Troy Trojan, FP CRUX European Special Situations and Baillie Gifford Japanese are among the funds investors could look to add next year, according to AJ Bell Investments’ Ryan Hughes. 
The head of fund selection said after an “interesting” 2017, investors will likely review their portfolios as the year draws to a close and consider how to position themselves for the coming 12 months.
But with equity markets hovering around record levels, deciding where to invest next year is tricky, particularly following the strong returns that have been on offer this year.
As the below chart shows, it was another strong year for equities with the MSCI AC World index which has risen by 13.39 per cent, although bonds have fallen by 1.29 per cent as interest rates began to rise globally.
Performance of indices over YTD
Source: FE Analytics
While many portfolios will be looking very healthy however, this also raises the question of whether we are reaching the end of the bull-run and are moving into bubble territory.
Hughes said: “Calling the top of the market is simply a guessing game and we currently have some of the most experienced investors in the market at odds over the outlook for equities.
“For investors running their own portfolios, the best course of action will be to have a clear understanding of how much risk they are prepared to take at the moment, position their portfolio accordingly and sit tight.”
Starting with those that are willing to take on a bit more risk next year in return for superior gains, Hughes said the Baillie Gifford Japanese could continue its strong run.
The four FE Crown-rated fund, run by the outgoing Sarah Whitley and co-manager Matthew Brett has made a top quartile return this year in the IA Japan sector, having been the best performing fund in 2016.
It has been consistently in the top quartile over one, three five and 10 years, returning 208.88 per cent over the last decade – almost double the TOPIX’ 117.13 per cent gains.
“Japan had a strong year in 2017 as the economic reforms that have been taking place over the past few years continue to bear fruit,” Hughes noted.
“The tailwinds remain in place for 2018 and coupled with a rapidly improving shareholder focus from company management this should help the Japanese market move higher next year.
“The team at Baillie Gifford are one of the strongest around and are well placed to cope with the retirement of the head of the team. With a strong focus on stock picking and a willingness to look different to the index, this is a good choice for higher risk investors.”
The £2.3bn fund has a yield of 0.72 per cent and a clean ongoing charges figure (OCF) of 0.63 per cent.
For those looking to take on some risk, but not as much as the previous fund, Hughes highlighted FE Alpha Manager Richard Pease and co-manager James Milne’s five crown-rated FP CRUX European Special Situations.
The £1.96bn fund has had a strong 2017, returning 19.75 per cent to investors year-to-date, placing it in the top quartile of the IA Europe ex UK sector, as the below chart shows.
If the fund ends this year in the sector’s top quartile, it will be the fourth consecutive year it has done so.
Performance of fund vs sector and benchmark over YTD
Source: FE Analytics
“The European economy has been recovering strongly during 2017 with every sign that this is likely to continue into 2018 as corporate earnings continue their good momentum,” Hughes said.
“With this supportive backdrop, the Crux European Special Situations fund could be well placed to benefit.”
The fund focuses on companies that have exceptional management and a market-leading position and is happy to invest in a high conviction manner away from the benchmark.
“This approach typically finds more opportunities in medium and smaller companies and while it can be more volatile than its competitors, it is proof that talented bottom-up stockpickers can add significant value,” he added.
FP CRUX European Special Situations has a yield of 1.48 per cent and an OCF of 0.87 per cent.
Investors looking to take a more cautious approach to investing next year could look to the £4.4bn Troy Trojan fund run by FE Alpha Manager Sebastian Lyon and deputy manager Sean Beck.
“With equity markets around all-time highs and fixed interest markets looking challenged, a multi-asset solution that takes an absolute return mindset could prove sensible for a cautious investor, Hughes said.
“Troy Trojan looks to deliver growth over the long term but importantly has a very clear eye on protecting capital.
“The portfolio has exposure to equities, bonds, cash and gold, making it well-diversified and giving investors an instant portfolio. So, should volatility increase next year, this fund is well-placed to protect investors.”
The fund has a yield of 0.36 per cent and an OCF of 1.05 per cent.
For those with a greater focus on income, the £316m River & Mercantile UK Equity Income fund run by FE Alpha Manager Daniel Hanbury could be worth a look.
“The UK market is a mature dividend-paying market and therefore remains a solid choice for income seekers,” Hughes said.
“While the largest few funds in the sector have historically taken the bulk of assets, some strong choices exist if you look a little further afield.
“Dan Hanbury at R&M is a very experienced manager and with a quantitative screen underpinning the process. This diversified portfolio will be a good foil to other better-known equity income funds.”
The portfolio, which is 59.3 per cent weighted to large caps and 19.4 per cent weighted to small-cap stocks, has consistently outperformed the sector average over one, three and five years.
R&M UK Equity Income has a yield of 4.02 per cent and an OCF of 0.9 per cent.
While bonds have had a challenging year in 2017 as interest rates have begun to rise and inflation picks up, investors looking to maintain exposure to the asset class could opt for the £1.8bn Fidelity Strategic Bond fund.
Run by FE Alpha Manager Ian Spreadbury and deputy managers Claudio Ferrarese and Timothy Foster, the fund is more cautious than some of its peers, something that could prove useful in the coming 12 months.
“With higher inflation, the gradual withdrawal of QE [quantitative easing] and higher interest rates, the back drop for fixed interest in 2018 looks more challenging than it has done for some time,” Hughes said.
“The flexibility offered by the Strategic Bond fund gives the manager the tools to still make money and, with extensive resources at Fidelity, the team now look to add value through relative value trades around the world as well as traditional UK gilts and bonds giving an extra source of potential return.”
The fund has a strong long-term track record, returning 89.78 per cent over the past decade compared to the sector average’s 63.02 per cent, as the below chart shows.
Performance of fund vs sector over 10yrs
Source: FE Analytics
More recently, however, the portfolio has underperformed, lagging the sector average in the past two calendar years and on course to do the same in 2017.
The fund has a yield of 2.11 per cent and an OCF of 0.66 per cent.
For those worried about potentially falling markets in equities and bonds next year, Artemis Pan-European Absolute Return could be worth a look as a form of protection, said Hughes.
Run by Paul Casson, the £188m fund uses a long/short strategy in the European market to take advantage of positive momentum while also protecting on the downside.
“The European economy has been improving rapidly through 2017 and has now gained some crucial positive momentum,” Hughes said.
“One way of capitalising on this without taking on all of the risk of the equity market is through a long/short equity fund and manager Paul Casson is a high quality stockpicker who understands his investment process and his ability to identify both strong and weak companies well.
“His net exposure is around 50 per cent, meaning that he is well placed to capture some market upside but should there be some market volatility, he is likely to fall less than the market and protect investor’s capital.”
The fund has an OCF of 0.96 per cent.