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Four bargain areas of the market and their investment opportunities

24 November 2020

FundCalibre’s Juliet Schooling Latter gives four markets which are currently trading at significant discounts and the investment options within them.

By Eve Maddock-Jones,

Reporter, Trustnet

With some markets reaching new highs as they continued to recover from the impact of the Covid-19 pandemic, investors could be led to believe that assets are once again looking expensive.

But this isn’t the case everywhere, according to Juliet Schooling Latter, FundCalibre’s research director, who says there are still bargains to be found for those willing to look for them.

Below, she highlights four inexpensive parts of the markets and funds to access them.

UK

The UK was already an unloved market heading into the pandemic and has been one of the poorest performing developed markets during the Covid-19 crisis. Its late response to the pandemic and ongoing Brexit uncertainty has deterred international and, increasingly, domestic investors, with net flows out of UK equity funds.

The UK market’s reputation as one of the highest yielding has also taken a hit as companies have been forced to slash payouts to conserve cash during the pandemic. Additionally, the construction of the market with more cyclical companies – such as banks, utilities, oil & gas – and lower technology exposure than its peers.

Nevertheless, there are two funds that Schooling Latter research director thinks are ideal for picking up a UK bargain: AXA Framlington UK Mid Cap and Fidelity Special Values.

The £37.2m AXA Framlington UK Mid Cap is managed by FE fundinfo Alpha Manager Chris St John and deputy manager Dan Harlow and is “unashamedly growth-orientated”, according to Schooling Latter, targeting long-term capital growth by investing in FTSE 250 companies.

The managers will also invest in some “select opportunities”, in small caps and allow “winning mid-cap holdings to grow into larger-sized companies”.

Over the past three years the fund has outperformed both its IA UK All Companies peer group and the FTSE 250 ex Investment Companies index, with a 13.88 per cent gain.

Performance of fund versus sector & benchmark over 3yrs

 

Source: FE Analytics

The second UK pick is Fidelity Special Values, the investment trust managed by FE fundinfo Alpha Manager Alex Wright and Jonathan Winton.

The £665.6m investment trust runs a value style approach and has been invested in some of the worst-hit sectors of the market this year.

But these are the kinds of areas the managers look for, Schooling Latter said.

“This trust invests primarily in unloved UK companies and waiting for them to come back into favour,” she said. “Alex and Jonathan are experienced managers and have a good track record. While neither are income investors, Fidelity Special Values' dividend has increased every year since Alex took charge in 2012.”

Over the past three years the trust has made a total return of 1.13 per cent, outperforming the FTSE All Share index, which lost 1.21 per cent, but underperforming against its IT UK All Companies peer group (8.67 per cent).

European smaller companies

European smaller companies is another area where investors have been getting rid of their holdings all year, said Schooling Latter, with the sector having seen net redemptions since January despite strong performance over the long term.

With over 25 countries and 5,000 companies in this one asset class, Schooling Latter said that the investment opportunities were “vast”.

“It tends to be under-researched – but this just means that a good fund manager can really add value by identifying the big winners,” she explained.

 

One fund Schooling Latter likes is the €154.5m T. Rowe Price European Smaller Companies fund, overseen by Alpha Manager Ben Griffiths.

Griffiths, who has “proven experience” managing funds in this sector, follows a bottom-up process that has seen it outperform both its sector and index over the past three years with a total return of 19.66 per cent.

Performance of fund versus sector & benchmark over 3yrs

 

Source: FE Analytics

Another option is the newly launched £17.9m Jupiter European Smaller Companies fund, run by Alpha Manager Mark Heslop, who previously ran Colombia Threadneedle’s European small-cap strategy.

“This interesting new fund was launched in February 2020 and has got off to a blistering start, despite launching at a very difficult time,” Schooling Latter said.

Since launch the fund has made a total return of 28.50 per cent, beating the IA European Smaller Companies sector, 14.95 per cent and its EMIX Smaller European Companies Ex UK benchmark, 12.73 per cent

Property

The third discounted area of the market – and one that has struggled this year – is property, which has been hit hard by Brexit and Covid-19, the latter causing redemptions and the suspension of some funds.

Her investment picks here are: TR Property Investment Trust and Premier Pan European Property Share.

Closed-ended TR Property Investment Trust has been run by Marcus Phayre-Mudge since 2004, who Schooling Latter described as: “a very experienced manager with a strong track record who has the benefit of a well-resourced and dedicated team”.

Over the past three years it has outperformed the FTSE EPRA Nareit Developed Europe index (7.14 per cent) with a total return of 12.82 per cent.

The second option, Premier Pan European Property Share, which as its name suggests similarly invests across Europe including the UK.

“Manager Alex Ross is incredibly knowledgeable about his sector,” Schooling Latter said. “[He] has managed to differentiate the fund meaningfully from both its benchmark and its sector making it a worthy satellite contender for a diversified portfolio.”

Over the past three years the fund has outperformed both the IA Property Other sector (8.24 per cent) and GPR 250 Europe Capped index (6.10 per cent) making 10.21 per cent.

Latin America

The final unloved market is Latin America, which has struggled in recent months as the Brazilian market – the largest constituent of the regional benchmarks – fell heavily in Q1 due to the impact of Covid-19.

The Latin America market has so far failed to recover. Compared with other global indices, MSCI Emerging Markets Latin America has made bigger losses year-to-date, as shown in the graph below.

Performance of indices YTD

 

Source: FE Analytics

“As such, south America is cheap, but could also benefit from a potential global recovery and a more coherent and consistent foreign policy from the US now we are likely to see a change in leadership,” Schooling Latter said.

For this sector, Schooling Latter highlighted the £1.5bn JP Morgan Emerging Markets trust.

She said it is supported by one of the largest emerging markets research teams and manager Austin Forey has “delivered excellent returns on this trust for more than two decades” demonstrating a successful long-term approach to stockpicking whilst also being able to evolve this portfolio to meet changing trends. Over three years, the trust has made a 53.57 per cent total return.

Performance of indices YTD

 

Source: FE Analytics

The final pick is the £92.5m ASI Latin American Equity fund, overseen by the Aberdeen Standard Global Emerging Markets Equity team who invest in companies “demonstrating outstanding quality characteristics”, according to Schooling Latter.

She said: “The consistency of the labour-intensive yet cautious approach of this fund lends itself particularly well to these volatile and less-researched equity markets.”

Over the past three years the fund has made a loss of 14.05 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.