18 diverse fund picks to boost returns

With spring came a modest recovery in global stockmarkets, but the overcast economic environment continued, along with investor sentiment. Against this gloomy backdrop, our panel of expert multi-managers have adopted varying investment strategies.

Those who see little improvement in the near future are seeking the security of the bond markets, while those who are more optimistic are pursuing growth in the few areas they hope it may be found.

One common theme has emerged, however. As returns from mainstream markets have been thin, our managers are being forced to search for opportunities elsewhere.

They are finding them, but sometimes in relatively unlikely places. Who would guess, for example, that lacklustre Japan might deliver growth, or that an Asia fund might provide a valuable source of income?

Fund Picks

One manager also highlights the significant discounts on private equity trusts. The message is that growth is available, but it's just not in the conventional places. The following fund picks should give investors a steer on where to look.

David Coombs, Rathbones

The US has been one of the better-performing markets over the year, and that has continued over the three months to early May, with the S&P 500 up 9% compared with the FTSE All-Share's 4.4% gain.

But David Coombs, head of multi-asset investments at Rathbones, says that the race for the US presidency is creating headwinds for certain sectors.

Candidates have for example been quick to talk tough in regard to "robber baron" pharmaceutical companies, which are allegedly pushing up drug prices.

Such populist statements have created a more volatile environment for the likes of Biotech Growth Trust, which has delivered exceptional returns over the past few years by riding a wave of mergers, acquisitions and technological innovation.

But Coombs expects these attitudes to be diluted or even forgotten after the election.

"The average price/earnings (PE) ratio of biotech companies is lower than that of the wider market," he points out. "Meanwhile, the US Food and Drug Administration is approving more drugs annually than it has in two decades."

Any shift in sentiment will likely also benefit Legg Mason ClearBridge US Aggressive Growth, Coombs thinks.

Its managers share this thinking on healthcare, as well as believing that the oil price will rise above its cost of production and that consumer giants are overvalued. Unfortunately, these themes have recently played out poorly.

"The fund is heavily exposed to energy and biotech names while having no consumer staples holdings at all. Added to that, its technology picks have lagged the highly rated FANG stocks of Facebook, Amazon, Netflix and Google," Coombs says.

Despite the disappointing performance, though, Coombs says he is backing the managers' convictions. They too are sticking to their guns: just 3.2% of the portfolio is turned over each year on average.

Meanwhile, Japan has proved challenging for investors so far this year. The Topix index slumped alongside other global indices, but its recovery has been more muted than its peers.

Nonetheless, Coombs has identified an investment trust that continues to buck the trend, in the shape of Baillie Gifford Shin Nippon.

The trust avoids larger firms, where downbeat economic data and a lack of quantitative easing expansion from the Bank of Japan have loomed large. Instead, it has been focusing on smaller, capital-light businesses, and has posted punchy returns over the past quarter as a result.

"These domestically focused firms are attacking the lumbering incumbent multinationals, and winning," Coombs says. "They don't rely on economic growth to drive returns - they're stealing market share from more established firms."

Peter Hewitt, F&C

Peter Hewitt, director and investment manager with the F&C global equities team and fund manager of the F&C Managed Portfolio Trust, likes the environmental sector, which he says has performed well recently and continues to look promising.

His first pick is the leading investment trust in the area, Impax Environmental Markets.

While the portfolio has delivered superior earnings growth over the medium term, a steady derating of its holdings has been a drag on returns.

However, since the Paris Agreement in December, which established a global mechanism to rein in climate change, sentiment and the trust's performance have both improved.

"With stocks in the portfolio estimated to achieve 15% earnings growth, the trust seems well-positioned," Hewitt says.

Aware that private equity is at the lower end of its historic valuation range, Hewitt is eyeing established trust performers Standard Life European Private Equity and ICG Enterprise.

In both cases, discounts have moved out to over 30%, despite the fact that over the long term a well-managed private equity trust tends to outperform mainstream equity indices.

"This comes at a time when it appears the underlying operating performance of most investee companies continues to be robust," Hewitt adds.

"Balance sheets are conservatively managed and a weakening sterling, especially relative to the euro, should provide a tailwind for net asset growth."

Like Coombs, he has also been observing the travails of the Japanese market. "The yen has strengthened sharply against most currencies, in particular the US dollar, and this has affected many large exporters," he says.

"The economy has also slid back into recession and the threat of deflation is still present."

But despite the negative backdrop, Hewitt is impressed by Baillie Gifford Japan trust. "It has kept well ahead of the equity market over both the long and the short term, through a strategy of focusing on medium-sized growth companies," he explains.

Peter Walls, Unicorn Mastertrust

Value investors have struggled to keep up with markets in recent years - and that has meant hard times for British Empire trust, which has bumped along the bottom of the performance tables in its sector over the last five years.

However, Peter Walls, investment trust expert at Unicorn, has a nose for a turnaround. He believes the trust could enjoy its day in the sun if the manager's attempt to unlock latent value in parts of the portfolio bear fruit.

"Among these is a holding in Better Capital, which hopes to realise its largest investment later this year and return capital to shareholders," Walls explains.

Still focused on the turnaround story, Walls is also watching Aberdeen's Asia Pacific ex Japan investment trusts. The net asset value (NAV) of each of the four regional trusts has been in negative territory over the past three years, with an average loss of 5.9%.

"Investors have fared somewhat worse, as widening discounts have led to an average share price fall of 15.1% over the same period," Walls says.

"Outflows from Aberdeen's other mandates haven't helped matters, but there are grounds for optimism given the fundamental attractions of Asia relative to developed markets." Contrarian investors might consider Aberdeen New Dawn, Walls adds.

This trust looks attractive because of its discount to NAV of around 14%. In contrast, Walls suggests that investors wait for a more favourable time to buy the standout performer of the sector, Pacific Assets, as it is now trading on a premium.

Max King, Investec

We may live in a pessimistic world, but too many fund managers are focused on protecting clients' money when they should be looking for new opportunities, according to Max King, multi-asset portfolio manager at Investec Asset Management.

For this reason, King's first pick is Finsbury Growth & Income trust. He explains that its manager, Nick Train, describes himself as "always a raging bull", and likes to draw attention to the fact that, on average, equity markets have risen in 75% of years.

"Train believes it is impossible to predict either interest rates or the direction of the economy and the stockmarket," King says. "Instead he focuses on a portfolio of just 24 holdings in companies with an average age of 129 years. Portfolio turnover is under 10% a year."

This has been a successful strategy, as the fund's compound return over 15 years is an annualised 9.7%, more than 5% ahead of the FTSE All-Share index.

King also likes the equally simple formula employed by Terry Smith at Fundsmith: only invest in good companies, don't overpay and do nothing.

"The result is focused portfolios with a low turnover. They are invested in companies which look superficially expensive but have high returns on capital and hence the ability to finance long-term growth or to return capital to shareholders," he comments.

As well as a UK fund, Smith also runs King's second choice, Fundsmith Emerging Equities Trust. King believes that this trust's performance, which has lagged since launch two years ago, should improve now that the tide appears to have turned on the bear market for emerging markets equities.

Frontier markets are widely regarded as even higher risk than emerging markets, but BlackRock Frontiers investment trust has returned 35% in the past five years.

This is 45% ahead of the emerging market index and is generated by investments in quality companies from Argentina to Ukraine. "While the pessimists have their heads in the sand, there is money to be made," King points out.

David Hambidge, Premier

Sectors with notional higher risk are also attractive to David Hambidge, head of multi-asset investment at Premier Asset Management. Worries over a possible Brexit have caused UK smaller firms to underperform the FTSE 100 index so far this year.

However, as smaller companies traditionally outperform their larger counterparts over time, Hambidge believes this presents a buying opportunity. "Investing in smaller companies carries a greater risk, but that can be reduced by using a diversified fund," he says.

His preferred option is Montanaro UK Income. It invests primarily in UK small and medium-sized companies and is run by an experienced team. Another advantage is that it pays a dividend of about 3.5%.

On the subject of income, Hambidge highlights Asia as a potential, if not immediately obvious, hunting ground.

His choice in this sector is Schroder Asian Income, which aims to provide both income and capital growth.

He says: "We have been very impressed by this fund. It has an excellent short and long-term track record, while the 4% yield compares favourably with global equities, bonds and, of course, cash."

While bonds have yet to experience the kind of demise many commentators predicted for them, Hambidge is concerned that the peak of returns has been passed. In this case, the smaller and more nimble Henderson Preference & Bond is his choice for income seekers.

"It should do a better job of protecting capital value than many other funds once UK interest rates do eventually return to more normal levels," he says.

Ayesha Akbar, Fidelity Solutions

Markets are likely to stay volatile throughout the rest of 2016 on the back of worries about central bank policy and the strength of the global economy, observes Ayesha Akbar, a portfolio manager within Fidelity's multi-manager team.

She agrees with Hambidge that "investors may find assets or funds with some downside protection more appealing in this environment". However, she differs in her preferred investment choice.

"High-yield bonds, for example, can offer lower risk than equities while still allowing investors to achieve returns," she suggests. Akbar's favoured option in this sector is the Invesco Perpetual High Yield fund.

"The managers have worked together for over 15 years and they use an unconstrained approach to investing. The fund is often the first mover into the areas where they see value. While this may result in some volatility, it allows the possibility for better returns."

For investors looking for a regional story, her choice is currently North America. For Akbar, like Coombs, the US offers one of the most dynamic economies in the world, with many companies at the forefront of new technologies. Her choice here is JPM US Select.

She says: "The fund is run by an extremely experienced portfolio management team. It is broadly sector-neutral with performance mainly driven by stock selection."

Akbar remains considerably more cautious than King on emerging market assets, despite a rebound earlier in the year.

Investors sharing that opinion but still keen to maintain some exposure to the region could choose the arguably lower-risk route of debt rather than equity exposure, such as via Pictet Emerging Local Currency Debt, she adds.

"During difficult market conditions, the fund will invest in developed markets with a high correlation to emerging markets but lower volatility," she says. "This provides some protection from what can be a challenging investment universe."

This article was originally published by our sister magazineMoney Observer here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.