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Five funds to consider for cautious portfolios in 2018

27 December 2017

With 2018 almost upon us, FE Trustnet asks the experts which funds currently look like attractive additions to cautious portfolios.

By Gary Jackson,

Editor, FE Trustnet

Absolute return funds with a focus on UK equities, income strategies and the bond market are among the funds that could be considered by investors with a more cautious mindset, according to a panel of professional fund pickers.

While 2017 has seen a number of markets reach new record highs, there are signs of depressed investor sentiment on the back of seemingly stretched valuations, the uncertainty created by the UK’s decision to quit the European Union and the gradual tightening of monetary policy by several central banks.

Recent research by Hargreaves Lansdown found that sentiment among UK private investors has fallen to a record low in 2017 on the back of such concerns. The HL Investor Confidence index, which polls between 250 and 500 of the platform’s clients on a monthly basis, stands an average reading of 76 points for 2017 – the lowest annual level since it was launched in 1995.

With this in mind, FE Trustnet asked five professional fund pickers which funds could be attractive opportunities for cautious investors as we move into 2018.

 

Darius McDermott – BlackRock UK Absolute Alpha

Chelsea Financial Services managing director Darius McDermott chose an absolute return fund for his cautious 2018 pick but opted for one that focuses on UK equities with the aim of making a positive return regardless of current market conditions.

Performance of fund vs sector and index over 5yrs

 

Source: FE Analytics

“Run by one of the best-resourced and most experienced UK equity teams, BlackRock UK Absolute Alpha is a very useful portfolio diversifier, with much lower volatility than the UK equity sector average,” he said.

“The manager has a pragmatic approach to stock selection which we like, taking the macroeconomic environment into account as well as looking at each individual company's fundamentals. The fund aims to achieve a positive absolute return for investors regardless of market conditions and the manager will use contracts for differences (CFDs) to secure short positions, aiming to make money when share prices fall as well as rise.”

BlackRock UK Absolute Alpha, which is managed by Nick Osborne and Nigel Ridge, has posted annualised volatility of 4.28 per cent over the past five years compared with 9.22 per cent for the average IA UK All Companies member and 9.55 per cent for the FTSE All Share index.


In their most recent review, the managers said they were positioning the portfolio “in between the pessimism displayed by the bond market and the optimism offered by the climb higher in equities”. While the fund is short the index, the portfolio has net long positions in sectors such as consumer services, financials and industrials.

BlackRock UK Absolute Alpha has an ongoing charges figure (OCF) of 0.92 per cent but does levy a 20 per cent performance fee.

 

Simon Evan-Cook – Artemis US Absolute Return

Simon Evan-Cook, senior investment manager for multi-asset funds at Premier Asset Management, also went for a long/short equity absolute return fund but one focusing on the US market – Artemis US Absolute Return, which is run by FE Alpha Manager Stephen Moore.

“One of the big questions investors face is, what do you hold if you’re cautious on markets but think bonds and cash look likely to lose in real terms over the long term, as we do?” he said.

“One of the best solutions we can find is market-neutral (or close to neutral) long/short funds. These rely equally on the manager’s skill at holding good stocks and shorting poor ones, and therefore shouldn’t be susceptible to either bond or stock markets selling off. One manager we rate in this area is Stephen Moore at Artemis, and he forms a part of our ‘insurance’ portfolio within many of our funds.”

Performance of fund vs sector and index since launch

 

Source: FE Analytics

Although the fund only launched after Moore joined Artemis in 2014, the manager has experience of running long/short US equity money going back to 2010. His process makes use of macroeconomic analysis to understand cyclical and secular trends in the North American economy, then identifies stocks set to benefit or be hampered by these.

The manager’s current thinking notes that the economic background remains supportive in the US but concedes that the payoff between risk and reward looks “increasingly skewed”, leading to an outlook that the coming months could be more challenging for investors as the US central bank tightens monetary policy.

Artemis US Absolute Return has a 0.88 per cent OCF and charges a performance fee of 20 per cent.

 

Ben Willis – TwentyFour Absolute Return Credit

Whitechurch Financial Consultants head of research Ben Willis chose the TwentyFour Absolute Return Credit fund as his cautious option. He noted that manager Chris Bowie, who also runs the TwentyFour Corporate Bond fund, has displayed “very impressive” risk-adjusted returns.

“Although the fund sits within the absolute return sector, it is effectively a long-only bond fund, that is unlevered and targets an income of at least 2.5 per cent per annum, net of fees, and less than 3 per cent volatility per annum,” Willis said.

“Bowie and his team will actively manage the portfolio to dampen volatility and protect capital, all underpinned by their proprietary bond screening system. Since inception the fund has exceeded its target return with lower volatility than the stated target.”


FE Analytics shows that the fund, which launched in August 2015, has posted annualised volatility of 2.38 per cent with a maximum drawdown of 1.41 per cent. Over this time, it has generated a total return of more than 10 per cent – doubled that of its average peer in the IA Targeted Absolute Return sector.

TwentyFour Absolute Return Credit has an OCF of 0.65 per cent.

 

Rob Burdett – Janus Henderson Strategic Bond

Rob Burdett, who co–heads of BMO Global Asset Management’s multi-manager team with Gary Potter, also chose a bond fund for his 2018 cautious option. He prefers the Janus Henderson Strategic Bond fund, which is currently outperforming its average peer over one, three and five years.

“Managers John Pattullo and Jenna Barnard currently have a bearish view of the bond world but this fund’s flexible brief allows their investors to profit from this stance,” he said. “They use their broad strategic brief to capitalise on opportunities that the market throws up. As quantitative easing policies mature, their experience and skills should prove very useful.”

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

Pattullo and FE Alpha Manager Barnard currently hold that the world economy is in a period of low growth, low volatility, low default rates and low interest rates that will persist for several more years. This should be good for bonds as low rates will stop dramatic price falls and the fund has performed well on the back of positioning for this, although it could lag its peers if rates rise faster than expected.

Janus Henderson Strategic Bond has a 0.69 per cent OCF and is yielding 3.60 per cent.

 

Jason Hollands – Invesco Perpetual Global Targeted Income

Tilney managing director of business development and communications Jason Hollands opts for the Invesco Perpetual Global Targeted Income fund as his cautious 2018 pick.

“A lot of investors have been piling into sterling strategic bond funds in recent months, perhaps because of speculation in some quarters of a stock market correction being overdue,” he said.

“Corporate bonds are traditionally perceived as a safe haven asset class but this worries me in the current market environment because the mispricing in fixed income is even greater than that found in equity markets and yields remain dismal once inflation is factored in. For cautious investors, an alternative might therefore be to invest in diversified multi-strategy absolute return funds instead.”

Invesco Perpetual Global Targeted Income aims to deliver an income target of LIBOR +3.5 per cent before fees, with less than half the volatility of global equities. It also has the aim of preserving capital in all market conditions, over rolling three-year periods.

The portfolio is built around 25 investment ideas across currencies, equity markets, inflation, interest rates, credit and commodities. Ideas being explored in the portfolio include the Russian ruble vs US dollar, equity dispersion and US vs UK inflation.

It has a 0.87 per cent OCF and is yielding 3.29 per cent.

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