Emerging markets, Japan and global smaller companies are among the themes FE Trustnet journalists are backing to perform well next year.
Below, the FE Trustnet team reveals the funds it’s backing next year and the reasoning behind these choices.
Gary Jackson – Baillie Gifford Emerging Markets Growth
After choosing First State Global Listed Infrastructure last time around, FE Trustnet editor Gary Jackson has opted for an emerging markets strategy in 2018.
“Emerging markets have had a strong 2017 and, according to Bank of America Merrill Lynch’s Fund Manager Survey, have become a consensus overweight among global asset allocators,” he explained. “However, I think that the rally in this part of the market looks set to continue as valuations remain compelling after several years in the investment wilderness.
“Finding a fund in the IA Global Emerging Market sector that can capture upside isn’t as easy as it sounds, however, with FE Analytics showing that its average member has an upside capture against the MSCI Emerging Markets index of less than 90 per cent over the past decade.”
Performance of the index vs sector over 10yrs
Source: FE Analytics
“Not wanting to go with an index tracker (given I feel this is a part of the market where active management is needed to avoid pitfalls) I’ve opted for one of the IA Global Emerging Market sector’s few funds to outperform in rising markets: Baillie Gifford Emerging Markets Growth.”
Jackson said: “Managed by Richard Sneller since 2005 with co-manager Mike Gush joining in 2015, the £724.3m fund has an upside capture ratio of 122.39 per cent over the past decade and a downside capture ratio of 99.58 per cent, showing (slight) outperformance in down markets as well. This has translated into top-quartile returns over one, three, five and 10 years.”
He added: “Like all Baillie Gifford equity funds, Baillie Gifford Emerging Markets Growth is managed with a long-term, bottom-up process that has a growth bias.
“Holdings at the moment include Samsung Electronics, Tencent, Alibaba, Taiwan Semiconductor Manufacturing Company and Ping An Insurance, with more than one-third of the portfolio in Chinese stocks.”
Baillie Gifford Emerging Markets Growth has an ongoing charges figure (OCF) of 0.80 per cent and holds four FE Crowns.
Jonathan Jones – Lindsell Train Japanese Equity
Reporter Jonathan Jones came unstuck in 2017 after backing FE Alpha Managers Kevin Murphy and Nick Kirrage’s Schroder Recovery fund, as momentum in the value trade evaporated at the start of the year. As such, this year Jones has opted for something slightly different.
“Part of me wanted to re-select last year’s Schroder Recovery pick, as although the value trade failed to materialise in 2017 I remain convinced that at some point it will return,” said Jones.
“But, last year I made the mistake of going with the hot sector and getting swept up by bullish commentators. Believe me, I appreciate it doesn’t seem like it now but back then UK domestics recovering from the fall in sterling were flavour of the month (which is unfortunately about all it lasted for).”
He continued: “This year I have decided to go the opposite way. I considered Europe and the emerging markets but there are many that are bullish on the prospects for both regions next year and I do not want to fall into a similar trap.
“Instead therefore I have gone for Japanese equities, which quietly went about their business in 2017. Indeed, the Topix index was the second-best performing index of all major global indices, rising 19.92 per cent.”
“The £180m Lindsell Train Japanese Equity fund is the second-best performer in IA Japan sector over the last three years, returning 27, 28 and 29 per cent in each of the last three calendar years,” explained Jones.
Performance of funds vs index & sector over 3yrs
Source: FE Analytics
“While there is a concern that there could be a correction in markets next year, if this were to occur the yen exposure, which is often seen as a safe haven in times of market stress, would provide some security to investors.”
He added: “The five FE Crown-rated fund, managed by Michael Lindsell, who is (I am reliably informed) helped on the fund by FE Alpha Manager Nick Train, has a focus on high-quality and well-known large-caps with strong branding power and well-established competitive advantages.
“While the strong style bias means that the fund has found itself at both the top and the bottom of the sector in different calendar years, I think the focus on quality should come through next year as global growth continues to tick along and prime minister Shinzo Abe’s reforms drip feed into the market.”
Lindsell Train Japanese Equity has five FE Crowns and has an OCF of 0.85 per cent.
Rob Langston – Standard Life Investments Global Smaller Companies
After picking the most successful fund last year – Monks Investment Trust – news editor Rob Langston has stuck by global equities, albeit with a slightly different strategy.
“I’ve changed my mind a number of times about which fund to back in 2018, but this year I’m going with the £718.3m Standard Life Investments Global Smaller Companies fund,” he explained.
“While I think UK stocks could undergo a re-rating – particularly if progress continues to be made around Brexit talks – I’m more bullish about the prospect for global equities.
“This five FE Crown-rated fund appeals to me on a number of levels: it’s a global equities fund with exposure to riskier smaller companies and should do well if markets continue to grind higher.
“It is a high conviction fund and manager Alan Rowsell has built a strong track record in managing the strategy since launch in 2012.”
Langston said: “With the growth style having returned in 2017, I think this fund will be able to benefit if the existing market conditions continue in the new year.
Performance of fund vs sector over 2017
Source: FE Analytics
“In the past year, the fund has been a top quartile performer generating a total return of 24.58 per cent compared with its peers in the global equities sector – most of whom are able to invest in the large-cap part of the market which has performed so well.
“Indeed, with the exception of 2014, the fund has been a top quartile performer in each of the past five years and even delivered a double-digit return in 2016 when the growth style was out of favour.”
Standard Life Investments Global Smaller Companies has an OCF of 1.06 per cent.
Anthony Luzio – Templeton Emerging Markets Investment Trust
After missing out on the top position among the FE Trustnet team’s picks for 2017 to an investment trust, Trustnet Magazine editor Anthony Luzio has opted for a closed-end fund for this year’s choice.
“This year I am going for Carlos Hardenberg’s Templeton Emerging Markets Investment Trust,” he explained.
“The trust had been losing its way to some extent until Hardenberg took charge in October 2015, but since then it has made 98.07 per cent compared with gains of 68.35 per cent from its MSCI Emerging Markets index benchmark and 53.76 per cent from its IT Global Emerging Markets sector.
Performance of trust vs benchmark & sector since October 2015
Source: FE Analytics
“Fundamentals look extremely encouraging for emerging markets at the moment and while valuations and earnings have recovered a lot over the past few years, equities in this sector still trade at a discount to their developed counterparts.”
He added: “The trust has an overweight position in technology compared with its sector, with Hardenberg saying a lot of the innovation in this area which used to be dominated by Germany, the US and the UK is now shifting into emerging markets.
“Although its discount has narrowed slightly, the trust is still trading at about 10 per cent below its net asset value.”
Templeton Emerging Markets Investment Trust has ongoing charges of 1.21 per cent and is trading on an 11.3 per cent. It is 1 per cent geared.