Interactive Investor

18 funds and trusts to navigate global uncertainty

24th February 2017 16:09

Marina Gerner from interactive investor

Considering the looming Brexit negotiations and the controversy around US president Donald Trump's policies, uncertainty promises to characterise 2017.

Several of our panel of leading multi-manager experts are looking towards Asia and emerging markets and the attractive opportunities they offer investors, away from the nervousness surrounding politics in the West. In particular, India is seen as a promising market long term.

Meanwhile, some of our panellists express an interest in the technology sector, which is set to benefit from the ageing population and developments in automation worldwide.

While our panellists concede that prospects in the UK are likely to remain uncertain this year, some of them consider it a fertile ground for contrarian fund picks or plays on value. As ever, diversification remains paramount to all our panellists.

David Coombs, Rathbones

As the Western world ages, David Coombs believes technology is our greatest hope for giving people the living standards they expect with a diminishing workforce.

He says: "We live in a highly disruptive age where science and technology have brought once-unthinkable products and systems into our daily lives. Just 20 years ago the internet was still a geeky oddity.

"Now it connects us, and almost anything we do, to the rest of the world. Meanwhile, automation and the use of robotics have revolutionised factory floors in ways that were science fiction only decades ago.

This is why he invests in the San Francisco-based Allianz Technology Trust, run by experienced managers with a strong and lengthy track record.

Another consequence of our ageing population is the global rise in healthcare spending. Coombs holds the Biotech Growth Trust, which has delivered exceptional yet volatile returns over the past few years by riding a wave of mergers, acquisitions and technological innovation.

Coombs believes that this will continue, as more drugs were approved in 2015 than in any year since 1950. However, president Trump's plans to roll back parts of Obamacare could cause upheaval in the healthcare and pharmaceutical industries.

Turning towards opportunities in the developing world, Coombs looks to India. He says the country's "sleepless dynamism can alarm some investors, but we think it will reward patient investors over the next decade".

The government's decision to retire its two highest-value banknotes was a setback for equities, but he believes this is a blip in the country's development; he holds the JP Morgan Indian investment trust as a long-term position.

He argues that "a greater use of technology can make India's farmers much more efficient and profitable, helping drive down food costs and spurring the wider economy".

But he cautions that in the short term, India has proved to be extremely volatile and should be approached with care.

Ayesha Akbar, Fidelity Solutions

Ayesha Akbar's three fund picks for this quarter are equity funds, reflecting the better growth environment we have seen of late.

She says: "For those investors still wanting to take advantage of a better cyclical picture, I would choose the Invesco Perpetual Global Equity Income fund. This aims to generate a rising level of income, together with long-term capital growth."

The manager, Nick Mustoe, is supported by two strategists, as well as six regional portfolio managers responsible for contributing investment ideas from their own regions, Akbar points out.

"By investing in a global equity fund, you can diversify your risk and help to average out the high valuations of some of the more richly priced markets."

For investors who want to take regional bets, Akbar picks Japanese and domestic US equities. Japanese equities are attractively valued compared to other equity markets, and have traditionally benefited from cyclical upswings in the global economy to a larger extent than other markets, she says.

"I like Baillie Gifford Japanese, run by Matt Brett and Sarah Whitley. The fund invests across small, medium and large companies, with Baillie Gifford having a large team dedicated to researching Japanese companies in Edinburgh."

Her third fund choice is the Schroder US Mid Cap fund. Investors betting on stronger US growth following the election of Trump should probably opt to allocate away from the S&P 500, says Akbar.

"Small and mid-cap companies should be more closely oriented to any pick-up in domestic growth and less affected by downside risks such as greater trade protectionism. In addition, the Schroder fund is defensive in nature."

Peter Hewitt, F&C

With the FTSE 100 index close to an all-time high and yet a great deal of uncertainty on the horizon for 2017, Peter Hewitt argues that it seems appropriate to select an investment company from the flexible investment sector.

He explains that this category contains a number of defensive trusts constructed with the objective of preserving value should equity markets experience a period of volatility. His preferred choice is the Ruffer Investment Company.

The FTSE 100 index is close to an all-time high, yet there's a great deal of uncertainty for 2017

The trust's managers believe that the long-term compass is set to rising inflation and negative real interest rates, says Hewitt, and in order to preserve value, they have over 40% of the portfolio in various index-linked holdings.

A further 40% of the trust is exposed to equities - mainly overseas - with the main holdings in Japanese financials, which the managers believe will be beneficiaries of higher bond yields and rising inflation.

Given the Brexit-related uncertainty surrounding UK financial assets, a holding which is exposed primarily to overseas equity markets seems sensible to Hewitt; he believes Monks Investment Trust to be a strong candidate.

He says: "The portfolio draws on the best ideas generated on a global basis by the team at Baillie Gifford. Only 7% is in UK equities. The company recently announced strong net asset value (NAV) performance."

A contrarian pick would be Temple Bar, says Hewitt. "This trust has long-espoused a value approach to stock selection and portfolio construction. Patience is key and the trust has had a long period of unexciting performance.

"The trust has substantial exposure to financials, banks in particular, oil and gas and also industrial sectors, as the manager believes a recovery in profitability is not reflected in share prices."

Peter Walls, Unicorn

It's been a tough few years for value investors and those specialising in UK smaller companies have not been helped by Brexit, says Peter Walls.

UK retail investors have continued to pull money out of open-ended small cap funds, while the discounts of similar closed-ended investment trusts have widened appreciably to stand at an average 15%. But negative sentiment does afford opportunities for contrarian investors.

Among smaller companies trusts, Aberforth Smaller Companies trust, which applies a value investment style, has seen its discount move out to more than 16%.

The outlook for M&A activity in the US is encouraging

Walls says: "One of the trust's top 10 holdings, e2v Technologies, was recently bid for at a 48% premium to the prevailing market price and it may well be the case that further M&A activity will occur, given the devaluation of sterling which has attracted overseas buyers."

Sticking with the value theme but crossing the Atlantic, Walls points out that Gabelli Value Plus trust, which made its debut in February 2015, has grown its NAV by around 45% over the past 12 months.

This trust invests in US equities, with an emphasis on "corporate catalysts such as takeovers, tender offers, liquidations, and other corporate events such as reorganisations involving spin-offs and other financial engineering".

Walls argues that with the likelihood that a repatriation tax break will be declared under Trump, the outlook for M&A activity in the US is encouraging.

His third choice is the Polar Global Technology Trust which provides exposure to technology companies around the world and performed strongly in 2016.

For long-term investors it offers exposure to heavyweights such as Alphabet, Microsoft, Facebook and Apple, together with some exciting emerging technology businesses.

However, he adds, "the recent strong performance has been rewarded with an improvement in the rating such that the shares now trade at a premium to NAV, so there may be better times to buy".

David Hambidge, Premier Asset Management

While the UK economy has performed better than most forecasters expected since the Brexit vote, the big loser has been sterling.

David Hambidge explains that this has had a positive impact on many companies quoted on the FTSE 100 with overseas earnings. One beneficiary of the weakness in sterling is the Franklin UK Equity Income fund.

This fund performed well against the broader UK stockmarket, and Hambidge values the manager's commitment to provide an income stream that is both higher than the FTSE All-Share index and grows over time.

Both Asian and emerging market equities should deliver strong long-term returns

"It is the concept of growing income that makes equities so attractive for longer-term investors, and more so now with returns from cash and fixed income securities close to record low levels. The fund currently delivers a yield of just over 4% with income paid quarterly."

One investment theme that has grown in popularity over the past few years is the concept of delivering absolute returns in all market conditions. "Of course this is a great idea in theory," says Hambidge, "although it has been hard to deliver in practice."

Nevertheless, he says there are some funds that have delivered good returns with relatively low volatility over the past few years, such as Jupiter Absolute Return. Hambidge says the fund's portfolio is well-diversified from a geographic and thematic point of view.

He believes that both Asian and emerging market equities should deliver strong long-term returns and some exposure may be of interest to patient investors prepared to accept a greater level of volatility.

He says: "There are a number of very well-managed funds in this area, but one that is less well-known is the Schroder Small Cap Discovery fund. At just over £150 million in size, this fund is reasonably small, which should be an advantage to managers in this space."

Nick Greenwood, Miton

Nick Greenwood invests in out-of-favour trusts, so most of his picks could be considered contrarian. He argues that emerging markets reacted badly to the change of direction in US politics.

"Many will now find themselves directly in the firing line of Trump's protectionist stance. Whilst India is less vulnerable than its peers to a change in terms of US trade, its equities make up a significant proportion of specialist emerging market ETFs."

"Closed-ended timber funds are regarded by many as uninvestable, which explains the deep discounts that these vehicles trade on," says Greenwood. He believes the outlook for Phaunos Timber has improved, however.

"The board has brought in a new manager who has cut out much of the deadwood and focused the portfolio on more promising plantations. These are now reaching maturity, which means that free cash flow is beginning to be generated."

He suggests that once this trust has established itself as a dividend payer, it is unlikely to remain on a 20% discount.

While Baker Steel Resources shares are worth a mere 29p, they represent an interesting recovery play, according to Greenwood. "The portfolio of mining prospects awaiting development was savaged when the sector collapsed in 2013."

More recently, he says, the management team's strategy has been to focus on half a dozen investments which they can finance through to production.

He adds: "This was in recognition of the fact that the trust's resources are too limited to save all their projects. Looking forward, the payback from most of the investments lies at least two years away, which is further out than most investors' time horizons.

"While this means that in the short term the shares are likely to be static, it gives investors the opportunity to tuck some shares away for the medium term."

This article was originally published by our sister magazine Money 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.