirms the extent to which we are an increasingly divided nation.”
“The Scottish issue – and, inextricably linked, the English issue – is not going away as many hoped after the Scottish referendum, but will be a feature of the political landscape throughout the five years of the Parliament. This may not be entirely positive for the Scottish economy.”
Five reasons why you’re wrong to write off UK growth funds
Sticking in the UK and next up is an article written by head of FE Trustnet content Joshua Ausden, which was based around a poll conducted at the recent FE UK Growth Event.
According to the survey, 70 per cent of the UK’s leading fund selectors believe that the out-of-favour UK All Companies sector is due a comeback with many also expecting better things from underperforming UK Smaller Companies funds.
Both sectors have been hit by huge outflows recently, but given the increasingly positive sentiment, Ausden ran through five of FE’s highest rated UK growth funds, which all have different characteristics, for investors to consider such as CF Lindsell Train UK Equity, Old Mutual UK Alpha and CF Miton UK Value Opportunities.
Has Bill Gross just told you to buy nothing but absolute return funds for 35 years?
Next up is a fairly bearish article following legendary US bond giant Bill Gross’ recent note to investors.
The former Pimco, now Janus, manager spoke of his “sense of ending” and fear of dying before moving onto his argument that the bull run which has boosted asset markets for more than three decades is set to come to a close.
Performance of indices over 20yrs
Source: FE Analytics
“We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm.”
As a result, Gross says investors now need to focus on risk/reward more than ever and therefore change the way they think about portfolio construction.
“35 years of an asset bull market tends to ingrain a certain way of doing things in almost all asset managers. Since capital gains have dominated historical returns, investment managers tend to focus on areas where capital gains seem most probable.”
“Hogwash. This is all ending. The successful portfolio manager for the next 35 years will be one that refocuses on the possibility of periodic negative annual returns and miniscule Sharpe ratios and who employs defensive choices that can be mildly levered to exceed cash returns, if only by 300 to 400 basis points.”
Why investors need a drastic rethink about equity income funds
This article was based around data from FE Analytics, in which we looked at the IA UK Equity Income funds which have paid-out the most in dividends over the last five years.
While investors will no-doubt know that small and mid-cap funds have performed very well from a total return point of view over the last half a decade, but the researched showed that lower-cap funds such as PFS Chelverton UK Equity Income and Unicorn UK Income have also paid out the most to their investors as well.
Source: FE Analytics
Miton’s Gervais Williams then told us why he thinks that trend will only continue, given that many FTSE 100 stocks have already cut their dividends this year, that even more don’t have the financial stability to maintain their dividend at current levels and you can find more dividend cover, a precursor for dividend growth, in the lower end of the FTSE All Share.
Ricketts: Why I’m selling the top-performing Fundsmith Equity fund
On a more portfolio specific level, Margetts’ Toby Ricketts told us that funds with high exposure to bond-like equities are due a period of underperformance as monetary policy starts to tighten and fixed income yields begin to rise and has therefore sold Fundsmith Equity as a result.
The five-crown rated £3.5bn fund, which is headed up by FE Alpha Manager Terry Smith, has been a phenomenal run over recent years due to its focus on high quality businesses which have advantages that are difficult to replicate, do not need significant leverage to generate returns, have reliable earnings and are resilient to change.
However, Ricketts said that the portfolio’s bias towards high quality, defensive stocks – which have been lapped up by “tourist” fixed income investors who have been forced up the risk scale – will mean it goes through a period of underperformance as bond yields continue to rise.
“The fund has performed very well against its benchmark and the global sector. If a fund were to significantly underperform over that period of time you would ask questions, so when it performs so well you have to do the same – especially as it is very concentrated and has low turnover,” he said.
“Smith holds a lot of stocks which have come in vogue recently with QE in the background. The team at Fundsmith are also first to admit that they have been in the right place at the right time as they have been hit by a lightning strike of liquidity.”
“I think the fund has delivered a huge amount of returns too early so we have taken some money out. Our verdict on the manager hasn’t changed and we will probably allocate to the fund again in the future, but we were concerned about the level of its significant outperformance.”
Funds that tick all the right boxes: UK Equity Income
In the first of a series over on Trustnet Direct, Anthony Luzio looked at which funds in the UK Equity Income sector have five FE Crowns, at least one FE Alpha Manager at the helm and a place on the Trustnet Direct 100 list of recommended funds.
Only two funds in the sector fitted this profile: Majedie UK Income and Threadneedle UK Equity Income.
Majedie Income looks for stocks that are unloved by the market, but undergoing a positive transformation, while still paying out an acceptable dividend to investors.
The FE Research team said Threadneedle UK Equity Income would be a good diversifier in a portfolio as its managers Richard Colwell and Leigh Harrison aim to avoid buying all the same stocks as their peers.
There are four funds in the UK Equity Income sector that have the maximum five crown-rating and are run by at least one FE Alpha Manager, but that are not on the Trustnet Direct 100 – Marlborough Multi Cap Income, MFM Slater Income, Schroder Income and Threadneedle UK Equity Alpha Income.