Schroder Recovery, Invesco Perpetual Strategic Income, and JP Morgan US Equity Income are among several funds advisers and fund pickers are continuing to back despite failing to impress in 2017.
This year has been a good one for active managers after a disappointing 2016 when the value trade bounced back pushing the index higher and hampering the relative returns of growth-orientated funds.
This proved to be just a one-year reversal, with the growth trade returning to form in 2017 and boosting many active funds.
However, not all managers have had a strong year. Below FE Trustnet asks industry experts which funds they are going to continue to back next year despite a lacklustre 2017.
JP Morgan US Equity Income
The first fund on the list is the one FE Crown-rated JP Morgan US Equity Income run by Clare Hart and Jonathan Simon.
The £3.7bn fund has a value approach with a large overweight to financials and underweight to technology causing it to underperform this year.
Indeed, year-to-date it has delivered a total return of 6.05 per cent compared with a gain of 9.98 per cent for the average IA North America sector fund and 10.52 per cent for the S&P 500 benchmark.
Performance of fund vs sector and benchmark over YTD
Source: FE Analytics
However, it was a top quartile performer during 2016 when the value trade came back into fashion, returning 36.8 per cent over the year.
Liontrust Asset Management’s head of multi asset John Husselbee said: “The numbers this year have dictated that growth funds have done extremely well and left in their wake have been the value funds.
“This is a global theme, not just in one or two markets, however it is most noticeable in the US and if I am looking to see where I think that the most dramatic catch up can be done it is in there.
“We have a holding in JP Morgan US Equity Income alongside our UBS US Growth fund as I think that any bouts in value, not necessarily in the next few months but more likely in the next few years, will support these types of funds.”
He added that what is particularly appealing is that the managers have run the fund for a long period of time, meaning they have shown consistency in their style and approach.
“We like to support those managers who we believe are style consistent but they have to prove it over a number of years and this fund has,” he said.
JP Morgan US Equity Income has a yield of 1.96 per cent and a clean ongoing charges figure (OCF) of 0.93 per cent.
Schroder Recovery
Staying with the value theme, Wellian chief investment officer Richard Philbin said investors shouldn’t give up on the two crown-rated Schroder Recovery fund.
Run by FE Alpha Managers Nick Kirrage and Kevin Murphy, the £1.1bn fund has a deep value approach, with overweights to financials, consumer services and materials companies.
While the fund has been a top quartile performer over the last decade, more recently it has struggled as the value trade has lagged.
Like the JP Morgan fund above, Schroder Recovery outperformed last year, returning 31.11 per cent as the style outperformed but has returned 6 per cent so far this year, 5.3 and 3.45 percentage points behind the IA UK All Companies sector and FTSE All Share respectively.
Performance of fund vs sector and benchmark over YTD
Source: FE Analytics
Philbin said: “The fund is dogmatically managed, but two experienced and excellent fund managers who operate a style which has not been in favour.
“They fish in parts of the pond which are being overlooked so being as it’s a fairly concentrated portfolio – circa 40 holdings – you only need a couple to come back in style and the shorter-term poor numbers will rapidly turn around.
“The fund will provide diversification benefits and there is also a relatively attractive 2 per cent yield whilst you wait.”
Schroder Recovery has an OCF of 0.91 per cent.
Invesco Perpetual UK Strategic Income
“The one we are certainly not giving up on is in the UK equity space and is Mark Barnett’s Invesco Perpetual UK Strategic Income fund,” Thesis Asset Management portfolio manager Steven Richards said.
“He is only up 6.5 per cent versus the index which is up 9 per cent and 2017 looks like it is going to be another fourth quartile year for him following on from an awful 2016.”
Indeed, barring a dramatic improvement in the final two weeks of the year, the fund is on course for its second annual fourth quartile performance in a row having returned just 1.12 per cent in 2016.
Richards said: “It is a bit of shame actually because in 2016 we understood why he had a bad year – obviously value stocks were bouncing back and his quality growth style was just out of favour in that year.”
The portfolio, which has a more quality growth tilt and includes financials, industrials and healthcare stocks among its largest weightings, started 2017 strongly but tailed off in the latter half of the year.
Performance of fund vs sector and index over YTD
Source: FE Analytics
“He has just had a series of stock-specific issues from the summer onwards that have seen him fall quite a few per cent behind the index this year,” Richards said.
“The likes of Provident Financial, Allied Minds and Capita and a smaller company in there to boot – Card Factory but the reason we are not giving up on him is because he has been pretty honest and he is not resting on his laurels of his past performance.
“He has admitted that with a degree of hindsight certain problems in those companies mentioned could have been foreseen.”
He added that he expects Barnett to re-visit his process in order to avoid too many more stock-specific issues cropping up in the future.
“The other reason we are still keeping faith with him is [that] we do believe the market is quite fully valued and if it were to have a more mediocre year or indeed a pullback his quality growth style normally performs well in those market conditions,” he noted.
The fund has a yield of 3.05 per cent and an OCF of 0.92 per cent.
ISE Cyber Security GO UCITS ETF
The final option for investors to stick with comes from Andy Merricks, head of investments at Skerritts Wealth Management, who has chosen the passive ISE Cyber Security GO UCITS ETF.
The $355m exchange-traded fund (ETF) provides investors exposure to companies engaged primarily in cybersecurity business activities.
“This is one that is a theme that personally I don’t think is going away and I think that will be one that will reward us,” he said.
“The risk isn’t going away and the need for everyone – personal, corporate and government – to bolster their cybersecurity is a pressing one.”
He said that they added the position around two years ago and said it is one to hang on to and add to throughout the next year, despite underwhelming for large parts of 2017.
“The first year was particularly good but this last year has been a bit disappointing. It has been negative over the last six months at a time when a lot of the US tech market has been roaring,” Merricks added.
Indeed, the fund returned 18 per cent in 2016 but has returned 13.16 per cent so far this year and over the last six months has lost 34 basis points.
Merricks noted: “13 per cent a year is not too disappointing but it is one that has been disappointing in the last nine or 10 months.”
The fund has costs of 0.75 per cent.