The key for investors in 2017 is to remain globally diversified, according to Juliet Schooling Latter, director at FundCalibre. 
As we head into the new year, the investment outlook remains mixed, with some encouraged by the shift away from central bank monetary policy to government-led fiscal policy particularly in the US.
However, the probable start of Brexit negotiations in March along with the uncertainty Donald Trump brings to the US presidency and what he means for globalisation have some investors worried.
Schooling Latter said: “I think 2017 is going to be quite a difficult year to call and there’s going to be a lot of volatility around, which is obviously going to give a lot of opportunities for investors but will make some investors rather nervous at the same time.”
“The macro is going to be pretty important, we’ve got the Brexit which I think is going to dominate the UK markets and we’ve got Trump coming in dominating the US markets.”
“So politics and volatility are going to be key themes of 2017 and given the somewhat sketchy outlook I think diversification is going to be key.”
She adds that in times when the economic outlook is subject to politics diversification can also benefit from a currency point of view which was particularly topical following the Brexit vote in June 2016.
Performance of currencies in 2016
Source: FE Analytics
Indeed, as the above graph shows, over the course of 2016 the pound dropped 16.83 per cent against the dollar, proving the importance of currency changes to a global investor.
Below, Schooling Latter outlines the fund picks she is making for the year based on the trends mentioned above with a focus on diversification.
The first on the list is the £1.5bn Jupiter UK Special Situations run by Ben Whitmore, which has a distinct contrarian and value-based approach.
“This fund offers investors access to a reasonably diversified portfolio of large and mid-cap UK stocks,” Schooling Latter said.
“The manager, Ben Whitmore, is hugely experienced and has had considerable success running this type of mandate.”
“Despite the fund having an allocation to mid-cap stocks and the highly stylistic nature of the investment process, it has historically been about two thirds as volatile as the FTSE 100.”
Last year, the MSCI World Value index outperformed the MSCI World Growth 11.46 percentage points and some market analysts are expecting this trend to continue into 2017.
Schooling Latter said: “The fund’s style will fall in and out of fashion as the business cycle evolves. For the past couple of years, this has been the case, but if the rotation from growth to value continues this year, investors could be well rewarded.”
Despite the struggles seen over the last decade for value investors, the fund has outperformed the FTSE All Share and the IA UK All Companies sector average.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Unsurprisingly, the fund performed particularly well last year (providing a total return of 23.63 per cent) with the value style returning to prominence, but over the last decade it has almost doubled (133.01 per cent) the returns of the benchmark (70.04 per cent).
Additionally, over the past decade the fund (13.07 per cent) has been 1.05 percentage points less volatile than the FTSE All Share (14.12 per cent).
Schooling Latter suggests, like the fund below, that investors should look to buy and hold this fund for around a three-year timeframe.
Another of the three-year funds, Schooling Latter says the £500m JOHCM Asia ex Japan fund run by FE Alpha Manager Samir Mehta and Cho-Yu Kooi could be in line for a return in 2017 after a disappointing 2016.
The fund typically holds around 45 stocks with the core of the fund made up of high quality, sustainable growth stocks (minimum 75 per cent), while up to 25 per cent is invested in companies more sensitive to the economy.
“The managers like companies that can do well in all market conditions and like consolidating industries such as technology and healthcare, focusing on those with the ability to consistently generate high returns on capital invested (minimum 15 per cent),” Schooling Latter said.
“They are not afraid to pay up for quality or growth. Both managers have experience of past crises and are not afraid to go against the grain in their selection.”
“The fund’s relatively small size gives them great flexibility. Asia has been out of favour for some time and now could be a reasonable entry point.”
The fund returned 21.62 per cent to investors in 2016, 6.05 percentage points below the MSCI AC Asia ex Japan index and placing it in the bottom quartile of the IA Asia Pacific ex Japan sector.
However, over a long timeframe the fund has performed strongly, sitting in the top quartile over a five-year period returning 71.95 per cent.
Specialists
Away from geography plays, Schooling Latter says insurance and real estate are two areas that investors should consider adding to their portfolios in 2017.
With the insurance sector, the analyst says the five crown-rated Polar Capital Global Insurance, run by Nick Martin, is her preferred choice.
“There are few fund managers with a more intimate knowledge of their market than the managers of this fund, which provides access to a specialist and often undervalued sector.”
“Their many years of experience in risk and casualty insurance are fundamental to the fund’s success and they invest in quality insurers that can produce sustainable underwriting profits.”
“These insurers tend to have management teams who are underwriting with their own money through material stock ownership.”
“Management ownership is crucial – as Warren Buffett says, no-one ever washes a rented car! Everything around us is insured, regardless of economic boom or bust, so this defensive characteristic, along with the managers’ experience of the intricacies of the insurance world, provide the comfort needed by investors in a specialist sector fund.”
“It is also a sector that tends to be less volatile than the wider market, so it can be a good diversifier in a portfolio.”
In the property sector, F&C Real Estate Securities is Schooling Latter’s preferred fund in the space which has suffered in 2016 from gating problems.
“Property - it's a bit of a dirty word at the moment as a number of physical property funds had to temporarily suspend trading last year, due to increased redemption post-ER referendum. But I still think property has a place in most portfolios as it gives greater diversification and income,” she said.
Indeed, both funds had very contrasting 2016’s, with Polar Capital Global Insurance returning 34.36 per cent while F&C Real Estate Securities produced 8.84 per cent for investors.
Performance of funds over 1yr
Source: FE Analytics
However, F&C Real Estate Securities’ returns were still above the IA Property sector average and over a three- and five-year timeframe the fund has been a top quartile performer in the sector.
Schooling Latter says this is because the fund offers as alternative form of investing in real estate as it buys in property-related shares rather than the properties themselves.
“In the very short term, real estate securities are highly correlated to the wider equity markets, but over the longer term, they have a higher correlation to the underlying property market,” she said.
“F&C Real Estate Securities invests in commercial and residential real estate securities in Europe and the UK.”
One factor for the fund’s success is the ability to short stocks (up to 10 per cent of net asset value) on which they have a negative view, which is unusual in their peer group and a big positive for the fund.
“Put into practice, it translates into consistent outperformance and favourable risk/return characteristics,” she added.