GLG Japan CoreAlpha, Hermes Global Emerging Markets and Old Mutual Global Equity Absolute Return are three funds that investors concerned over the prospect of trade war might consider, according to Architas’ Adrian Lowcock. 
US president Donald Trump followed through on threats to levy tariffs on Chinese exports last week, sparking concerns that they could escalate into a trade war. An earlier proposal for tariffs on steel and aluminium had threatened to draw in other exporters such as the EU.
However, Architas investment director Lowcock (pictured) noted while Trump’s tariffs on $60bn of products had sent a message to Chinese authorities, they had so far failed to respond in kind.
He said: “The level of tariffs introduced by the US are lower than expected and the response from China is very restrained and so far they have expressed a desire to avoid engaging in a full blown trade war.
“However, trade wars have a way of getting out of control quickly and president Trump has shown he doesn’t like to back down. He has always stated he wanted to address what he sees as unfair trade with China. As such, things could easily escalate before politicians sit down to negotiate a truce.”
The imposition of tariffs has been felt in the market, however, with the US and global markets (as represented by MSCI AC World index below) moving lower in response.
Performance of markets over one month
Source: FE Analytics
Lowcock added: “Markets have started to price in the potential impact of a trade war but there is the potential for further sell-offs if things escalate.
“Any sell-off is likely to create potential investment opportunities as global growth is still healthy. Investors should ensure they have some protection should things deteriorate whilst being prepared to take advantage of the inevitable opportunities that market volatility will throw up.”
The investment director said there were several things an investor could do in such an environment: protect portfolio against further falls with a changed in outlook; be prepared to invest as sell-offs create buying opportunities; and remain focused on goals by ignoring short-term noise.
Below Lowcock highlights three funds that investors could consider given the current conditions in markets.
Hermes Global Emerging Markets
The first recommended by Lowcock is FE Alpha Manager Gary Greenberg’s five FE Crown-rated Hermes Global Emerging Markets fund.
“Emerging markets look attractive long term and a correction could provide an opportunity to access the asset class at a discount,” he explained.
Lowcock said Greenberg, who manages the fund alongside Kunjal Gala, seeks out businesses which offer growth potential but with an emphasis on valuations.
“The type of companies he likes are quality/compounders: businesses with strong franchises, good and improving cash flow and consistent or improving revenues and earnings,” he said.
“In addition, they want business which also offer a margin of safety including attractive valuations and strong balance sheets.”
Among the fund’s top-10 holdings are tech companies Tencent, Samsung Electronics, Alibaba and Taiwan Semiconductor Manufacturing. It also includes other well-known names such as Naspers
Performance of fund vs sector & benchmark under Greenberg
Source: FE Analytics
Since taking over the $4.2bn fund in July 2011, Greenberg has delivered a total return of 80.48 per cent compared with a gain of 31.58 per cent for the MSCI Emerging Markets index benchmark and a 30.26 per cent return for the average IA Global Emerging Markets fund.
Hermes Global Emerging Markets carries an ongoing charges figure (OCF) of 1.13 per cent.
Old Mutual Global Equity Absolute Return
Lowcock’s second fund is Old Mutual Global Equity Absolute Return, managed by Ian Heslop, Amadeo Alentorn and Mike Servent.
The £10.3bn fund aims to deliver absolute returns that have a low correlation with equity and bond markets.
Lowcock highlighted the “stable and repeatable” process that the team have built. “This is a systematically run fund using in-house quantitative tools,” said the Architas investment director. “The system is constantly monitored with adjustments and improvements made regularly.”
He added: “The team believes that markets are not fully efficient and that stock prices often diverge from their fundamental value due to investors’ behavioural biases and style drifts.
“The investment process behind the strategy of the fund seeks to exploit these biases in a dynamic and efficient way, resulting in outperformance driven principally by bottom-up stock selection.”
Since launch the fund has delivered a total return of 76.53 per cent, compared with a gain of 31.39 per cent for its average IA Targeted Absolute Return peer. It should be noted, however, that the sector is home to a range of different strategies.
Old Mutual Global Equity Absolute Return has an OCF of 0.81 per cent.
GLG Japan CoreAlpha
The final fund for an escalating trade war is the four FE Crown-rated GLG Japan CoreAlpha fund, which is team managed by Neil Edwards, Jeff Atherton and Adrian Edwards under the leadership of Stephen Harker, head of Japanese equities.
“As a global exporter the Japanese market is sensitive to a trade war as the country hasn’t been excluded from the US tariffs,” said Lowcock.
“However, the yen is seen as a safe haven currency so rises there will offset some of the falls in the market.”
He added: “Longer term the outlook for corporate Japan remains positive and valuations are attractive.”
The fund is also highly thought-of by analysts at Square Mile Investment Consulting & Research, who noted: “The team are not afraid to invest with conviction, often increasing the size of their positions as the book value per share becomes cheaper.
“Given the style of investing this fund can go through periods of feast and famine but we consider it to be a sound option of those investors seeking returns from Japan.”
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in 2006, the fund has returned 148.15 per cent compared with a 74.25 per cent gain for the TSE TOPIX benchmark and a 58.11 per cent return for the average IA Japan fund, as the above chart shows.
GLG Japan CoreAlpha has an OCF of 0.9 per cent.