Financial advisers expect to put less of their clients’ money into UK equities over the coming year as Brexit remains an ongoing concern for investors, research by Schroders suggests.
The Schroders Adviser Survey 2017 asked which Investment Association sectors advisers expect to recommend to their clients over the course of 2018. Just 10 per cent said they would be tipping IA UK All Companies (although this means it is still the fifth most popular sector) while the proportion backing IA UK Equity Income has collapsed to around 2 per cent.
This comes as advisers flagged Brexit as the biggest concern for their clients over the coming 12 months, with 10 per cent more advisers highlighting Brexit as a worry than did in the 2016 edition of the survey. Most advisers think that Brexit will have a negative impact on client portfolios, with almost 90 per cent of clients expressing concern about this to their adviser.
Other areas of concern that advisers drew attention to included geopolitical risks such as the tension between the US and North Korea, political disruptions, increased regulation and inflation.
Investment Association sectors that advisers will be recommending
Source: Schroders Adviser Survey 2017
At the same time, there has been a big jump in the number of advisers looking at global and European equities while multi-asset sectors also remained popular with advisers. Europe was by far the most popular area on a regional basis, with the survey also finding that advisers are increasingly looking at global funds over regional specialists.
Other trends highlighted by the survey include advisers reporting continued demand for passive investment products, with more than 65 per cent saying they use index trackers in client portfolios. However, growth in passives seems to be easing as more than 60 per cent of advisers said they haven’t increased the proportion of assets held in trackers over the past 12 months.
In this article, however, we will focus on the sectors that advisers plan to buy in 2018 as well as revealing the funds from each that they’ve been researching more. In order to do this, we looked at how advisers have been researching funds on FE Analytics, highlighting those that have been winning a bigger share of research activity this year when compared with 2016.
IA Europe ex UK
While the Brexit negotiations have led to a drop in the number of advisers planning to allocate to the UK, the same isn’t true for European equities as the IA Europe excluding UK sector was the third most popular in the Schroders survey.
Europe has returned to the forefront of investors’ attention this year thanks to its steadily improving economic environment and continued stimulus from the European Central Bank. Added to this is the fact that the continent still looks relatively attractive for valuations when compared with the US, which has led the bulk of the post-financial crisis rally.
The popularity of Europe is all the more clear when looking at the funds that professional investors have been researching on FE Analytics in 2017. Jupiter European has been the most researched fund from the entire Investment Association universe, jumping from eighth place in 2016 and replacing Standard Life Investments Global Absolute Return Strategies at the top.
The below table shows the 10 IA Europe ex UK funds that have seen the biggest increase in their share of research activity on FE Analytics over the course of 2017. Given the big uptick in research needed to top the overall Investment Association table, Jupiter European is in first place here as well.
Source: FE Analytics Market Intel Tool
The £4.9bn fund, which is run by FE Alpha Manager Alexander Darwall, is one of the most respected funds in the sector thanks to a very strong track record. The five FE Crown-rated fund is top decile in the peer group over three, five and 10 years, as well as being the best performer over one year with a 33.09 per cent total return.
The FE Invest team, which has Jupiter European on its Approved List, said: “Darwall has built up an impressive track record in European equity investing and this strategy and style of buying high-quality global companies has now weathered a number of market environments. The fund could sit well as a core European equity holding, should investors believe that more globally oriented, higher-growth companies will continue to outperform a more balanced approach.”
James Sym’s £1.3bn Schroder European Alpha Income fund is another respected member of the IA Europe ex UK sector and is top quartile over three- and five-year periods. The portfolio is constructed with reference to the business cycle and is tilted towards cyclical or defensive stocks depending on the outlook; at the moment, Sym is thinking about capital protection after the strong rally in European equities.
Marlborough European Multi-Cap is managed by David Walton and holds five FE Crowns. The £331.8m fund – which has made top-decile returns over one, three and five years – can invest across the market cap spectrum and currently has just under half of its portfolio in small- and micro-cap stocks.
IA Global
The Schroders survey found that the IA Global is the second most popular with advisers making recommendations for 2018. As mentioned at the start of the article, advisers are increasingly turning to global funds over those specialising in single regions.
The sector is often seen as a difficult area for active managers to add value, given the vast universe of stocks to cover and the dominance of the US market in the index. However, the peer group remains a popular one with investors and is one of the largest in the Investment Association universe.
Among the professional investors using FE Analytics, the most heavily researched funds is Fundsmith Equity, which is headed up by FE Alpha Manager Terry Smith. The £13bn fund, which has been one of the sector’s best performers since its launch in 2010, focuses on stocks that can make sustainable returns on investors’ capital of over 10 per cent.
Fundsmith Equity tends to be one of the most viewed funds on FE Analytics no matter what time frame is considered. However, its share of total research on the tool has declined in 2017 when compared with its 2016 share; the following table shows the IA Global funds that have captured a bigger proportion of attention this year.
Source: FE Analytics Market Intel Tool
In first place is the £794.6m Old Mutual Global Equity fund, which is managed by Ian Heslop, Amadeo Alentorn and Mike Servent. Holding five FE Crowns, the fund uses a systematic process to avoid style bias and make trading decisions in a methodical way.
Square Mile Investment Consulting & Research, which gives the fund an ‘A’ rating, said: “The fact that investment decisions are based on a level of quantitative analysis naturally helps the managers remove certain behavioural biases and be fairly dispassionate about where the portfolio is invested.
“Broadly speaking we would expect this fund to outperform the MSCI World index during periods of market growth as well as when markets are being driven by fundamentals. Whilst it is important to be are aware that it may well underperform during market inflection points, a natural weakness for more quantitatively driven strategies, we believe that investors will be well served over a full market cycle.”
Standard Life Investments Global Smaller Companies is the fund with the second biggest increase in its share of IA Global’s research activity, possibly reflecting improved economic confidence among advisers. The £718.3m fund is managed by Alan Rowsell and makes uses of the proprietary Matrix stock selection tool that was developed for the successful Standard Life Investments UK Smaller Companies fund.
Schroder Global Recovery, which has seen the third largest surge in interest, is another that suggests greater confidence in global growth as this tends to be beneficial to value strategies. Managed by the FE Alpha Manager duo of Kevin Murphy and Nick Kirrage, the £105.5m fund is fourth quartile over the past year but is often tipped by analysts as a potential beneficiary of a rally in the value style.
IA Mixed Investment 20-60% Shares
The sector that most advisers told Schroders they would be allocating to is IA Mixed Investment 20-60% Shares, which highlights the ongoing demand for income and a generally cautious mindset.
As the table at the start of the article showed, the sector is the most popular by a decent margin. However, fewer advisers are planning on recommending the peer group in 2018 than in any of the previous three years of the survey.
The most heavily researched member of the IA Mixed Investment 20-60% Shares sector over the year-to-date has been Paul Causer, Paul Read and Ciaran Mallon’s £3bn Invesco Perpetual Distribution fund. This is one of the largest members of the sector and is therefore always under the spotlight, although its share of overall research is down this year.
Source: FE Analytics Market Intel Tool
Artemis Monthly Distribution is the IA Mixed Investment 20-60% Shares fund experiencing the biggest jump in interest this year. The £669.2m fund holds five FE Crowns; James Foster runs the bond portion of the portfolio while Jacob de Tusch-Lec manages its equity exposure.
It has a very strong track record. Artemis Monthly Distribution has made first quartile returns over the past year and is the sector’s best performer over three- and five-year periods. Over the past five years, it has generated a 78.08 per cent total return compared with a 35.40 per cent gain from its average peer.
The fund with the second largest jump in research this year – Vanguard LifeStrategy 40% Equity – is a passive product. The LifeStrategy range offers exposure to Vanguard’s index trackers and automatically rebalance to keep them in line with static asset allocation targets. They have proven to be very popular with advisers since launch in 2011.
Kames Diversified Monthly Income, which is managed by Vincent McEntegart and Jacob Vijverberg, gained its three-year track record earlier in 2017 and is top quartile over one and three years. The process behind the £416m fund maintains that asset allocation is the main driver of returns and attempts to generate income through a portfolio of lowly correlated assets.