A fund focusing on three of the most-hated investment areas, one operating in a seemingly dull market and a trust on a 30 per cent discount are some of the portfolios that more adventurous investors could consider for 2019.
The past year has seen markets buffeted by the return of volatility and many expect 2019 to bring more of the same, thanks to the US/China trade spat, Brexit, lacklustre economic growth and the move towards quantitative tightening.
However, some investors might want a more aggressive tilt to their portfolio despite this so in the below article we find out what five fund pickers think could be attractive opportunities for those going into 2019 with an adventurous stance.
AJ Bell - Polar Capital Global Insurance
Ryan Hughes, head of active portfolios at AJ Bell, has opted for the £1.3bn Polar Capital Global Insurance fund, which he concedes does not operate in the raciest area of the market.
“Insurance never sounds like the most exciting of investment ideas but in many ways that’s precisely the appeal,” he said. “It’s a sector that often goes under the radar but insurance companies have a fantastic ability to generate cash regardless of the economic environment, as we all know through our ever increasing insurance premiums.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“Polar Capital Global Insurance is highly unusual in focusing on this area but they are experts in this specialist field and this comes through in the quality of management. The strategy has relatively low correlation with global equities and therefore adds useful diversification to an existing portfolio of traditional equities.”
The fund, which is headed up by FE Alpha Manager Nick Martin and holds five FE Crowns, made a 261.60 per cent total return over the decade to 17 December. It is outperforming its MSCI World/Insurance benchmark over one, three, five and 10 years.
Martin and his team focus on underwriting, reserves and inside ownership when choosing their holdings, which leads them to small- and medium-sized companies rather than the more widely known large insurance companies. Top holdings include Arch Capital, Marsh & McLennan and Chubb.
Polar Capital Global Insurance has an ongoing charges figure (OCF) of 0.88 per cent.
Premier – VT Teviot UK Smaller Companies
Simon Evan Cook, senior investment manager for multi-asset funds at Premier, pointed out that there appear to be three words that investors hate at the moment: ‘UK’, ‘small caps’ and ‘value’.
“As a card-carrying contrarian, naturally I’m going to suggest a UK small-cap value fund for a more aggressive portfolio. Our favoured pick here is VT Teviot UK Smaller Companies,” he continued.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“Its managers have a reassuring value heritage, while the fund itself is still manoeuvrable enough to allow them to access the best value opportunities in a meaningful way.”
The fund only launched in August 2017 but since then has outperformed its average IA UK Smaller Companies peer and Numis Smaller Companies benchmark. Despite the fund’s short track record, co-manager Andrew Bamford has specialised in UK small company investment for over 25 years while Barney Rand has a 23-year investment career.
The £49.8m portfolio has 69 holdings, with 27 of these having a market cap below £100m and 17 between £100m and £250m; there are three larger than £1bn. Mothercare, TT Electronics and Anglo Pacific Group are the three biggest holdings.
VT Teviot UK Smaller Companies has a 1 per cent OCF.
Hawksmoor Investment Management - Oakley Capital Investment
Ben Conway, co-head of fund management at Hawksmoor Investment Management, thinks that listed private equity investment trusts offer opportunities for more adventurous investors, noting that his MI Hawksmoor Distribution and MI Hawksmoor Vanbrugh have “benefited hugely” from the likes of HG Capital and ICG (formerly Graphite) Enterprise over the past nine years.
“Mystifyingly the market still accords these trusts discounts – an echo from the global financial crisis when many now defunct managers gave the sector a bad name. I say ‘mystifyingly’ because the portfolios of these managers have performed better than listed equity portfolios,” he said.
Performance of fund vs sector over 10yrs
Source: FE Analytics
“A feature of the post-QE era has been just how many companies are choosing to stay private. Private equity trusts thus give investors access to some world-class companies not available on the public markets. This is reflected in the constantly superior earnings growth these companies are delivering.
“Oakley Capital Investment has one of the best track records of any in the sector. They tend to invest in companies at an earlier stage than others in their peer group and pay lower multiples. They also deploy less leverage to achieve their returns.”
Conway added that the discount on the trust is “huge”, standing at more than 30 per cent in mid-December. The manager added that the trust has a strong track record but its past is chequered by some “questionable capital raises” and sales of treasury shares at discounts to NAV (net asset value); however there has been a turnaround in corporate governance, with significant purchasing of the shares by management and a commitment to narrowing the discount.
Oakley Capital Investment has ongoing charges of 1.08 per cent, which rises to 1.34 per cent when its performance fee is included. It is yielding 2.6 per cent.
Charles Stanley Direct - Aberforth Smaller Companies
Charles Stanley Direct pensions & investments analyst Rob Morgan said Aberforth Smaller Companies investment trust could be an attractive option for value investors looking for “bargains” in the UK stock market amid Brexit uncertainty. It could also be a good diversifier for investors with a growth tilt to their portfolios.
“The management team has a contrarian investment philosophy that has the aim of unearthing cheap companies whose longer-term potential they believe has been misunderstood or underestimated by the market as a whole,” he said.
Performance of fund vs sector and index over 20yrs
Source: FE Analytics
“Given the current political uncertainty there is a great number of opportunities for them consider at the moment, and a further potential kicker is that the investment trust shares themselves trade at a discount to net asset value of around 12 per cent – providing even greater value to investors looking for exposure to the UK market.”
There are six named managers on the portfolio: Alistair Whyte, Richard Newbery, Euan Macdonald, Keith Muir, Chris Watt and Peter Shaw. Because of this well-resourced team, investment decisions are made collegially and, as noted by Morgan, favours undervalued companies.
As the chart above shows, the fund has made more than 950 per cent over the past 20 years and beaten both its average IT UK Smaller Companies peer and benchmark. It drops into the sector’s bottom quartile over shorter time frames, however, due to the underperformance of the value style in the post-financial crisis bull run.
Aberforth Smaller Companies has ongoing charges of 0.76 per cent and is yielding 2.5 per cent, according to the Association of Investment Companies.
Tilney – Fidelity Emerging Markets
Tilney Investment Management Services’ Jason Hollands noted that 2018 was “a particularly tough year” for emerging markets after the escalating trade tensions between the US and China as well as the impact of the stronger dollar.
However, he has chosen FE Alpha Manager Nick Price’s £2.3bn Fidelity Emerging Markets fund as his aggressive pick for 2019 – arguing that the asset class could be due a bounceback. The fund, targets quality growth companies with strong balance sheets, has outperformed since launch in June 2010 but has lagged over more recent time frames.
Performance of fund vs sector and index since launch
Source: FE Analytics
“Emerging equities really do look a bargain at current multiples, trading at lower levels than the 2015-16 period when concerns around China were at the peak. There are also reasons to be more optimistic on outlook for the year ahead,” Hollands said.
“Firstly, a moderation in US growth is expected to see the US Federal Reserve adopt a more dovish stance towards future rate rises and that should take the edge of the dollar, providing relief to emerging markets.
“Secondly China has also started to ratchet up targeted stimulus measures, which should prove supportive to growth. While the trade war hasn’t gone away, there are some signs of progress in US-China relations. If the US and China can reach a ‘deal’ that would be another boon to emerging market equities.”
Fidelity Emerging Markets has an OCF of 0.96 per cent.