Steady global growth and positive economic fundamentals mean the outlook for most markets is sanguine over the medium term, according to Architas’ Adrian Lowcock (pictured).
The investment director said there are several equity regions which are likely to offer positive upside. However, he is less positive on prospects for the UK, given the sheer amount of Brexit-related uncertainty on the horizon.
“We’re in this relatively benign Goldilocks global situation,” he said. “Economic growth is okay and there’s nowhere really in the world that is suffering at the moment. So everything is continuing in the right direction.
“If you look where we are in the UK though, the data is slightly better but not enough to get excited about. Of course, we have ongoing Brexit negotiations. If you’re a global investor, why would you allocate to the UK when you just don’t know what’s going to happen?”
In the below article, Lowcock discusses four regions which could present good opportunities for equity investors and which funds he believes are best-placed to gain access to those market areas.
Japan: Man GLG Japan Core Alpha
Lowcock said Japanese equities are attractively valued, especially given its corporate earnings growth over the last 12 months has outpaced most other regions.
His favourite fund in the market area is Stephen Harker’s Man GLG Japan Core Alpha fund, which is £1.9bn in size and has a concentrated portfolio of 43 stocks.
“Stephen Harker is a contrarian investor, actively looking for companies out of favour with investors,” he explained. “He uses valuation measures including price-to-book, dividend yield and price earnings ratio to identify such stocks.
“He selects companies with strong fundamentals where he believes there is the opportunity for a turnaround. He has significant exposure to banks which were unloved following the country dipping into negative interest rates last year.”
Over the last five years, the fund has returned 152.57 per cent compared to its average peer and benchmark’s respective returns of 121.99 and 126.82 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has done so with a top-quartile Sharpe ratio (which measures risk-adjusted returns), but with a bottom-quartile maximum drawdown (which measures the most money lost if bought and sold at the worst times) and annualised volatility, which suggests it may not be best-suited to more cautious investors. This is perhaps unsurprising, given its value mandate.
Man GLG Japan Core Alpha has a clean ongoing charges figure (OCF) of 0.9 per cent.
Given that the US is in the late stages of its economic cycle, Lowcock said a long/short fund would be well-placed for the current environment.
As such, he favours FE Alpha Manager Stephen Moore’s £934m Artemis US Extended Alpha fund, which adopts a 130/30 approach to portfolio construction.
“This fund is able to use tools to buy or sell investments it does not hold (go short) which means the managers are able to potentially profit from expensive areas of the market,” Lowcock explained. “The team has an excellent knowledge of the wider economic picture in the US and uses this to generate broad themes which are then used to guide stock selection ideas.
“The fund has a growth focus but should also be able to protect investors in weaker markets. This late in the economic cycle a long/short fund is more sensible as the quantity of shorting opportunities should be greater.”
Since its launch in September 2014, the fund has outperformed its average peer and benchmark by 29.11 and 19.59 percentage points respectively with a total return of 86.69 per cent. In terms of risk metrics, it is in the top quartile for its maximum drawdown and Sharpe ratio and in the second quartile for its annualised volatility over this time frame.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“Currently it is positioned to benefit from the continued growth in technology and financial services, which should benefit from stable global growth,” Lowcock added.
Artemis US Extended Alpha has a clean OCF of 0.86 per cent.
Asia/emerging markets: RWC Global Emerging Markets
Lowcock said Asian equities remain appealing given ongoing improvements to corporate governance. While he doesn’t believe commodities – on which many emerging markets are dependent on - will rally exponentially from here, he nevertheless thinks the market area offers strong growth prospects.
One fund in the sector that he particularly likes is RWC Global Emerging Markets, which was launched by John Malloy at the end of 2015.
“It is actively managed with a view that to invest successfully in emerging markets you need to understand the wider economic environment and themes within emerging markets,” the investment director explained.
“This is combined with thorough stock selection with no consideration of the benchmark – companies are included on their own merit.
“Valuations are important as the managers look for growth at a reasonable price. At the moment they favour China on valuation grounds, but the fund can invest anywhere in emerging markets and the team are flexible to act quickly if the outlook for China should change.”
The fund has returned 107.85 per cent since its launch, compared to its average peer and benchmark’s respective returns of 69.7 and 75.96 per cent. It has done so with a top-quartile maximum drawdown and Sharpe ratio and a second-quartile annualised volatility.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
That said, investors should note that this isn’t a particularly long time frame in which to monitor a fund’s performance. Lowcock pointed out that it has a momentum style which should do well in the early years of a bull run in emerging markets but may suffer in a downturn.
RWC Global Emerging Markets has a clean OCF of 1.3 per cent.
Europe: BlackRock European Dynamic
Lowcock said that, despite the recent rally in European equities, the market area remains attractively valued. He particularly likes the five FE Crown-rated BlackRock European Dynamic fund, which has been headed up by FE Alpha Manager Alister Hibbert since its launch in 2010.
“Hibbert uses a flexible style, allowing him to adapt the portfolio to changing market conditions,” Lowcock said.
“He employs a rigorous, disciplined fundamental research process combined with strong economic awareness and sophisticated risk management tools to produce consistent market beating returns over time.
“Hibbert runs an unconstrained fund with a focus on companies which have higher potential earnings growth than the market over the medium and long term. The flexible approach means the fund will change style from growth and value depending on where we are in the economic cycle.”
Over five years, the £2.6bn fund has outperformed its average peer and benchmark by 33.8 and 35.94 percentage points respectively with a total return of 135.6 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Over the same time frame, it has a top-quartile Sharpe ratio, as a well as a second-quartile annualised volatility and maximum drawdown.
BlackRock European Dynamic has a clean OCF of 0.92 per cent.