Funds investing in UK equities, infrastructure and China are three out-of-favour areas that investors should consider given the current investment backdrop and generally high valuations, according to Charles Stanley Direct’s Rob Morgan.
As markets have shrugged off many of the geopolitical headwinds and continued to move higher, investors have become increasingly concerned over valuations and are struggling to find obvious ‘buy’ opportunities.
However, according to investment analyst Morgan, the fact that there aren’t any real stand-out opportunities is an opportunity itself: “There’s a few areas that I’m interested in right now. Yes, none of them scream ‘buy me’ but that is probably the point.”
As part of an ongoing series, Morgan outlines three unloved areas he believes could offer opportunities given the investment backdrop and the lack of obvious ‘buy opportunities’.
UK equities
With mounting political tension and Brexit on the horizon, Morgan noted the UK is deemed a ‘no-go’ area for many investors both at home and overseas, which can serve to add exposure to the home market through some interesting strategies.
“According to figures from the Investment Association, UK equity funds experienced £1.2bn of outflows in May alone and, to the contrarian in me, this spells opportunity,” the investment analyst said.
“Topping up favoured UK funds makes sense, especially ‘value’ based ones, an investing style that has been especially out of favour.”
Morgan’s UK equity first choice is Man GLG Undervalued Assets, a fund that aims to achieve long-term capital growth through investing predominantly in securities of UK listed companies which are considered to be undervalued relative to their asset base and to the returns on capital the companies are generating.
The £1.1bn Man GLG Undervalued Assets fund has been overseen by FE Alpha Manager Henry Dixon and Jack Barrat since launch at the end of 2013.
Performance of fund vs sector and index since launch
Source: FE Analytics
According to Square Mile Investment Consulting and Research, this is a strategy that differentiates itself from many of its peers, with Dixon having a calm exterior and a cool head, which are important characteristics to have when running this type of mandate.
Performance numbers seem to back the research house’s views. The fund has been top quartile since launch, up 66.60 per cent compared to a 40.31 per cent gain for the average fund in the IA UK All Companies sector and a 39.33 per cent gain for the FTSE All Share index. It has an ongoing charges figure (OCF) of 0.90 per cent.
The largest investment trust in the AIC’s UK Smaller Companies sector – Aberforth Smaller Companies – is the next UK equities offering on Morgan’s radar.
The £1.2bn trust has been run by Alistair Whyte and Richard Newbery since 1990, with Euan Macdonald and Keith Muir joining the team in 2011 and latterly Chris Watt and Peter Shaw in 2016.
The fund has a long-term track record stretching back to 1990 and is managed by a team with more than 70 years of experience on this trust alone.
The six-strong management team, who are all partners at Aberforth, pursue a bottom-up approach to the market, focusing on what they deem to be undervalued companies.
Over 10 years, Aberforth Smaller Companies Trust has delivered a 281.66 per cent total return compared with a gain of 301.15 per cent for the average fund in the IT UK Smaller Companies sector.
The fund is trading at an 11.4 per cent discount to its NAV, is not geared and has an ongoing charge of 0.76 per cent, data from the Association of Investment Companies (AIC) shows.
FE Alpha Manager Jamie Seaton’s GVQ UK Focus is the investment analyst’s next fund idea.
Seaton essentially has private equity approach to investing, looking at how growing cashflow can increase the value of the assets of the business relative to the debt and picks stocks that he foresees earning a minimum of 15 per cent compounded over the lifetime of the investment.
Performance of fund vs sector and index since launch
Source: FE Analytics
The FE Invest team, which includes this fund in its Approved List, said: “The focus on cashflow for valuation is a superior approach to the usual focus on the income statement and earnings-per-share figure, which are far too easily manipulated by companies to be reliable.
GVQ UK Focus has been top quartile over 5 years, up 309.20 per cent compared to a 241.72 per cent gain for its sector since launch in 2003.
Infrastructure
Another unloved area Morgan believes could throw some interesting opportunities given the lack of obvious ‘buy’ options is infrastructure.
“The prospect of a Labour government coupled with rising bond yields has cast a considerable shadow over infrastructure investment trusts,” noted the investment analyst.
“It’s true: a Corbyn-led government could rewrite the rule book on PFI [private finance initiative] and other private finance in public projects. But it would have a battle on its hands, and taking most existing contracts ‘in house’ would likely be unappealing when it boils down to cost.”
As such, Morgan said he senses an opportunity in broad-based trusts such as International Public Partnerships (INPP), which has a 4.6 per cent yield.
INPP invests in public and social infrastructure assets and related businesses, with assets located around the world, including the UK, Australia, Europe or North America.
The fund is trading at a 7.3 per cent premium to its NAV, is not geared and has an ongoing charge of 1.14 per cent, data from the AIC shows.
China
The final area highlighted by Morgan is the Chinese market, which has taken a dive amid Donald Trump’s relentless pursuit of a trade war with the nation.
“The administration knows that there will be a significant cost to US business if he pursues this trade agenda too aggressively and with mid-term elections due to be held in November, any escalation as threatened (and likely broad-based market sell off) is not the ideal backdrop in what will be seen as a vote on his popularity,” the investment analyst pointed out.
As such, Morgan noted an opportunity to buy good-quality Chinese equity exposure could well present itself and chose First State Greater China Growth for those wanting to have exposure to the world’s second largest economy.
The £500.6m fund is overseen by FE Alpha Manager Martin Lau since launch alongside Sophia Li.
It invests in large- and medium-sized companies with an emphasis on identifying high quality growth businesses that are resilient in down markets.
Performance of fund vs sector and index since launch
Source: FE Analytics
The five FE Crown-rated fund is up 841.46 per cent since launch, ahead of the MSCI Golden Dragon index and the IA China/Greater China sector gain of 421.27 per cent. It has an OCF of 1.08 per cent.