There has been no shortage of crises since the beginning of the decade, with the world grappling with a pandemic, wars in Ukraine and the Middle East, and a resurgence of inflation. While many global equity funds have struggled amidst these paradigm shifts, GQG Partners Global Equity has managed to navigate through the storm relatively unscathed.

The fund is the sixth best performer in the IA Global sector over three years and has not experienced losses in any calendar year since its launch in 2019.

Performance of funds since launch vs sector and benchmark

Source: FE Analytics

Below, FE fundinfo Alpha Manager Brian Kersmanc discusses how the quality of a stock can fluctuate wildly over time and why his portfolio is like a football team.

Could you explain your investment process?

We want to compound capital over the course of time and we want to do it with less risk.

We're more focused on the absolute return and expect 200 to 300 basis points of relative outperformance on an annualised basis over the full market cycle.

Our philosophy is built on three main pillars: a long-term focus, quality bias and capital preservation.

We won’t add any name to the portfolio if we do not have a five-year view on it. That being said, we move the portfolio pretty aggressively at times.

How do you reconcile long-term focus and aggressive turnover?

We try to have the optimal version of the portfolio based on the five-year outlook that we see today. The more the information flow changes over the course of time, the more we adjust and adapt the portfolio.

The analogy I like to use is a sports team. You put the players on the field that you think are going to execute well over the next few quarters.

As the game progresses, players perform differently than you expected, some get injured or tired, the other team makes unexpected moves, the weather changes, etc. You're going to adjust based on those factors.

And just because I put a player on the bench doesn't mean my five-year view of that player is necessarily shattered. It may just not be the optimal time to have that player on the field right now. We substitute our players in and out, which allows us to keep the portfolio as optimal as we can over the course of time.

What is your definition of quality?

Plenty of managers invest for the long run in high-quality names. Where we tend to be different is that we're very open-minded about where quality can come from. We believe quality ebbs and flows over time, so we don't screen out any particular area. Instead, we try to identify where quality is emerging.

For example, if I had asked a room full of people whether Exxon Mobil was a high-quality business two years ago, I might have seen only one hand in the air out of 30. Most people would have said: ‘It’s a commodity business that pumps oil out of the ground, has no differentiation and is subject to the economic sensitivity of oil prices, so it’s a low-quality business.’

But if I had asked the same question 10, 20 or 30 years ago, 29 out of 30 people would have raised their hands, saying: ‘Absolutely, it’s a blue-chip stock, the highest market-cap company in the entire world, with the ability to compound through cycles.’

Why was it considered high quality then? Why was it not considered high quality over the past couple of years? Are the elements in place for this to be a high quality execution story going forward?

We apply this approach across the board to identify where quality is deteriorating, where quality is improving and where the gap in perception between the two of those things is.

Why should investors have your fund in their portfolios?

We have a firm belief in client alignment. At GQG Partners, we have a policy that forbids us from having personal trading accounts. We are only allowed to invest in either GQG strategies or broad-based indexes. Half of my own personal savings are invested alongside our clients.

The reason I bring this up is that both performance and risk management matter to us. If the market goes down 15% and we're only down 10%, I'm still going to have a conversation with my wife at home as she would rightly ask, ‘Brian, why did you lose 10% of our kids' college education savings last year?’

Also, we are the only industry in the world where clients can get average for free. I can't buy an average car or an average mobile phone for free, but if I want an average investment product, I can buy an index tracker for almost nothing. Therefore, there is no reason for us to exist if we don’t deliver outperformance.

Is there anything the market is underestimating?

The market is hyper focused on the US Federal Reserve and the trajectory of interest rates. If the Fed lowers rates, it probably means it is seeing a significant deceleration in economic outlook. We would have bigger problems and I don't know if it's necessarily a good thing.

An underappreciated element of higher rates is that higher cost of capital creates a higher barrier to entry, favouring mega-cap companies.

What do you do outside of fund management?

If you have a passion for something, you end up devoting most of your time in that particular area. So, investment is what I devote a lot of my time and energy toward. When my wife watches the TV, I'll be reading annual reports next to her because that’s what makes me tick.

In an era of higher interest rates, it makes no logical sense for gold to perform well. After all, why own an asset that offers no return (other than speculative capital gains) when you can make circa 5% in a bank account?

Yet gold may well have been a saviour for some portfolios over the past few years, with the precious metal quietly on an incredibly strong run.

Since 2021, when the S&P GSCI Gold Spot price index slipped back 3.4%, it has tracked consistently higher, gaining 11.8% in 2022, 6.5% and so far this year it has enjoyed its biggest rise, up 15.2% (in sterling terms).

Gold has sparkled thanks to its place as a safe haven. With plenty of election uncertainty in 2024, as well as geopolitical instability, wars and economic jitters, there are many reasons why investors might be looking to be more defensive.

Perhaps Labour’s victory – heralded as a positive for the UK after years of dysfunctional Conservative rule – may also have been good for the metal. As one expert explained this week, change can be scary, and a new government can often be a boost for the gold price. Gold rallied after Tony Blair was elected in 1997 too.

Gold is also a direct play on the US dollar, which shot higher versus the pound during former prime minister Liz Truss’ ill-fated administration in September 2022, but has softened around 17% since.

For these reasons, gold set its third consecutive quarter-average record at £1,853 and also set new month- and quarter-end highs at £1,845 on the last day of June.

So can the yellow metal continue its unheralded move higher?

Data from BullionVault earlier this month suggests that fresh highs last month did nothing to dissuade investors, who continue to hold the precious metal despite its price.

Demand was particularly positive in France in the lead up to the country’s general election, when fears of Marine Le Pen and the far right movement gaining a majority were high.

The number of first-time bullion buyers in Europe's third largest economy also set its highest quarterly total in three years amid the political upheaval of the snap election called by president Macron.

This did not happen, but the lack of a majority for either side could cause big blockages in the government. Even so, the fractious parliament represents uncertainty, which should be to gold’s benefit.

Adrian Ash, director of research at BullionVault, said earlier this month: “After finishing the first half of 2024 at new quarterly records, the price of gold looks set to continue its underlying uptrend as the UK and US follow France to the polls. Political uncertainty is adding to gold's appeal as investment insurance. Longer term, the fiscal and monetary backdrop is supportive for gold prices too.”

With the US election still to come – and plenty of question marks over issues such as president Joe Biden’s health and former president Donald Trump’s resurgence – gold may continue ticking higher for the next few months at least.

Premier Miton has launched its managed portfolio service (MPS), to be led by Ian Rees, head of the multi-manager team. The service will offer two actively managed portfolio ranges – Index and Blend – with target OCFs of 0.25% and 0.45% respectively.

Four portfolios each will be available as part of the Index and Blend funds, which are expected to go live across several investment platforms this year.

The Premier Miton Liberation fund, which currently holds £87.9m in assets, will be included as “core part” of each fund in the Blend range. This will give investors access to more specialised investments not usually available through an MPS, the firm said.

The Index range will be a made up of trackers selected by the Premier Miton team, while the Blend portfolio will use both active and passive strategies.

Jonathan Wilcocks, global head of distribution at Premier Miton said the launch of the MPS range was due to an “increasing demand from advisors” for “cost-effective investment solutions”.

Chancellor Rachel Reeves has barely been in office a week but has already announced planning reforms to “get Britain building again”.

In her first speech as chancellor, she promised to restore mandatory local housing targets, end the ban on building new onshore wind farms in England and prioritise energy projects within the planning system.

Hassan Raza, investment manager of Capital Gearing Trust, said genuine planning reform could provide “real tailwinds to a range of property, private equity and infrastructure trusts”.

Below, fund selectors highlight which investment trusts stand to benefit from the Labour government’s policies.

Housebuilding, property and construction

Labour promised in its manifesto to build 1.5 million new homes during the next five years and is establishing a housing task force to tackle stalled, large housing schemes. The new government also wants to release ‘grey belt’ areas of ugly but protected land.

All this bodes well for housebuilders and trusts that own them, such as Aurora Investment Trust, which holds Barratt and Bellway. Managed by Phoenix Asset Management Partners’ chief investment officer, Gary Channon, the trust has a concentrated portfolio of 12 to 20 investments.

Peter Hewitt, who manages the CT Global Managed Portfolio Trust, described Aurora as “a real play on domestic UK”. It has a £189m market capitalisation and an 8.1% discount.

The Artemis Alpha Trust holds several of the same stocks as Aurora and has about 15% in housebuilders, including Redrow and Barratt. Managed by Kartik Kumar and John Dodd, it is trading on a 12.5% discount and has a £123m market cap.

Performance of trusts vs sector and benchmark over 5yrs

Source: FE Analytics

For a purer punt on real estate, Hewitt suggested TR Property. Marcus Phayre-Mudge, a partner at Thames River Capital, has managed the £1.1bn trust since 2011. Most of its assets are in continental Europe, but it still has substantial domestic exposure with 35.7% in listed UK property companies and 6.3% in UK bricks and mortar. Shares sit on an 8.7% discount.

Wind power

Greencoat UK Wind, which owns and operates UK wind farms, is in pole position as Reeves ends the ban on onshore wind farms. Not only will more wind farms be built, but Hewitt expects the value of the trust’s existing assets to rise. He anticipates interest from potential acquirers now that the sector has a “clearer road ahead” and the government is making “positive noises”. The £3.2bn trust is trading on a 13% discount, which has been as wide as 20%.

The lifting of the onshore wind farm ban could prove to be a double-edged sword, warned Juliet Schooling Latter, research director at Chelsea Financial Services.

“Whilst it will likely create more opportunities, increased renewable energy generation means lower long-term power prices that will also be more volatile. We've sometimes seen power prices go negative when it's particularly windy or sunny, which is actually bad for renewables,” she said.

Performance of trust vs sector over 5yrs

Source: FE Analytics

Clean energy

Labour wants to make Britain a clean energy superpower and its ambitions stretch far beyond wind power. Raza expects GB Energy and the National Wealth Fund to “play a critical role in mobilising existing technologies (solar, wind and biomass) and commercialising new ones (hydrogen and carbon capture).”

This should improve conditions for the disposal and development pipelines of trusts such as the NextEnergy Solar Fund and JLEN Environmental Assets, he said.

Labour's renewable push will also require more battery infrastructure to stabilise the grid, which could help some of the battery trusts which have been “massively out of favour”, Schooling Latter said.

Peter Walls, manager of the Unicorn Mastertrust fund, agreed. “More intrepid investors may want to look at the battery storage trusts, although prices here are expected to remain volatile, with greater sensitivity to energy prices and uncertainty about the National Grid.”

Meanwhile, Raza believes that investment in the national grid and broader infrastructure to support electrification should provide a boost for trusts such as International Public Partnerships.

Infrastructure

Many infrastructure investment trusts are trading on wide discounts due to higher interest rates and borrowing costs but some of this pressure will ease as and when the Bank of England cuts rates.

Labour’s reforms are a further tailwind, including the creation of a £7.3bn National Wealth Fund to invest in ports, gigafactories and steel.

Walls said: “While UK interest rates may well stay higher for longer, the direction of travel is downwards and this combined with the Labour party’s stated policies, increases the attractions of trusts such as HICL Infrastructure and Pantheon Infrastructure, which trade at wide discount to net asset value.”

Performance of trusts since Pantheon’s inception

Source: FE Analytics

James Carthew, head of investment companies at QuotedData, highlighted Downing Renewables & Infrastructure Trust (on a 34% discount) and Pantheon Infrastructure (on a 28% discount).

UK equities

Prime minister Keir Starmer has declared it his mission to “kickstart UK growth” and comes to power at a time when UK equity valuations are compelling, despite strong performance in recent months.

Small-caps are the cheapest part of the market, after a rough few years, said Walls, highlighting Aberforth Smaller Companies and Henderson Smaller Companies as good options.

Carthew also pointed to “big bargains” and wide discounts in the UK Smaller Companies sector, naming Montanaro UK Smaller Companies (on a 14% discount), Rights & Issues (13%) and BlackRock Throgmorton (10%).

Moving from listed small-caps to private equity, Hewitt tipped Literacy Capital, which is managed by the father and son team, Paul and Richard Pindar. They invest in small, privately-owned UK companies such as housebuilder Antler Homes and recruiter Kernal, often enabling the founders to partially cash out, and they professionalise how these businesses are run.

Performance of trust vs sector since inception

Source: FE Analytics

The £304m trust has already performed well and will prosper if the UK economy picks up, Hewitt said. It donates 0.9% of its net asset value every year to help disadvantaged children learn to read.

With the mental acuity of current US president Joe Biden under scrutiny, bond markets have begun to price in a victory for former president Donald Trump in the upcoming election, according to AJ Bell investment director Russ Mould.

If successful, Trump would become only the second president in US history to win a second term having previously been ousted from office, following in the footsteps of Grover Cleveland.

“This can be seen most clearly in how the US 10-year Treasury yield responded to the presidential debate hosted by CNN late last month. The benchmark US government bond saw prices fall and yields rise sharply in response to the broadcast, as fixed income investors began to anticipate a Trump win and the inflation they feared that would bring,” said Mould.

Not all agreed, however. Algernon Percy, managing director of Waverton Investment Management, noted that 10-year US Treasury yields have been “fairly static” over the past quarter, moving between a low of 4.2% and a high of 4.7%, before settling at 4.4% at the end of June.

US 10-year Treasury yields over 12 months

Source: AJ Bell, LSEG Datastream

“This reflected the ebb and flow of sentiment regarding US economic growth and inflation – with the most recent data indicating a gradually slowing US economy that is broadly helpful to a benign inflation outlook, notwithstanding somewhat sticky services inflation and wage growth,” he said.

However, Percy admitted that “short-term noise” around “economic statistics and political shenanigans” could impact yields in the coming months.

On Trump, Mould said some of the former president’s main policies are likely to be inflationary. An extension of 2017’s tax cuts and promises of more to come, for example, should boost consumer spending, which would increase the demand side of the supply-demand dynamic and keep prices high.

This would also run up the US’ already large annual deficit, adding 6% per year to a figure that already stands above 100% of GDP.

“The situation would look even worse, if a soft (or hard) economic landing were to transpire and tax income recedes just as welfare payments rise, as it seems logical to assume that the annual deficit would balloon,” said Mould.

Second, more tariffs on imported goods – not just from China – will hike prices. Lastly, reducing immigration would limit the pool of workers available, with wages likely to rise as a result.

But Mould noted that Biden is “not promising hair-shirt austerity” either. Indeed, if the incumbent president wins, in his first term the US is expected to “rack up” an additional $7trn in borrowing.

This all comes at a time when US Federal Reserve chair Jay Powell is “dangling the carrot” of interest rate cuts, providing inflation continues to cool, Mould said.

This presents a dilemma. On the one hand, investors may want to lock in yields if the Fed does indeed start to cut in the Autumn of this year, as some expect. On the other, although yields are currently above inflation, as the chart below shows, any spike in prices would soon erode this return.

US 10-year Treasury yields vs inflation over 5yrs

Source: AJ Bell, LSEG Datastream

As such, bond investors need to ask themselves what an appropriate level for US 10-year yields might be. “The base case is the 2% inflation target. An investor may then wish to add some term premium to that, since the headline rate is stuck near 3%, thanks to strong services inflation,” he said.

“Then there remains the incipient inflation risk offered by both presidential candidates. And then there is America’s massive deficit which could both pressure the Fed to cut rates to keep the Federal interest bill manageable (since it is now running at $1trn a year) and oblige the US to offer tempting yields so it can find buyers for its newly issued debt.”

All of this implies 10-year Treasury yields are likely to stay above 4% for the foreseeable future, suggesting capital appreciation on these bonds (currently paying 4.28%) could be limited.

“Investors must then decide whether the coupon is enough to compensate for inflation risk, if US Treasuries are to form a part of a balanced, diversified portfolio,” concluded Mould.

Stewart Investors has launched the Global Emerging Markets (ex-China) Leaders Sustainability fund to be helmed by fund manager Jack Nelson. The portfolio identifies 25-45 mid-to-large-cap companies outside mainland China, contributing to a more sustainable future for emerging markets.

The fund has been launched to work alongside a dedicated Chinese funds, which have proven popular among investors in recent years, the firm said. Most emerging market funds invest heavily in China, meaning people who own both are likely to be double dipping into the region.

However, the fund should also appeal to investors who have concerns over investment risk in Chinese markets.

It joins Stewart Investor’s range of sustainability funds, including the Asia Pacific Leaders Sustainability Fund, which holds £6.7bn in assets under management.

Nelson said there was a “real opportunity in the years ahead” for sustainable investors to make strong returns in the region. “Emerging markets are a melting pot for forward-thinking and innovative companies contributing positively to sustainable development,” he said.

With a newly minted prime minister and government, the UK has been under the spotlight this past week. But how does Blighty stack up from an investment perspective?

Elections aside, there has been a slew of negative news about the UK recently, further hitting investor confidence, which hasn’t picked up much since Brexit in 2016. In that time, the UK has dwindled to become the world’s fifth-largest stock market, its $3.5trn dwarfed in comparison to the US at $54.7trn and coming behind China, Japan and India. And will it shrink further? Maybe.

The exodus

Coutts, the Queen’s banker, recently announced it is slashing its UK exposure in its investment portfolios from 40% to a meagre 3.5% in some cases. The drop in confidence of institutional investors will likely creep to others and trickle down to private investors too.

And we have seen a plethora of de-listings in recent years, UK companies fleeing the London Stock Exchange (LSE) to list in other, what they see as more profitable shores. One of the biggest delisting stories was Cambridge-based ARM Holdings, a microchip manufacturer, which left London for New York in March 2023. Another is Paddy Power’s owner Flutter, which will follow ARM this summer.

AIM has also seen a sharp increase in de-listings, with 70 companies either moving to private ownership or relisting elsewhere – the LSE is on track to lose 30 or more £100m-plus companies this year alone. And rumour has it the NASDAQ is on the hunt to lure more firms from the beleaguered FTSE to New York.

Poor economic data

Economic news for the UK isn’t the best either. The Organisation for Economic Co-operation and Development recently downgraded its British growth forecast from 0.7% to 0.4%, making the UK the worst performer in the G7.

The International Monetary Fund (IMF) has also recently released a report telling the UK government it faces a £30bn funding gap that can’t be filled with higher growth or extra borrowing. A blow for the new chancellor.

Is it all bad?

So far, so depressing. But investors would do well to remember that it’s not all doom and gloom and to look beyond the headlines. The FTSE 100 is at an all-time high and still trading at attractive valuations.

It is also a misnomer to think that a bleak economic outlook for the UK is reflected in the stock market. This is certainly not the case for the FTSE 100, where up to 80% of its earnings come from overseas. More than two thirds of FTSE All Share revenues come from overseas and upwards of 50% for the FTSE 250, the oft-touted ‘domestic bellwether’.

Don’t confuse the stock market with the economy

Given the international earnings nature of the FTSE, it’s important not to confuse the stock market with the economy. Many UK smaller companies are international businesses, which are plugged into long-term structural growth trends, but they’re being valued as if they’re linked to the UK economy, or as if they’re in structural decline.

This is largely to do with valuations and investor perception. Market participants have long suggested that UK public limited companies (PLCs) deserve a lower valuation rating compared with international peers, specifically the US. This is usually due to investors pointing to profitability ratios such as return on equity and return on invested capital lagging behind the US, as well as our companies being prone to higher levels of cyclicality.

Valuations are attractive, especially in 'smid'-caps

Like-for-like valuation comparisons (Unilever versus Proctor & Gamble or Shell versus ExxonMobil, for example) show that UK companies tend to trade at a discount to international peers – those with near identical business models, cash flow profiles and end markets.

Then there are other points of reference, such as investment trust discounts, which in October 2023 reached levels that had last been witnessed in 2008, although they have since recovered a bit from the lows.

When you look beneath the surface at our small and medium-sized companies, you will find that valuations have reached extreme lows.

As at 31 October, the Numis Smaller Companies index was trading at a Shiller price-to-earnings (P/E) ratio of 13x. This is close to its all-time troughs, seen on three occasions: the great financial crisis, the tech bubble aftermath and the early 1990s recession. After these troughs, smaller companies went on to produce significant returns over many years.

Of course, ‘smid’-cap investing doesn’t come without risks (it tends to be significantly riskier than investing in larger companies) but it can have an important role to play in a diversified, well-balanced portfolio and we think there is currently an opportunity to buy UK equities at attractive prices.

Innovation isn’t just in tech

Another important point for investors to remember is that innovation comes in many forms and not just US technological disruption. This might provide some comfort to investors who are worrying they have missed out on the Magnificent Seven boom.

Longevity is a good signal of innovation – you need to stay innovative to succeed as a business. And there are some FTSE businesses that have been around for a long time.

Diageo, which owns the best-selling whisky and vodka brands in the world, has been adapting to consumer tastes for hundreds of years. And RELX, the world’s largest publisher and exhibitions company, was formed from the merger of Reed International, a publisher with roots harking back to 1895, and the older-still Elsevier, a Dutch academic publisher.

Further down the market-cap spectrum, the UK can also boast about engineering brilliance, with the likes of Spirax-Sarco and its world-leading thermal and steam systems and Rotork, a global market leader in valve actuators.

Having cheap valuations is one thing, but investors are keen to know about catalysts, and those are already happening.

There has been a surge in merger and acquisition activity, hitting the highest levels in decades. It’s a double-edged sword, as it means the UK is losing quality businesses to overseas buyers, but it’s also proof that we have something desirable and genuinely trading cheaply (not just optically cheap).

The ever-decreasing size of the stock market is also partly self-inflicted through record share buybacks and we expect more investors to take note and take part.

The UK has a reputation for being tenacious, innovative and ahead of the curve in many respects. So, although our markets will evolve and change and our economy will dip and thrive again, regardless of the broader macro-outlook, there will always be pockets of opportunity in the UK for investors.

Kamal Warraich is head of fund research at Canaccord Genuity Wealth Management. The views expressed above should not be taken as investment advice.

Now that UK government bonds offer a yield above 4%, equity income strategies have to work harder to justify their existence.

The argument for an equity income strategy is clear: dividend payouts plus the prospect of capital growth and higher total returns than those available from the bond markets. And with many investment trusts trading on a discount, investors can gain access to a portfolio of shares for less than they are intrinsically worth and potentially make additional gains if the discount narrows.

In practice, however, the holy grail of yields plus capital gains has been hard to achieve, with only a handful of investment trusts delivering top-quartile returns over three years with a yield payout in excess of 10-year gilts (4.2% as of 10 July 2024).

Within the Association of Investment Companies’ (AIC) UK Equity Income sector, Merchants Trust is the only one to make the mark with a yield of 4.9%. It is one of the AIC’s dividend heroes, having increased its dividend for 42 consecutive years.

Peter Hewitt, who manages the CT Global Managed Portfolio Trust and invests in Merchants Trust, said it can be relied upon to keep growing its dividend. “They will not drop the ball” he said.

The £859m trust is the third-best performer in its sector on a total return basis over three and five years. It is trading almost at par, with a very slight discount of 1.4% as of 31 May 2024.

Performance of trust vs sector and benchmark over 3yrs

Source: FE Analytics

Simon Gergel, chief investment officer for UK equities at Allianz Global Investors and head of the value and income team, helms the trust. RSMR analysts described its investment style as contrarian and value-orientated, with an income bias.

Two Asia Pacific equity income trusts achieved top-quartile returns over three years with a yield above gilts: abrdn Asian Income with a 5.7% yield and Schroder Oriental Income paying out 4.5%. The two trusts have grown their dividends for 15 and 17 consecutive years, respectively.

The abrdn Asian Income trust was trading on a 12.4% discount by 31 May and has a £348m market capitalisation. Richard Sennitt’s £690m Schroder Oriental Income trust sits at a 4.2% discount.

Performance of trusts vs sector and benchmark over 3yrs

Source: FE Analytics

Other equity trusts making the grade included BlackRock Latin America (a 6.4% net yield and a 12.9% discount), BlackRock Frontiers (a 4.4% yield and a 5.9% discount) and Schroders’ International Biotechnology Trust (a 4.5% yield and a 8.7% discount). The latter has committed to paying a 4% dividend from capital reserves.

Meanwhile, the Henderson High Income Trust is a top-quartile performer in the UK Equity & Bond Income sector and has a 6.4% yield. It is trading at a 9.7% discount.

For investors who prioritise income payouts, Henderson Far East Income has a 10.5% yield while the British & American Investment Trust boasts an 9% yield.

Two UK equity trusts paid an income over 7%: Chelverton UK Dividend Trust (7.8%) and abrdn Equity Income Trust (7.4%).

However, all four trusts underperformed their peer groups from a total return perspective over three years, which illustrates the difficulty of achieving both income and growth.

Henderson Far East Income’s performance has struggled, lagging its sector average over three and five years, but it changed hands last autumn when Mike Kerley retired and his colleague Sat Duhra stepped up to become lead manager. Since then, “it's really picked up”, Hewitt said. “He's sorted things out and I’m very impressed.”

Performance of trust vs sector over 1yr

Source: FE Analytics

The £376m trust has been consistently boosting its income by writing call options for a decade or more, Hewitt added.

The warmest May on record and a strong rebound in the construction sector pushed the UK’s month-on-month GDP growth to 0.4% in May – twice the level economists had expected.

Construction output grew by 1.9% month-on-month, its fastest rate in a year. After a wet April with flat GDP, housing and infrastructure output climbed 2.8% and 3.5% in May, respectively.

The services sector was a significant contributor, with output up 0.3% as consumers flocked to bars and restaurants, and production rose 1.9%.

Danni Hewson, head of financial analysis at AJ Bell, said: “It’s amazing what a bit of warm weather can do. As temperatures soared to record highs in May, shoppers shopped, builders built and lots of us downed a nice cold pint.”

May’s figures brought three-month GDP growth up to 0.9% – the fastest pace of growth since January 2022. Annual GDP growth to May stands at 1.4%.

Neil Wilson, chief market analyst at Finalto, said the GDP figures “hint at the existence of tailwinds for the UK economy just as the government takes office – a bit of luck on the side of Labour.”

Rob Morgan, chief investment analyst at Charles Stanley, agreed that “Labour has inherited a tepid but improving economy”. After last year’s slowdown, the UK is enjoying “a very gentle upswing in activity”.

Falling inflation combined with persistent wage growth at 6% means that households have greater purchasing power, whilst recent cuts to National Insurance and the increase in minimum wages are boosting consumer confidence further, he added.

However, Hewson warned that the economy’s prospects remain vulnerable to the vagaries of the British climate. “July is already looking a bit soggy and even if England can bring the Euros home, boosting pub profits along the way, the wet weather is likely to impact footfall on our high streets and productivity on our construction sites.”

Furthermore, better-than-expect economic growth is a double-edged sword because it makes interest rate cuts less likely.

Derrick Dunne, chief executive of YOU Asset Management, said: “These surprise growth figures for GDP, particularly considering it is the best growth over three months for more than two years, are creating a huge conundrum for the Bank of England (BoE). If the economy is beating inflation and tolerating much higher rates than it has done for over a decade, why cut?”

Robust GDP data has led to a modestly hawkish reaction in financial markets, said Sam North, an analyst at investment platform eToro, “with a slight uptick in the pound versus the dollar and a dip in bond futures”.

“The market's reaction suggests that the data may influence the BoE to maintain or tighten monetary policy, especially given ongoing concerns about services inflation and wage pressures. However, the extent of this adjustment is expected to be limited as market participants await upcoming key economic indicators, including the CPI, wage data and retail sales figures,” he explained.

Conversely, Morgan expects the BoE to cut rates sooner rather than later, now that the Consumer Prices Index (CPI) has hit its 2% target, although he thinks September is a more probable date than August for the first cut.

Overall, the economy in solid shape but it isn’t out of the woods. “The biggest danger is that inflation reaccelerates and interest rate cuts are shallower than anticipated and this acts as a brake on activity,” he cautioned.

The new government also has “some significant structural problems to deal with”, he continued. “Weak levels of investment and company formation alongside low labour force participation are impediments to economic expansion.”

Reducing friction at the border with the European Union would help, he added, as will liberalising planning laws and attracting long-term capital for investment.

Labour’s landslide election result last week has spurred Chris Forgan, portfolio manager of the Fidelity Multi Asset Open range, to take an overweight position in the UK.

Now that the “dust has settled”, there are several reasons for investors to be optimistic about the UK market, including a potential economic recovery.

The economy is already on the up after a slowdown in 2023, with first quarter GDP being revised up to 0.7% by the Office for National Statistics. This was driven by an uptick in consumer spending, said Forgan, which could continue as consumers are saving more at present but might loosen their purse strings if inflation settles.

On this front, Forgan noted that price rises are also “looking more positive” with years of rampant inflation now seemingly behind us.

Although UK inflation was “stickier” and appeared more difficult to “get under control” compared to other regions last year, it has fallen “consistently” this year, he said.

“Services inflation is still higher than the Bank of England (BoE) would like, but we believe it has a dovish bias and that it will begin its rate cutting cycle before long. We believe this should further stimulate economic activity,” said Forgan.

On top of this, more mergers and acquisitions (M&A) being completed at “attractive premiums” and valuations that are “some of the most attractive in the developed market universe” suggest the UK has a lot to offer investors from here.

To go overweight the UK, the Fidelity Multi Asset Open range has bought two funds. The first is Polar Capital UK Value Opportunities, which Forgan described as a “market-cap agnostic” portfolio.

Managed by George Godber and Georgina Hamilton, the fund has been under the cosh for some time as it has been hit by the double-whammy of owning value stocks (which have struggled compared to their more growth-oriented peers) as well as mid-caps, which have lagged their large-cap rivals in recent years.

As such, the fund finds itself in the third quartile of the IA UK All Companies sector over three years. However, the fund has come into its own over 12 months and is now ahead of the average peer since its launch, although still lags the FTSE All Share.

Performance of fund vs sector and benchmark since launch

Source: FE Analytics

“We like the strategy’s investment process, which is entirely bottom-up, applying a replicable process to each company in the investment universe. The managers apply a value philosophy, looking for stocks trading at a temporary discount to their intrinsic value,” said Forgan.

“We also favour the mid-cap bias the fund currently adopts – nearly 70% is invested in small and mid-caps.”

The other fund he uses is Artemis UK Select, headed by Ambrose Faulks and FE fundinfo Alpha Manager Ed Legget.

The strategy was added to the Fidelity Multi Asset Open range during the third quarter of 2022, since when it has been the second-best performer in the IA UK All Companies sector, beating both the FTSE All Share index and its average peer.

Performance of fund vs sector and benchmark since July 2022

Source: FE Analytics

“The strategy is a concentrated multi-cap best ideas fund run by experienced portfolio managers with a strong record of managing UK equity portfolios,” said Forgan.

Managers focus on earnings growth, cash flow and balance sheet resilience alongside re-rating potential, resulting in a portfolio that has no size bias and a value tilt.

Forgan was not the only Fidelity manager keen on the UK’s prospects following Labour’s victory. Salman Ahmed, global head of macro and strategic asset allocation, said there were a number of reasons to be positive from a macroeconomic standpoint.

First he highlighted the UK’s relationship with Europe, which should improve as the new government aims to be more “collaborative and constructive” than its predecessor.

“This approach may lead to smoother trade negotiations, reduced tariffs and more predictable regulatory frameworks, benefiting UK businesses operating within and trading with the EU,” he said.

An 11% gap has opened up between the UK’s pre-Brexit business investment trends forecasts and the current reality, according to the Centre for European Reform, with Ahmed noting that improved relations will be “critical to attracting European and global investors back to the UK market”.

Next is fiscal restraint, with the Labour party more likely to take a cautious approach to tax increases in the short term and an improved outlook for borrowing.

“Growth will be key and political stability, coupled with movement on EU relations, may help maintain the projected fall of the debt burden without crippling spending cuts or tax rises,” said Ahmed.

Lastly, political stability should help encourage investors back to the UK, with the current government in power for the next five years, barring any major setbacks.

“Already, we have seen the government announce changes to the planning laws to help alleviate housing shortages, which signals both a willingness to act quickly and the importance of having a strong majority when it comes to delivery,” he said.

Reduced political risk could lead to lower volatility in the stock market, particularly if Labour is “consistent and transparent” in its policymaking. This would “enhance the UK's reputation as a reliable investment destination”, said Ahmed.

There is a growing expectation that the Bank of England will soon cut interest rates, potentially as early as its next meeting in August.

Falling interest rates would stimulate economic activity, benefitting the more cyclical areas of the stock market, such as household goods and construction companies, utilities and retailers.

As Rebecca Maclean, investment director, UK Equities at abrdn, said: “Lower interest rates can reduce mortgage rates and debt servicing costs, thereby increasing discretionary income and bolstering consumer confidence.”

Below, managers of UK equity funds explain which sectors and stocks they expect to benefit from rate cuts.

Housebuilding and construction

Falling interest rates reduce the cost of mortgages, making home purchases more affordable, which should enable housebuilders to thrive.

The sector is also poised to benefit from the new Labour government’s commitment to build 1.5 million new homes over the next five years.

Hence Ambrose Faulks, co-manager of Artemis UK Select, believes housebuilding will be at the “epicentre” of a stock market revival and holds Vistry and Morgan Sindall within his fund.

Job Curtis, manager of The City of London Investment Trust, is also bullish on housebuilders, holding positions in Taylor Wimpey and Persimmon. Additionally, he invests in brick-maker Ibstock and Marshalls, which produces paving stones and roofing products.

“They should benefit medium-term as improved demand leads to more homes being built,” Curtis said.

Simon Murphy, manager of VT Tyndall Unconstrained UK Income, also focuses on businesses that serve the housing industry. For example, he invests in the aggregates business Breedon Group, buy-to-let mortgage provider OSB Group and property manager Savills.

Performance of stocks over 3yrs

Source: FE Analytics

Real estate

Some managers prefer the real estate sector and anticipate an upswing if rates are cut, due to reduced borrowing costs, increased property values and higher demand.

Therefore, Simon Moon, co-manager of Unicorn UK Smaller Companies, favours LondonMetric Property, a REIT focused on logistics and retail properties.

Meanwhile, Callum Wells, co-manager of the Castlefield Sustainable Portfolio funds, prefers Assura, which focuses on general practitioner and primary care buildings.

Charles Luke, manager of Murray Income Trust, believes that Safestore, the UK’s largest provider of self-storage, will thrive.

He said: “Firstly, the interest charged on its debt would decline. Secondly, the discount rate on which its assets would be valued would fall resulting in a higher asset value. Finally, for its customers, a lower interest rate would likely lead to an increase in disposable income and greater housing activity, both of which would be likely to benefit demand for Safestore’s product.”

Performance of stocks over 3yrs

Source: FE Analytics

Consumer discretionary

For Andy Gray, co-manager of Artemis Special Situations, one of the “mysteries” of the past six months has been the lack of upturn in consumer spending.

“Covid savings are intact, unemployment is low, wage growth is strong, inflation has eased.  Indeed, consumer confidence is back to pre-Covid levels. Yet consumer-facing companies are yet to see it,” he observed.

“Larger ticket consumer purchases in particular look overdue a recovery with volumes well below 2019 levels.” 

Interest rate cuts might act as a catalyst to encourage UK consumers to increase their spending, particularly on larger items.

Therefore, Gray holds furniture retailer DFS and kitchen manufacturer Howden, noting that these companies have gained market share during the downturn and enhanced their product offerings.

Murphy, who also holds DFS and Howden in VT Tyndall Unconstrained UK Income, pointed to DIY retailer Wickes and home furnishing retailer Dunelm.

Will Tamworth, co-manager of Artemis UK Smaller Companies, is overweight in the UK consumer discretionary sector, anticipating that rate cuts will serve as a catalyst to encourage consumers to make major purchases.

In addition to investing in home-oriented businesses such as DFS and bathroom equipment retailer Norcros, Tamworth also favours travel-related businesses like low-cost airline Jet2 and online travel agent On The Beach.

Murphy also believes that travel and leisure are themes to play ahead of interest rate cuts. These sectors have been recovering since the Covid lockdowns but he expects increased disposable income after rates fall to provide a further boost.

His key holdings in this area are WHSmith and low-cost airline EasyJet.

Meanwhile, Artemis UK Select invests in clothing retailer Next and the pubs and restaurants group, Mitchell & Butlers.

Performance of stocks over 3yrs

Source: FE Analytics

Financials

UK banks have proven to be a terrific investment since central banks began their hiking cycle and Faulks expects them to continue performing well, even as macroeconomic concerns recede.

He said: “Due to their use of the five-year swap rate to hedge themselves, they are still meaningfully under-earning their full capacity, so we would expect their earnings to grow during the first falls in interest rates. Not least, this will ease deposit pressures.”

Yet, lower rates are likely to benefit the wider financial sector, driven by increased activity and investors seeking alternative income sources.

For example, Moon highlighted global professional services provider JTC, which could experience heightened demand for its fund administration and corporate services.

Similarly, investment platform AJ Bell could see gains from higher trading volumes and increased assets under management as investors become more active in a lower-rate environment.

Wells also sees potential in asset managers such as Impax, which are expected to benefit from increased assets under management due to rises in the value of their underlying investments.

Performance of stocks over 3yrs

Source: FE Analytics

Growth companies and small-caps

Finally, fund managers highlighted growth companies and small-caps, both of which suffered as interest rates were on the way up.

Maclean said: “The valuation of equities is sensitive to long-term discount rates. The compression of valuations for growth-oriented companies during the interest rate hikes of 2021 and 2022 exemplifies how heightened discount rates can dampen the present value of future cash flows, with the reverse true when rates fall.”

Moon has invested in recently-listed Raspberry Pi, known for its single-board computer, anticipating increased adoption across various industries.

He also believes that Microlise, a provider of telematics and fleet management solutions, will benefit from increased business investment in efficiency-boosting technologies.

Small-caps have suffered in recent years because they are often more closely connected to the health of the domestic economy, compared to their larger peers.

However, they are also among the first to benefit from interest rate cuts.

Wells concluded: “There is certainly value in small-caps, as evidenced by recent takeover activity, often by savvy private equity investors who have acted quickly to snap up bargains before interest rates reduce and valuations surge again.”

The Financial Conduct Authority (FCA) is overhauling the rules for companies seeking to list on the UK stock markets. The regulator said its changes aim to “boost growth and innovation” and are the most significant amendments to the UK’s listing regime in more than three decades.

The new rules, which will come into effect on 29 July, abolish the need for shareholders to vote on significant or related-party transactions. They also introduce more flexibility around enhanced voting rights. Shareholders are still required to approve major events such as reverse takeovers.

Chancellor Rachel Reeves said: “These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here.”

The number of listed companies in the UK has fallen by about 40% since 2008, according to the government’s UK Listing Review. A spate of British companies – including chip designer ARM Holdings and building materials group CRH – have moved their primary listings to the US to boost their valuations and tap into the US government’s spending spree through the CHIPS and Science Act and the Inflation Reduction Act.

Between 2015 and 2020, the UK accounted for 5% of initial public offerings globally, more or less in line with the UK’s approximately 4% position in global indices, but this is a statistic the regulator wants to improve.

Sarah Pritchard, executive director of markets and international at the FCA, said: “A thriving capital market is vital in delivering investment to growing companies plus returns and choice to investors. That’s why we are acting to make it more straightforward for those seeking to list in the UK, while retaining vital protections so investors can help steer the businesses they co-own.”

Capital market reform, such as making it easier to float and undertake mergers and acquisitions, has “real momentum” behind it, said Sue Noffke, Schroders’ head of UK equities.

She also expects Labour’s planning reforms to help construction companies, while a reversal of the ban on onshore windfarms will favour utilities and the renewable energy sector.

“Such changes could open up great investment opportunities for companies involved in providing grid infrastructure for the renewable transition, while many quoted housebuilders should benefit from planning reform,” Noffke explained.

Going forward, Hargreaves Lansdown hopes that the new government will introduce regulation to improve retail investors' access to initial public offerings (IPOs) and secondary capital raising rounds. At the recent Raspberry Pi IPO, the investment platform was significantly over subscribed, which proves that demand from retail investors is there, said Tom Lee, head of trading proposition.

"Boosting retail investment on the stock exchange will have wider market benefits providing depth and liquidity, as well as boosting interest in investment with the wider public, unlocking further capital for UK-listed companies," Lee said.

However, Chris Beckett, head of equity research at Quilter Cheviot, warned that the listing rules are not the main reason for the London market’s demise and said reforming them is “very admirable” but “a bit of a red herring”.

“The main reason for the gloomy clouds over the City is the makeup of the main indices. London is home to large, legacy industry companies, such as miners, oil and gas and financials, which have been out of favour in the past decade and show no real signs of becoming loved once more,” he argued.

Beckett was sceptical about the government’s ability to attract exciting growth businesses to the UK. Growth investors gravitate towards the US, so “if a business wants to achieve an attractive valuation, it too will go to America”, he suggested. “Many of the companies in the FTSE 100 are global in nature too, so will naturally look to overseas markets if that is a better fit for them.”

Yet despite the UK’s underdog status versus North America, the investment community is optimistic about the new Labour government ushering in a period of stability, which fund managers hope will attract international investors back into UK equities.

John Ions, chief executive officer of Liontrust, said he was encouraged by the government’s “pro-growth agenda”. “Along with falling inflation and the expectation of a reduction in interest rates, this should encourage international investors to return to the UK and boost capital flows to the stock market,” he concluded.

Timing when a stock will surge is notoriously tricky but so too is getting the position size right to profit from the movement.

With Microsoft, Apple, and Nvidia making up such a large part of the major indices (over 4% apiece of the MSCI World as of 31 May), active managers need to take substantial positions to keep pace with their benchmarks.

Peter Bates, manager of the T. Rowe Price Global Select Equity fund, invested in Apple in April 2024 with immaculate timing but his position size – 500 basis points underweight versus his benchmark, the MSCI World – weighed on relative performance. “That was a good buy but it still hurt me,” he said.

He initially bought Apple’s shares at $170, calculating a hard downside of $130, a soft downside of $150-160, an upside case of $200 and the best case scenario of $240-250 with an 18-month view.

At that time, Apple’s share price appeared to be on the way down so he did not want to go overweight, but the narrative has changed substantially since.

In the past couple of months, Apple has disclosed plans to embed more artificial intelligence (AI) functionality into its iPhones and talked about partnering with third parties. At a developer conference on 10 June, the company unveiled a range of AI features including writing assistance tools, customisable emojis, integration with ChatGPT and a reboot of its voice assistant Siri.

These developments propelled Apple’s share price from $170 to $228 by 9 July, including a 7% rise the day after last month’s developer conference.

Bates was left kicking himself for not having bought more of the stock. “It's pretty amazing how fast the stock has gone from $170 to $220 and it makes me question, why did I only buy 250 basis points? That's 50 basis points that I've lost in relative performance after doing all this work,” he rued.

“I got very fortunate with the timing and that's the funny thing about this business, where even when you make a good decision, you [ask yourself] why didn't I buy more of it?

“Even when you do a lot of work and you think you know what's going to happen, getting the timing right is fool's gold, so you just hope to be in the game.”

He does not plan to add to the position now, however, because the current share price is so close to his upside target.

Apple’s share price ytd

Source: Google Finance

Before April, Apple was struggling to grow and had not announced any innovative new products for some time, but Bates expected the company to find a way to embed an AI assistant into its iPhones and monetise that.

He sold a consumer stock to fund the position in Apple, which he views as the consumer staple of the tech sector. People tend to upgrade their iPhones every four or five years, so Apple’s sales are easy to predict by looking at volumes four years ago, he noted.

Part of his investment thesis for Apple is how valuable people’s phones are to them. “God forbid if your phone breaks, you immediately buy a new one.”

Apple hasn’t been the only top performer for the Global Select Equity fund, however. Indeed, its top-quartile performance in the IA Global sector over the past year is due to another tech giant, Nvidia.

Performance of fund vs benchmark and sector over 1yr

Source: FE Analytics

Bates bought into Nvidia last summer – having earlier looked at the stock in the autumn of 2022 when he decided to buy Advanced Micro Devices (AMD) instead, which he thought was closer to its valuation trough. Nvidia appeared too expensive, he said, admitting to underestimating its upside case. Six months later, AMD was up 60-70% but Nvidia had risen over 250%.  

Bates admitted his mistake and revisited Nvidia, quoting Amazon’s ‘day 1’ culture of making decisions with a clean slate. His decision to buy into the chip designer proved prescient as its share price has risen 213% in the past year to 9 July 2024.

Nvidia’s share price over 1yr

Source: Google Finance

To put the difficulty of this decision into context: Will Low, head of global equities at Nikko Asset Management, also bought Nvidia in August 2023 and described it as “a potential egg in face scenario” given the share price had already doubled.

He was concerned about being accused of index hugging because he was buying one of the largest positions in his benchmark after it had run up significantly.

Performance of fund vs benchmark and sector over 1yr

Source: FE Analytics

The decision paid off as the Nikko AM Global Equity fund, which currently has 6.9% in Nvidia, is a top-quartile performer within the IA Global sector over one and five years.

Despite a year of election fever, with more than 70 countries are expected to go to the polls, wealth managers have become more bullish on equities, according to a survey by Asset Risk Consultants (ARC).

Sentiment towards stock markets has risen to 57% amongst wealth managers, a dramatic rise from the -22% sentiment over the past 12 months. This swing suggests investment managers are becoming less concerned with the consequences of upcoming elections.

Additionally, 63% of the 90 surveyed chief investment officers (CIOs) from wealth management firms were now expressing positive views on equities, a rise from just 13% this time last year.  

Source: ARC

ARC CIO Grant Wilson said, while elections can drive market volatility, recent analysis suggests that new government proposals can boost demand.

“In the medium-to-long term, reforms could create a more favourable business environment and support sectors with a high domestic exposure.”

However, Wilson also noted that, despite increased positivity, “the longer-term outlook is more uncertain, with the US election likely to have a far greater impact on the global economy, which could influence bond yields and potentially lead to higher interest rates in 2025.”

Indeed, last month’s Bank of America Global Fund Manager Survey found a net 39% of asset allocators are running overweights to equities.

Percentage of investors overweight equities

Source: Bank of America Global Fund Manager Survey, Jun 2024

The survey, which polled 206 fund managers running a collective $640bn, revealed that investors are underweight bonds, cash and real estate. Commodities were the only other overweight, although at much lower levels than stocks.

However, Bank of America also found fund managers consider politics to be a growing risk. The US election was cited as the market's main tail risk by 16% of investors, up from just 9% in the previous survey, while the proportion worried by geopolitics moved from 18% to 22%.

Nvidia continues to defy gravity. Despite being one of 2023’s best performing global equities, up almost 240%, at the time of writing Nvidia’s share price has continued to rise yet another 130% this calendar year. With a market cap of $2.8trn, it’s the third largest company in the MSCI ACWI behind Microsoft and Apple.

Nvidia has had a phenomenal run thanks to its near monopoly over artificial intelligence (AI) chips and its pricing power.

The commercial implementation of large language models has been percolating for a number of years, and the release of ChatGPT in November 2022 and the acceleration in investment it catalysed has been unprecedented.

Nvidia has been the primary beneficiary of this investment cycle. Building and operating AI models is both power and hardware intensive. This has resulted in huge demand for Nvidia’s GPUs, or graphic processing units (a powerful chip that can quickly process large quantities of simple operations but run them in parallel).

Nvidia’s share price performance has been underwritten by a significant increase in revenue and profit; net profit after tax increased from $4.4bn in 2023 to $29.8bn in 2024, with consensus expecting $63.7bn in 2025. The market has blessed the stock as the ultimate AI winner.

But we know that with any non-linear change, the landscape will shift over time.

We are currently in an arms race to build more capacity and train increasingly sophisticated models. But the question is, how sustainable is the current level of spending? Advanced Micro Devices estimates that spending will continue to grow at 70% per annum from $45bn in 2023 to more than $400bn by 2027.

To support this level of AI hardware, surrounding infrastructure also needs to be upgraded – we estimate an additional $350bn will need to be invested alongside the $400bn. This will take total data centre investment to $750bn by 2027.

These numbers are staggering – and to justify this level of spend, companies will need to find ways to monetise models.

As companies look to scale their AI models, the spotlight is squarely shifting to reducing the total cost of compute.

Competition is building from Nvidia’s traditional semiconductor rivals as well as the cloud giants that are developing in-house accelerator chips (an alternative to GPUs) to support both training and inferencing workloads (the workloads from deploying or using the AI model).

Furthermore, researchers are working on ways to increase the algorithmic efficiency of the AI models to get better use out of existing chips; startups are contemplating using alternative GPUs to run AI models once they are deployed into the real world; and smaller models are being deployed to run locally on devices without the need to use GPUs in data centres.

All these methods aim to reduce the cost of compute. The point is the phenomenal growth that Nvidia has experienced is not guaranteed into the future.

The capability of these large language models is transformational and there will be more than one winner from this cycle of innovation despite the way the market is behaving today. AI has the potential to transform the traditional parts of the economy – those businesses that can adopt AI to either drive revenue or significantly reduce costs – as well as change the way consumers interact with the digital and physical world.

Investors should be looking for ‘pragmatic value’ exposure to AI; in other words, stocks that can benefit from the AI investment cycle but are mispriced relative to their business resilience and growth profile. Two such ideas are Taiwan Semiconductor Manufacturing (TSMC) and Qualcomm.

TSMC is the picks and shovels play of AI given its critical role in the supply chain. TSMC is the largest and most sophisticated foundry in the world with a near monopoly over the manufacture of the most advanced semiconductor chips. The GPU or accelerator chips that are currently deployed in data centres are more than likely manufactured by TSMC.

TSMC’s competitive strength is evidenced by Intel’s challenges scaling its foundry business and Samsung Electronics’ inability to mass produce leading-edge chips at the same volume, quality and cost as TSMC.

The company has made the investments required to participate in this cycle of innovation including building leading-edge fabs in the US and Japan. Explosive demand for AI chips places TSMC in pole position to harvest those investments for growth and profitability.

We see the company growing earnings by 15-20% per annum and it is priced at only 14x our 2026 earnings forecasts. Geopolitical risks do exist but given TSMC’s critical role, both superpowers are still very dependent on the company.

Beyond first-order beneficiaries, investors should also be thinking about edge applications. Qualcomm is a global leader in low power compute and connectivity chips. Qualcomm’s expertise allows it to flex its creative muscle by designing AI chips for devices like phones and laptops. For example, some of Microsoft’s new Surface tablets and laptops will be able to run certain AI tasks locally on the device, powered by chips from Qualcomm2.

Running AI models locally results in lower cost (no data centre required), better security (sensitive information is not being sent to the cloud) and a better user experience from lower latency (avoids internet lag).

Unlike downloading a new app, users need to upgrade their hardware to access these new AI features. By bringing AI from the cloud to the device, Qualcomm benefits from this refresh cycle as well as via delivering more semiconductor content to the device.

The company is also gaining share in new markets such as smart glasses and connected cars. Qualcomm is trading today on 18x our forward earnings forecasts, an attractive multiple relative to its business resilience and growth profile.

Nvidia is today’s undisputed AI leader, but as with previous episodes of innovation, the landscape will shift. There are obvious parallels to the dotcom bubble. The fibre optics communications boom in the late 1990s led to game-changing technology that ultimately enabled all the things we take for granted today. But capacity was overbuilt in the short term, which led to a period of digestion as investment receded and stock valuations came back down to earth.

With TSMC and Qualcomm we are able to take exposure to AI at mid to high teens multiples versus 30x for the broader semiconductor complex. This is ‘pragmatic value’ exposure to AI.

Alison Savas is investment director at Antipodes Partners. The views expressed above should not be taken as investment advice.

Emerging markets can be a prosperous place for investors to put their cash but issues can arise when so-called ‘tourists’ enter the fray, according to Matthews Asia chief investment officer Sean Taylor.

He pointed to Russia’s invasion of Ukraine in 2022 as an example. The Russian stock market immediately became uninvestable, with fund managers having to write down any assets they owned in the country to zero.

While no one could have predicted the war, he noted that “experts didn’t get caught out” in Russian assets because they could see there were issues on the horizon.

He noted that global funds are the ones that end up “catching it”, because they tend not to “worry about valuations if they’ve got growth”.

“The problem for emerging markets is the tourists that go in,” Taylor said, referring to the asset class’ perceived risk.

One area where this has happened again is in Latin America, which soared in recent years on the back of rising commodity prices.

The IA Latin America sector was the second-best in the Investment Association (IA) universe last year behind only the IA Technology & Technology Innovation peer group.

It was second behind the IA Commodity/Natural Resources in 2022, but its strong returns over those two years came off the back of a dismal 2021, when the IA Latin America peer group was the worst in the space, down 11.5%.

Those still in the LatAm trade this year have been caught out again. The sector has been the worst place investors could have put their money so far in 2024, with the average fund down some 14.8%.

Performance of sector over YTD

Source: FE Analytics

“It was a place where people were hiding last year. It was a good structural story. US growth was working and people moved to Latin America as a result, choosing to underweight bigger Asia markets such as Korea, Taiwan and China,” said Taylor.

“That trade obviously reversed at the beginning of the year when people got more confident on the earnings of the Asian countries.”

Matthews Asia as a firm became more cautious on Latin America towards the end of last year as the region’s strong performance meant valuations were comparatively expensive relative to Asian alternatives.

But valuations are not the only issues. He highlighted two countries in the region as examples for why the asset class as a whole has struggled.

First is Mexico, which is up 36.3% in three years. So far in 2024, however, the market is down 15%.

Performance of sector over YTD

Source: FE Analytics

The country was pushed higher on the back of positive rhetoric from the US, with president Joe Biden noting the need to bring manufacturing closer to home and away from Asia – and in particular China.

“Mexico is one of the best structural stories in emerging markets,” said Taylor, because of its “access to the US”, with exports from the country “taking over the share from China”. Throw in a “low level of digitisation and financial penetration” and the country could be a long-term winner.

But it has its issues. So much so that “investment banks downgraded the currency and the equity market because that structural story is being challenged”, said Taylor.

The market recently sold off due to political instability, namely incoming president Claudia Sheinbaum Pardo, who is set to take over in October with a massive majority.

She follows on from Andrés Manuel López Obrador, also known by his initials AMLO, but Taylor said there are concerns that the new president will be more “radical” than her predecessor.

Additionally, worries over “how much influence AMLO will have over her”, as well as one final cabinet meeting in September under the current administration, instil nervousness.

Lastly, the US election could also cause big issues for the country, with former president Donald Trump likely to run on an anti-Mexico campaign as he did last time he won.

“I don’t think he would do anything to Mexico, but the rhetoric between now and the election is that Trump is going to hammer Mexico,” he said.

The Brazilian market has been on a similar trajectory in recent years to that of Mexico, up in 2022 and 2023 but down in 2024.

Here, he said “the corporate environment in Brazil is great but the overall political and global environment is difficult”.

President Luiz Inácio Lula da Silva has been a divisive figure and there are concerns he could tamper with the central bank, which recently voted to cut interest rates – albeit in a split vote.

“There is going to be a central bank change in January. Who does Lula put in? If he puts one of his friends in you have to downgrade earnings because of the currency,” said Taylor.

But the country “has a better balance sheet” and “is better run” than Mexico and “is really cheap”.

Of the two, Taylor said Brazil “will be an interesting market by the end of the year” based on its low valuations. If Trump returns to the White House later this year, “probably that would favour Brazil over Mexico”, he said.

Some £923m was removed from Liontrust funds by investors in the three months to 30 June, according to the asset manager’s latest three-month trading update.

This is despite positive performance for the firm’s funds as a whole, with investment performance adding £139m over the period. It leaves Liontrust with total assets under management (AUM) of £27bn, down from the £27.8bn it held on 1 April.

This marks a decline of 2.8% for the period, with most of the net outflows coming from the UK retail fund and managed portfolio channel, where investors pulled £772m.

However, outflows are slowing. Indeed, the £923m over the past three months was less than the £1.6bn removed during the same period in 2023.

Liontrust’s Sustainable Investment team runs the most money, with £9.9bn in AUM, followed by the Economic Advantage team (£6.3bn) and Muti-Asset range (£4.1bn).

John Ions, chief executive officer at Liontrust, said the firm could be in a good position going forward, particularly after the latest general election result, as he believes the outlook for UK-based asset managers is set to improve

“Labour’s large majority in last week’s general election should herald a period of stability that will be positive for financial markets. It is encouraging that the new government has a pro-growth agenda and is committed to the simplification of pensions,” he said.

Alongside falling inflation and expectations of interest rate cuts, this may be enough to finally encourage international investors back to the UK and arrest the years of consistent outflows by domestic investors.

"Given the ever-increasing need for individuals to save more for their retirement as well, this will significantly improve the outlook for asset managers,” he said.

“Liontrust is well placed for this improving environment as we have a strong brand, distribution, robust investment processes and a leading reputation for managing UK equities.”

The healthcare sector has been a story of two halves recently. Novo Nordisk and Eli Lilly, which dominate the weight loss drug market, have returned 78.1% and 103.9% in the year to 8 July 2024, respectively. Meanwhile, the biopharmaceutical industry has been dealing with a supply chain hangover and earnings downgrades following excessive spending during the Covid pandemic.

Many fund managers agree that the healthcare sector should benefit from the long-term trends of ageing populations, increasing demand and innovation, especially in biologics (a term encompassing vaccines and antibodies, among others).

Yet managers also concur that healthcare has not lived up to its potential over the past year. The broad MSCI World Health Care index (which has 15.4% in Eli Lilly and Novo Nordisk combined) has returned 14.8% for the year to 8 July, lagging the tech-fuelled MSCI World (up 25.5%).

Nonetheless, over the past five years, an allocation to healthcare would have delivered significant diversification versus the broader market, as the chart below illustrates.

Performance of the healthcare sector vs MSCI World over 5yrs

Source: FE Analytics

Below, Trustnet asked three global equity managers how they are approaching the healthcare sector.

Nikko AM: Still overweight despite a disappointing year

Will Low, head of global equity at Nikko Asset Management, said healthcare has been one of the most challenged areas of his portfolio during the past 12 months but the $827m Nikko AM Global Equity fund remains overweight (a 17.6% allocation to healthcare versus 10.9% for the MSCI All Country World Index).

During and after the Coronavirus pandemic, healthcare providers ordered excessive amounts of diagnostic equipment and other stock, which led to a build-up of inventory, Low said.

Several healthcare companies did not experience the revenue growth that investors and analysts had expected last year because their customers were not replacing equipment as quickly as usual, which had an impact on profit margins, and as a result, their earnings disappointed.

Now there are nascent signs that inventories are clearing and the run rate of orders is normalising, Low said.

Nikko holds Danaher, the life sciences and diagnostics company, whose share price peaked in September 2021 then fell until late October 2023 but has since rebounded.

One of his fund’s largest holdings is Encompass Health, which owns and operates rehabilitation hospitals in the US. In contrast to life sciences and diagnostics, healthcare facilities have performed well in recent months on the back of supportive utilisation trends. Encompass Health's share price has risen strongly since November 2023.

Fiera Capital: Don’t take drug-specific risk

The share of biologics in research and development budgets is increasing each year and the number of biologics drugs coming to market is growing annually, said Simon Steele, head of the Fiera Atlas Global Companies team.

He does not want to take drug-specific risk so has been looking for companies with exposure to biologics and processing that are agnostic about which drugs become successful.

Veeva Systems, a cloud-based software provider for the life sciences industry, was one of the $1.3bn Fiera Atlas Global Companies fund’s top 10 holdings as at 31 March 2024.

The fund also counts Edwards Lifesciences (which makes heart valves) and pet care specialists IDEXX Laboratories and Zoetis amongst its top 10.

One aspect that Fiera Capital analyses from a diversification perspective is “who pays our cash flows”, Steele said. “That enables us then to understand whether this is a consumer play”, as with pet care, or if a particular healthcare stock is more exposed to the public sector.

Performance of funds over 5yrs vs sector and MSCI ACWI

Source: FE Analytics

Orbis: Managed care providers are a contrarian bet

The Orbis Global Equity fund’s largest position, worth 4.7% of the portfolio, is UnitedHealth – an American health insurance and services provider. It also has about 2.5% in Elevance Health.

These managed care companies benefit from growing demand, limited supply and high barriers to entry. Over the long term, they have grown their earnings much faster than the average US company, said Ben Preston, head of Orbis Investments’ global sector research team.

However, UnitedHealth has come under fire recently due to several factors that Orbis’ healthcare analysts do not expect to have a material long-term impact. For example, it was the victim of a ransomware attack and the full impact on earnings is not yet known.

Orbis – a contrarian investor – has been increasing its exposure to UnitedHealth this year as the share price has dipped.

“When you ask us why we own something, we normally give you the reasons why everybody else hates it. We like to buy stuff when it’s cheap and the reason it gets cheap is when nobody else wants to own it,” Preston explained.

“We like stuff that’s got a core, solid, strong foundation but there are a few question marks around it because it puts off everybody else and allows us to buy it.”

Funds with concentrated portfolios arguably carry more risk, as managers take substantial bets on a handful of stocks, meaning that performance is tied to a small number of individual bets. Yet the potential for reward is far greater because managers’ best decisions are not watered down.

High conviction stock picking is, after all, what active management is all about – offering investors a differentiated product whose performance does not mirror an index.

Simon Evan-Cook, a fund manager at Downing, said: “Within the equity component of our Fox Funds, we own eight funds that have more than 50% of their portfolios held in their top 10 stock picks. This is because we only buy ‘full blooded’ active equity funds and avoid the opposite – closet trackers – like the plague.”

Below, Trustnet asks experts which funds with concentrated portfolios they would bet on.

Odyssean Investment Trust

Ben Mackie, portfolio manager at Hawksmoor, picked Odyssean Investment Trust, which Hawksmoor holds in The MI Hawksmoor Vanbrugh and The MI Hawksmoor Global Opportunities.

Managers Stuart Widdowson and Ed Wielechowski apply a private equity approach to public markets and only hold 18 UK small-caps, with their top 10 holdings accounting for 81.1% of the portfolio, according to FE Analytics.

Mackie said: “The concentrated approach reflects the extremely high bar for portfolio inclusion with the manager seeking to own companies with strong competitive positions and high-quality business models that are trading below their view of intrinsic value.”

Widdowson and Wielechowski typically make sure there are catalysts for the value of their holdings to be realised. These can include ‘self-help’ initiatives, operational improvements as well as merger and acquisition activity, although the fund has not benefited from the latter catalyst recently.

As they take meaningful stakes in less liquid, smaller names, Widdowson and Wielechowski often engage with the management teams of their investee companies to encourage changes.

“This engagement, combined with the stock selection process and active positioning results in a highly differentiated approach,” Mackie added.

The fund often invests in sectors where the managers have expertise, such as industrials, TMT (technology, media and telecommunications) and healthcare.

Performance of trust since launch vs sector

Source: FE Analytics

Since launch, the fund has outperformed its average sector peer by 33.7 percentage points and is the third-best performing investment trust in the IT UK Smaller Companies sector over five years.

HC Snyder US All Cap Equity

Evan-Cook picked HC Snyder US All Cap Equity, a US equities fund in which the top 10 holdings make up 56% of the portfolio.

“The managers aim to make their portfolio the crossover between the two Venn-Diagram circles that are ‘highest-quality companies in the market’ and ‘cheapest companies in the market’. If they get this right, it means that they hold a portfolio of very high-quality companies trading at very attractive prices and there’s a lot to love about that,” he explained.

Not many companies exhibit those characteristics at any given time, which explains the concentrated nature of the 21-stock portfolio.

The fund employs a multi-cap approach to US equities, encompassing large-caps such as Mastercard and Charles Schwab, along with lesser-known small- and mid-caps such as Clean Harbors and BWX Technologies.

Performance of fund since launch vs sector and benchmark

Source: FE Analytics

BlackRock Global Unconstrained Equity

Darius McDermott, managing director of Chelsea Financial Services, pointed to BlackRock Global Unconstrained Equity, a global equity fund whose top 10 holdings account for 63.7% of the fund.

FE fundinfo Alpha Manager Michael Constantis and Alister Hibbert believe the market’s obsession with short-term results presents an opportunity for long-term investors to back a small selection of exceptional businesses.

As a result of this ‘buy-and-hold’ strategy, the managers trade infrequently and allow the power of compounding take effect over the long haul.

McDermott said: “Portfolio adjustments are driven solely by fundamental changes in a company's prospects, valuation extremes, or the emergence of superior investment opportunities.”

Performance of fund since launch vs sector and benchmark

Source: FE Analytics

The fund was launched in January 2020 and sits in the top quartile of the IA Global sector over three years.

Martin Currie Global Portfolio Trust

McDermott also highlighted Martin Currie Global Portfolio Trust, which follows a similar approach, with 52% of the portfolio invested in the top 10 holdings.

In fact, reducing the number of holdings to eliminate low-conviction stocks was one of the first initiatives manager Zehrid Osmani took following his appointment in 2018.

The portfolio now comprises quality growth businesses that Osmani considers leaders and innovators in long-term investment themes such as technological advancements, resource scarcity and demographic shifts.

McDermott added: “Each holding is carefully selected to ensure it contributes a unique and valuable element to the overall portfolio, leading to a distinct composition compared to traditional global benchmarks.”

Performance of trust since manager’s appointment vs sector and benchmark

Source: FE Analytics

Since Osmani’s appointment, Martin Currie Global Portfolio has outperformed its average peer sector but lagged its benchmark.

Investors should avoid trying to time the market with short-term trades or buying up broad index exposure as macroeconomic and geopolitical volatility combined with some lofty valuations could derail such strategies.

This is the view of Fabiana Fedeli, chief investment officer (CIO) for equities, multi asset and sustainability at M&G Investments, who thinks investors should be seeking out innovative companies that have so far stayed out of the headlines.

In M&G Investments’ mid-year outlook, Fedeli argued that equity markets still appear to be an attractive opportunity, thanks to a backdrop of resilient economic growth and the likelihood that interest rates have peaked.

Performance of global equities vs global bonds over 2024

Source: FE Analytics

But she also suggested investors adopt a selective approach to stocks. Looking at the first half of 2024, Fedeli said there were two key drivers for outperformance: a beat of earnings expectations (as in the case of European and Chinese stocks) and the successful delivery of innovation (seen among companies in the US tech sector).

“In cases where undemanding expectations met with the power to innovate, this created some of the strongest outperformance,” she said. “Going forward, this will continue to be among the best hunting grounds for the creation of alpha, in our view, with opportunities deriving from investors’ tendency to converge around a narrower set of brand names.”

However, the CIO cautioned against simply backing the companies that have already performed strongly, pointing to the so-called Magnificent Seven of Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla. While these companies were responsible for the bulk of the S&P 500’s gains in 2023, only Nvidia is among the top 40 best performing stocks in the world for 2024 to date.

Top 10 performers in the MSCI AC World over 2024

Source: M&G Investments, Bloomberg. Returns to 6 Jun 2024 in US dollars

Fedeli said: “We firmly believe in the power of innovation as a driver of business and investment returns. However, the valuations of many companies at the forefront of innovation have seen a spectacular rise over the past year. Some may still warrant further upside, but others may be due a pause for business fundamentals to catch up with investors’ excitement.

“This, however, does not mean that the equity market has exhausted its opportunities. To harness the transformative potential of innovation and new technologies from here, we believe investors need to look beyond the ‘headliners’ and seek opportunities across the wider market; across sectors and geographies. In a nutshell, we need to dig deeper and broaden our search.”

While Nvidia has been “the poster child for tech innovation” recently because of its importance to artificial intelligence (AI), M&G Investments argued there are other less-visible companies with innovative products and a competitive edge, highlighting five to prove its point.

First up is German multinational technology giant Siemens. It is overlooked by some investors as it can be difficult to identify the attractive business drivers of such massive conglomerates.

However, Fedeli said Siemens has “quietly transformed” itself from being a large industrial manufacturing company into “an industrial software and productivity colossus” through its factory automation business.

NTT might be best known as Japan’s largest telecommunications firm but not every investor appreciates its status as the world’s third largest data centre owner. It is also at the forefront of cutting-edge ‘photonics’ technology.

“As data creation and transmission increases exponentially, particularly as the use of AI becomes more ubiquitous, the processing of information using the company’s optical technologies has the potential to increase energy efficiency by a factor of 100 (as well as increasing transmission capacity by a factor of 125 and reducing latency by a factor of 200),” the CIO said.

M&G Investments thinks another Japanese company is the third hidden gem innovator: material sciences firm Toray. The AI revolution needs to be powered by more energy and, when put alongside the need to transition to clean energy, the obvious winners might be wind and solar farm operators.

However, Fedeli pointed to the fact that advanced composite materials and components supplied by the likes of Toray are essential to these projects. The firm produces around 50% of the composite material used to manufacture wind blades across the globe, as well the cutting edge carbon fibre used to make lighter, more fuel-efficient aircraft.

M&G Investments turned to China for an example of an innovative business in a less eye-catching part of the market. Hong Kong-based Crystal supplies technical materials to the likes of clothing brands Uniqlo and Lululemon; it is increasingly focusing on sustainable materials, production techniques and supply-chain traceability, leveraging emerging technologies such as large language models and generative AI to improve efficiencies throughout its value chain.

Finally, the asset management house found a hidden gem in the technology sector: German software solutions company SAP. The company is embedding AI in its software products and using it to bolster research & development projects, while transitioning its core enterprise solutions business to the cloud.

“There are more hidden gems across industries, including many that are starting to emerge in the financial and healthcare sectors,” Fedeli finished.

“If we go by recent earnings season results, with consumers and corporates making increasingly deliberate choices about where to spend, companies that are not only meeting their customers’ current needs but also improving their products and services to meet their future needs, have been able to beat market expectations and grow – even with the backdrop of higher-for-longer rates.”

Fiera Capital has launched its 'all-seasons' Small-to-Mid (SMID) Cap growth strategy to European investors, reflecting the increased demand for high-growth US equities in European markets.

As of March 31, 2024, the strategy had outperformed the Russell 2500 growth index for 23 years, returning 24.6% over 12 months, and 15.3% over three years.

Run by Sunil Reddy, the $6.1bn fund holds 60-90 companies with revenues between $150m and $10bn at the time of purchase. The portfolio identifies stocks positioned for further growth based on their innovative solutions to current market challenges, such as their use of cloud computing, e-commerce and AI.

Reddy said: “The market tends to underestimate the longer-term opportunity posed by small to mid-size companies”, noting they “represent an excellent opportunity for investors seeking exposure to dynamic US companies beyond the highly subscribed and analysed large-cap market”.

Klaus Schuster, EMEA CEO, added that US equities have recently become a “growth powerhouse” but the small to mid-cap segment remained “under-owned and under-researched”.

More than a third of companies on the Russel 2500 Growth index do not have earnings, Fiera claimed, making an active approach a useful one in the asset class.

“A passive approach just doesn’t work when it comes to the small and mid-cap market,” Reddy said, noting that investors need to “identify and avoid these zombie companies”.

Whenever we look at fund performance, it’s all too easy to become drawn to the portfolios boasting the highest returns. After all, we all like to see our investments rising in value.

It was the famous football commentator David Coleman who once said “goals pay the rent”, so you can see why the star performers often hog the headlines. But scratch beneath the surface and you can also see a plethora of funds delivering consistent returns, the bedrock for any investor reaching their long-term goals.

Which brings us to the funds which have never lost money in each of the past 10 calendar years (2014-2023)*. These portfolios are just as integral in providing both diversification and risk management to investors. I also want to put this into perspective. In the past decade we’ve had the likes of Brexit, mass geopolitical uncertainty across other parts of the world (think of president Trump), Covid and the juxtaposition of low rates to where we currently sit in the world today.

So, we took a look at the calendar-year returns that our Elite Rated funds have achieved over the past decade, to the end of 2023, to see how they have fared. Our results found six funds with unblemished records of making money – and a few themes as well.

The first couple boasting a perfect record belong to the same asset manager in the shape of Polar Capital Biotechnology and Polar Capital Healthcare Opportunities. Both are subject to significant megatrends. Biotech companies are helping us live longer by bringing new drugs to market to tackle the likes of cancer, heart disease and obesity.

Healthcare is one of the biggest megatrends in the world and sits in the ‘defensive growth bucket’. Healthcare is almost style agnostic in nature and carries a low correlation with macroeconomic conditions. Most importantly, when compared with other sectors, demand for healthcare does not waver depending on the economy. As we know, biotech is one of a number of sub-themes within healthcare, with others such as implants, managed care, life sciences, hospital facilities and telemedicine.

Managed by David Pinniger, Polar Capital Biotechnology invests in companies of all sizes but with a bias towards smaller ones. Historically, the fund has had an overweight to European names, giving it a greater active share given the US-focused benchmark. Polar Capital Healthcare Opportunities has a similar bias, with around 30 per cent in larger companies and the rest in small and mid-cap names. Manager Gareth Powell looks at the impact of new products, specialist markets, potential M&A activity, innovative technologies and geographical or sector anomalies in the healthcare sector.

Global and dividend-paying funds complete the list of consistent performers

The list also has two global equity income funds in the shape of Guinness Global Equity Income and Fidelity Global Dividend. Managed by Matthew Page and Ian Mortimer, the Guinness portfolio typically consists of around 35 equally-weighted stocks, which the managers aim to hold for three to five years. They focus on how well, and how consistently, a company can use money to generate returns. The managers focus on first choosing the right companies – rather than filtering by dividend yield – as it gives them a greater chance of finding hidden gems in the market. They look for growing, rather than high, income and the equally-weighted portfolio also sets the fund apart from many of its peers.

Fidelity Global Dividend manager Dan Roberts looks for companies with understandable business models and predictable, resilient returns, and is happy to pay a fair price for a good company. The criteria for selecting companies falls mainly into two buckets. The first is valuation support, with Dan wanting to make sure he does not overpay for stocks – regardless of how good they look – as he does not want to dilute returns. The second is the quality of the franchise.

The third dividend payer is Fidelity Asian Dividend. Manager Jochen Breuer’s fund pays a decent yield of around 30-40 per cent more than the wider market, but also offers the opportunity for capital and dividend growth. While the portfolio favours high-quality companies, Jochen will not invest in them at any price and his value-aware mindset, coupled with the yield target, gives the fund a value tilt. 

JOHCM Global Opportunities has historically been amongst the least volatile in the IA Global sector. Manager Ben Leyland has a strong bias towards larger and medium-sized multi-national businesses in his portfolio, which typically holds 30-40 stocks. The philosophy of this fund is 'heads we win, tails we don't lose too much'. The fund also can, and will, hold large cash positions if valuations are unattractive.

Nine out of 10 is incredibly good!

A further 19 Elite Rated funds and trusts only lost money during one calendar year out of the last 10, many of which incurred their only loss during the volatile rate rising environment we saw in 2022.

Funds of note here included Fidelity Global Technology and AXA Framlington Global Technology, which both produced top quartile performance in the IA Technology & Technology Innovation sector in nine and eight of the past 10 calendar years respectively.

Scottish Mortgage was the only Elite Rated Investment Trust to make the list, with nine years of positive returns offset by a 45.7 per cent loss in 2022. Another to mention is Ninety One Diversified Income, which sits in the IA Mixed Investment 0-35% Shares sector. Managed by John Stopford and Jason Borbora Sheen, the fund targets a yield of around 4 per cent annually, distributed monthly, by principally investing in fixed income securities and some equity positions. The portfolio also uses hedging for downside protection, with the fund targeting half the volatility of UK equities. The portfolio has produced solid, single-digit returns most years since launch.

*Source: FE Analytics, figures from 1 January 2014 to 31 December 2023

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre. The views expressed above should not be taken as investment advice.

Investors should ensure their bond funds are taking on duration in the current market, according to FE fundinfo Alpha Manager Richard Woolnough, who believes this could be the “final chance” to “deploy cash” in the trade.

It is the second time this opportunity has presented itself in the past year. The first time investors should have considered adding duration was in October 2023, when US 10-year Treasuries surged to 5% on the back of higher-than-expected inflation. This caused investors to rethink their interest rate predictions from several rate cuts in 2024 to much fewer.

“Back then, the surge in yields – and subsequent decline – occurred rapidly, leaving many investors behind,” said the manager of the M&G Optimal Income fund.

Since that sharp market movement, investors have largely sat in cash, he noted, hoping for more favourable entry points, but now is the time to take action.

“While the market doesn't often offer second chances, it seems that investors may have another opportunity this time around,” said Woolnough.

His rationale for adding more duration has three parts. The first is that rate cuts have “almost been priced out”. He suggested that markets have been changing between the “extremes” of many rate cuts to none at all, rather than following a more logical path.

“While the Fed has maintained a consistent message, market participants have been mainly erratic, shifting from expectations of ‘higher for longer’ rates to forecasts of multiple rate cuts in 2024-25,” he said.

Currently, markets are back on the ‘higher for longer’ train, with almost no cuts priced in this year. While this could change, “most of the negative news has already been factored into the market”, Woolnough said.

Second, the recent US inflation upside surprises have “spooked some investors” into believing that strong price rises could be back on the cards.

However, he is unconcerned by this as money remains tight both at a government and an individual level, meaning the opportunities to increase prices will be lower.

“At present, money supply is still contracting and it would seem that we are now moving into an environment of ‘too little money chasing too many goods’,” the M&G Optimal Income manager said.

This should be disinflationary – something that is positive for long-duration assets – and although inflation may prove “sticky”, Woolnough said there was “no need to be overly concerned”.

The final argument is based around risk and reward. The downside risks of owning long-duration government bonds “appears limited”, he said, while they potentially offer double-digit returns going forward.

This is shown in the chart below, which uses M&G’s internal scenarios of expectations for total returns of 10-year US government bonds.

“In summary, we believe the opportunity to deploy cash and increase duration in investment portfolios has re-emerged as a result of a unique rates-inflation dynamic, one that has largely come from the central bank response to the Covid pandemic of 2020-21,” said Woolnough. “This may be the final chance for investors to take advantage of the situation, however.”

Robeco has launched two new equity strategies – the Emerging Markets Climate Transition strategy, and the Transition Asian Equities strategy – in a bid to contribute towards the net-zero drive.

The former will buy stocks specifically working on the transition toward a low-carbon economy in the emerging markets, while the latter is a broader Asia fund looking at both the on the climate transition but also other environmental and social objectives.

The firm said some $125trn will be needed to reach net zero by 2050 and these funds aim to provide more opportunities for the growth of sustainable finance.

The pursuit of net zero depends on more than just investing in existing green technology, however. Non-green businesses and sectors need the tools and funding to become more sustainable over time.

Both new funds will align with the goals of the Paris Agreement, and Asia’s wider environmental objectives.

“Effective transition is about greening the entire economy and not just growing the green economy,” the firm said in a statement. “The world doesn't just need investments in solar panels and wind farms; it needs transition finance to provide the funding for businesses and sectors that are not so green today but will become greener over time.”

Robeco also repositioned two of its existing fixed-income strategies into sustainable funds: the Transition Emerging Credits strategy (formerly Sustainable Emerging Credits) and the Transition Asian Bonds strategy (formerly Sustainable Asian Bonds).

Lucian Peppenlenbos, climate and biodiversity strategist at Robeco,  said there were opportunities in transition finance and that these funds would “identify companies leading the transition”.

He added the aim was to “foster positive change and ensure that high-emitting companies are a part of the solution” while also delivering value and creating alpha for investors.

Indeed, Robeco research has found that companies leading the transition to net zero have historically outperformed laggards, both in developed and emerging markets.

Emerging markets have been a disappointing sector to invest in over the past decade, as they’ve been severely impacted by the underperformance of Chinese equities, which account for 27% of the index.

The MSCI World Emerging Markets index has made just 75.9% over 10 years, while the developed market MSCI World has risen 223.5%. Much of this is due to China, with the MSCI China index up just 53.2%.

And things do not appear to be getting better, as problems remain. The world’s second-largest economy is struggling to reignite following a Covid dip, while geopolitical and trade tensions with the US and the European Union are on the rise.

For that reason, Charlotte Cuthbertson, co-manager of MIGO Opportunities Trust, a closed-ended fund investing in investment trusts trading at a deep discount, prefers to avoid China.

Instead, she invests in specialist investment trusts focusing on specific countries that appear to be in the emerging market sweet spot of delivering above-average growth, without the pitfalls surrounding their perceived lack of development.

VinaCapital Vietnam Opportunity

One of those countries is Vietnam, which she sees as one of the main beneficiaries of the trade war between the US and China.

This has caused “a lot of companies to diversify away from China,” Cuthbertson said, as political problems and a rise in the cost of labour in China had caused businesses to turn elsewhere.

“Vietnam is not as far on its lifecycle. You still have a situation where manufacturing is increasing, the middle class is growing and urbanisation is expanding,” she said.

To get exposure to this frontier market, MIGO Opportunities Trust invests in VinaCapital Vietnam Opportunity, which it’s the investment company’s top holding.

Although there are other options in the investment trust space to access the Vietnamese market, such as Vietnam Enterprise Investments and Vietnam Holding Limited, Cuthbertson explained that VinaCapital Vietnam Opportunity also holds private equities, which differentiates it from rivals that focus purely on public equities.

Performance of investment trusts over 5yrs vs indices

Source: FE Analytics

Georgia Capital

Another country in a sweet spot is Georgia and here Cuthbertson uses the Georgia Capital investment trust, which currently trades at a 58% discount.

She explained this deep discount is because it is unknown to many investors as there is little appetite for Georgian private equities, which account for 57% of the portfolio.

Cuthbertson said: “It's perceived by the market as being quite risky, but the underlying investments are performing very well and are very interesting.”

Similar to Vietnam, the middle class in Georgia is growing, meaning that people are spending money on things they couldn’t afford previously, which is a macroeconomic tailwind.

Yet there are also headwinds. For instance, Georgia neighbours Russia and there have been territorial disputes between the two countries in the past – something that has been in the zeitgeist since Russia’s invasion of Ukraine in 2023.

Cuthbertson added: “When Russia invaded Ukraine, there was a lot of nervousness about Georgia Capital because people thought Russia might roll into Georgia as well. That has not been the case, and we did not think it will be because Russia had already seized territories with a majority Russian population during the 2008 war.”

Performance of investment trusts over 1yr

Source: Bloomberg

Georgia Capital was the best performer for MIGO Opportunities Trust in the first five months of this year, but its share price has been hampered by volatility once again, driven by political factors.

The recent political instability stemmed from a new bill called the ‘foreign agents law’, which mandates that non-governmental organisations receiving 20% of their funding from abroad must register as ‘organisations acting in the interest of a foreign power’.

Cuthbertson said: “There have been protests in Georgia, and it has also upset the EU and the US, because it is seen as a Russian-style law. There's been a lot of political noise but we think things will quiet down. There are elections in October, so we don't think the ruling party will want to upset the electorate too much. When things calm down, we should see some recovery.”

JPMorgan Indian IT

Cuthbertson also invests India, citing its stable government, although she recognised this has been “slightly less true” in recent times, as prime minister Narendra Modi no longer holds the same majority he did before the recent elections.

Nonetheless, Indian equities have stood out as superstars among emerging markets, delivering stellar returns that have overshadowed the lacklustre performance of Chinese equities.

Performance of indices over 5yrs

Source: FE Analytics

As such, Indian equities have gained significant traction among retail investors in recent times as they have been able to keep pace with developed markets.

Until recently, MIGO Opportunities Trust had exposure to the Indian market through India Capital Growth but sold its position a few weeks ago.

Cuthbertson said it was a “very profitable investment”, with the trust buying India Capital Growth at a “a large discount” and holding on to it for “many years”.

“The underlying NAV has increased tremendously and now appears fully valued to us,” she added, highlighting the reason it was sold.

Indeed, after the remarkable performance of the Indian market in the past 18 months, valuations have become very high, particularly in the small- and mid-cap segments, which are areas India Capital Growth specialises in.  Some managers of Asia Pacific funds share the same sentiment and recently shifted their investments out of India and into China. 

Performance of investment trusts over 5yrs vs sector and index

Source: FE Analytics

However, MIGO Opportunities Trust maintained its exposure to India through JPMorgan Indian IT, which leans more toward large-cap stocks and trades at a double-digit discount. The trust was also added to Numis’s recommendation list at the beginning of the year.

Global stock markets have almost been reduced to a one-trick pony over the past year. Nvidia has shot the lights out, rising 203% in a single year, single-handedly dominating the returns of the major benchmarks.

The relative performance of active fund managers therefore hinged upon whether they owned Nvidia (which most top-quartile performers in the IA Global sector did) and whether they were overweight versus its substantial position in their benchmarks.

As a case in point, Axiom Concentrated Global Growth Equity led the IA Global sector, returning 39% for the year to 30 June 2024. Hot on its heels with returns in the thirties were GAM Disruptive Growth, Blue Whale Growth, GQG Partners Global Equity and Polar Capital Artificial Intelligence. All five counted Nvidia in their top 10 holdings.

However, 17 funds in the IA Global sector managed to achieve top-quartile performance over the past year without Nvidia featuring in their top 10 holdings.

Top-quartile funds that don’t currently have Nvidia in their top 10 positions

Source: FE Analytics, funds’ factsheets. These funds delivered top-quartile returns within the IA Global sector for the year ended 30 June 2024 in sterling terms and do not hold Nvidia within their top 10, according to their most recent factsheets.

At the top of the list, the IFSL Meon Adaptive Growth fund was a poster child for finding opportunities outside of the tech sector. Its top three contributors drew from other areas that have surged recently: the diabetes and weight loss drug producers Novo Nordisk and Eli Lilly; and aeroplane manufacturer Leonardo, which profited from the rally in defence stocks.

Its largest holdings as of 1 July 2024 were insurer Talanx, Hyatt Hotels, analytics and data specialist RELX, biotechnology pioneer Amgen, diabetes care specialist Ypsomed, information and software specialist Wolters Kluwer, CBOE Global Markets, engineering and cybersecurity provider Parsons Corp., Vertex Pharma and construction company ACS Actividades.

The £33.5m fund held Nvidia briefly – an underweight position worth 1.3% of the portfolio. It bought Nvidia shares on 2 October 2023 at $448 and sold the stock on 25 January 2024 at $626.

Investment manager Robert Hale said the fund invests in a diversified portfolio of quality global equities, selected using a quantitative investment process, looking at momentum, volatility, Sortino ratios, risk and price trends.

The second-best performing fund in the list above was the £708m Janus Henderson Global Select fund, an all-cap portfolio of 40 to 70 stocks managed by Julian McManus and Chris O’Malley. They focus on companies where they believe the market underestimates free-cash-flow growth and their largest holdings are Microsoft, Taiwan Semiconductor Manufacturing Co. (TSMC) and Vistra Energy.

Vistra has been a primary contributor to performance over the past year. It is one of the largest independent power producers in the US and it recently became a major supplier of nuclear power through its acquisition of Energy Harbor.

Vistra has "an attractive generation mix of nuclear and gas, which match America’s growing power needs, partly driven by data centres", the managers said. "The market misunderstood the improvements made to the company’s business model, and the stock at one point traded at a 30% free-cash-flow yield."

McManus and O’Malley did invest in Nvidia in January 2024, but it isn't a top 10 position and the fund is underweight (with 1.8% in Nvidia) versus its benchmark (4.2%). The fund also owns TSMC and ASML.

TSMC is a leader in foundry chip manufacturing and is benefitting from strong growth in high performance compute, including AI applications. "The company’s dominant position is allowing it to raise prices, resulting in margin expansion, and it trades at a fraction of the valuation of stocks such as Nvidia," the managers said.

European semiconductor capital equipment maker ASML has been a major contributor to the fund's performance and has developed the EUV technology required to manufacture cutting-edge chips, including those made by Nvidia. 

Janus Henderson Global Select’s other top 10 holdings are drawn from a variety of sectors and include BAE Systems, Marathon Petroleum, Liberty Media, Teck Resources, Dai-ichi Life, Canadian Natural Resources and Ferguson.

Third in line was Franklin Templeton Global Leaders, up 27.5% in the year to 30 June. Its largest positions include Amazon, Microsoft, Alphabet, Micron Technology, TSMC and T-Mobile. Beyond tech and telecoms, Rolls-Royce is the fund’s third-largest holding and other top-10 names include Icon, UnitedHealth Group and Freeport-McMoran.

Although the funds in this study sidestepped Nvidia, they have built up substantial exposure to technology through the other ‘Magnificent Seven’ giants (six of which feature in the MSCI ACWI’s top 10, the exception being Tesla) and TSMC.

Of the 17 funds listed above, 10 own Microsoft, while Alphabet and Amazon each feature amongst nine funds' top 10 positions, as the table below shows.

Popular stocks within the top 10 holdings of funds that don’t own Nvidia

Source: funds’ factsheets

Outside of the ‘Magnificent Seven’, top-performing tech companies in the past year included Arm Holdings, which returned 184.9% for the year to 8 July 2024, Uber Technologies (66.1%), Netflix (56.4%), ASML (55.1%), SAP (54.9%) and Advanced Micro Devices (51.4%).

Beyond the technology sector, some of the best performing stocks held by the funds in this study were Rolls Royce (up 213.9% or the year to 8 July 2024, according to Google finance), aerospace company Leonardo (up 108%), Eli Lilly (101.8%), Vistry (101.7%), General Electric (81.7%), Novo Nordisk (81.3%), Japanese insurer Dai-ichi Life (61.9%), private equity trust 3i Group (61.3%), Netflix (56.4%), UBS (54.8%), MercadoLibre (52.6%) and aircraft equipment manufacturer Safran (50.5%.)

Even larger returns were on offer amongst lesser-known stocks. Eight US-listed companies all rose by more than 1,000% in the year to 30 June 2024, according to AJ Bell. The best-performing UK-listed company was Upland Resources, up 511%.

Best performing US-listed stocks over 1yr to 30 June 2024

Source: AJ Bell, data to 30 Jun 2024

Investors should expect markets to be range-bound for the remainder of this year with volatility to follow in 2025, according to Vincent Mortier, group chief investment officer at Amundi.

The main reason for his caution is the US presidential election, with Republican candidate Donald Trump expected to return to the White House.

His programme, which proposes a 10% baseline tariff on products imported to the US and a 100% tariff on imported cars, as well as a range of tax cuts and stimulus measures, could exacerbate international tensions.

Mortier said: "It is still too early to fully understand the impact, but if Trump is elected and implements his proposed programme, we could see a significant resurgence of inflation, and growth could be under pressure."

Although this is not his base case, a stagflationary environment is still one that investors must be prepared for, according to the group chief investment officer of Europe’s largest asset manager.

Trump could also have big impacts outside of trade policy too. He has threatened to replace the chair of the US Federal Reserve, Jerome Powell, while some of his allies have drafted proposals to reduce the independence of the US central bank. Mortier also expects tensions with China to increase, with no improvement in sight.

The presidential election is not his only cause for concern in the US, however. The Amundi group chief investment officer also expressed worries about the path of US debt over the long run, stating that most economists agree it is not sustainable.

He said: “The growth in real GDP that the US would need to have to pay back its debt is unachievable; it’s way beyond potential. The US can monetise its debt, which means defaulting on its debt, or it could try to lower the burden through inflation.”

Another possibility is that the US could choose to ignore its debt and consider itself too big to fail, with the assumption that investors around the world will always want to invest in American assets, he added.

“It should be a systemic issue, but it might not be one, as long as the US dollar is the only reserve currency and as long as there are excess savings around the world,” Mortier said.

In the fixed income space, Mortier expects the effects of higher rates on the credit market to be felt next year.

He said: “Because of how debts are structured, the difficulties in refinancing have not yet occurred. That will begin to happen next year and in subsequent years. We will see which companies are able to cope with higher interest payments, but investors have not fully appreciated yet that some companies may default.”

He stressed that bankruptcies of very small companies have increased dramatically in recent months, which could be “the first sign of cracks in the system”.

For the next 10 years, Amundi expects 10-year US Treasuries to deliver an annual return of 3.8%, US investment-grade credit 4.6%, US high-yield credit 4.9% and US equities 5.6%, although markets could be volatile during the period.

Away from the US, Mortier expects European and emerging market equities to outperform their American peers, which is also the view of BlackRock and Vanguard.

He has a favourable outlook for UK mid-caps, which are more sensitive to the UK economic cycle compared to multinational companies in the FTSE 100.

“We find the UK very undervalued today. There is too much negativity,” Mortier said. He also pointed out the renewed interest of foreign firms in acquiring UK companies, which could boost valuations.

Mortier’s other contrarian view is China, although he recognised it has been a “painful” conviction.

“The demand for Chinese equities is non-existent, both from international and domestic investors, but I think it’s a mistake,” he said.

Chinese equities are, on average, three times cheaper compared to their US equivalents, which he said was a “very big discount”. Although there are “some risks”, the reward could be “significant”, he noted.

Privately-owned companies in China are investing, innovating and gaining market share, he continued. This contrasts with the situation in the Chinese equity market 10 years ago when it was still dominated by state-owned companies.

Mortier concluded: “China is still a nice growth story. We see more and more private companies, which are of good quality, profitable and growing. They will create value. The next step is to become more international, and I think they will.”

The 2024 India election result saw Narendra Modi’s Bharatiya Janata Party (BJP) win the largest number of seats, albeit a smaller number compared to the 2019 election.

While disappointing and with potentially negative consequences for selected market sectors, we don’t believe it will change the policy direction of the BJP-led National Democratic Alliance (NDA).

The focus will remain on developing the manufacturing base via the Production Led Incentives (PLI) scheme, the transition of growth in infrastructure from the public to the private sector, as well as renewable energy and stimulating consumption. There will also potentially be renewed attention on rural incomes.

On manufacturing

The BJP will likely push ahead with developing India’s manufacturing base during its third term. It has had significant success in attracting major Taiwanese contract manufacturers to assemble consumer electronics for leading global brands. This has created significant employment opportunities.

The PLI scheme has been a success, particularly in the semiconductor sector, which accounts for $20bn in grants and subsidies in the 2020-2025 period. Nvidia and Micron are establishing engineering centres of excellence in India, with plans to employ up to 10,000 workers. These investments by industry leaders are significant as they expand the high-skilled employment base beyond India’s traditional strength in global capability centres and technology solutions consulting.

One of the focus areas for prime minister Modi in his third term will be to leverage India’s position in the diversification of global supply chains. India is already having significant success in capturing investments by multinational companies searching for an additional manufacturing base outside China. One of the key attractions for these companies is the huge pool of skilled workers with wage levels below those prevailing in China.

On infrastructure

The pace of public sector infrastructure spending in India is expected to slow. Relative to growth of at least 20% over the past three years, it is expected to decelerate to 12% in 2025. However, as public sector spending slows, private sector infrastructure spending is expected to accelerate.

The pickup in private sector spending will be facilitated by the significant improvement in cash flow amongst the top 150 companies in India. Pre-Covid, these companies were generating $10bn in free cash flow annually; this has accelerated to S$40bn this year as faster top line growth has contributed to an improving cash position.

Public sector investment should continue to focus on transportation infrastructure, with the private sector likely to drive investments complementing the development of the manufacturing sector. This includes investment in factories, dormitories and renewable power.

On consumption

Analysis of the voting patterns in the recent election indicate the BJP did worse than expected in its share of the rural vote. This indicates there may be renewed focus on rural voters in Modi’s third term. Improved tax collection and expectations of a better 2025 fiscal position gives the government greater flexibility to increase spending in rural areas, including a focus on increasing fiscal transfers. This is likely to benefit the consumer discretionary and staples sectors, which are a focus of our investments in India.

There is also the possibility of loan forgiveness for farmers, but given the fiscally conservative focus of the government, this is not expected to feature prominently. Nevertheless, public sector banks have come under selling pressure as investors fret over a potential increase in non-performing assets. Our portfolio managers prefer private sector banks in India to mitigate against this risk.

The Indian election outcome is clearly a disappointment for investors relative to earlier expectations. Nevertheless, it is important to focus on the long term, and we do not anticipate significant policy changes in Modi’s likely third term. The drivers of India’s growth will remain centred on manufacturing, infrastructure and consumption.

Within the TEMIT portfolio, we are currently underweight India relative to the MSCI Emerging Markets index as we feel the positivity we outlined above has already been factored into the Indian equity market valuations.

Valuations for a range of companies, particularly consumer-facing companies, remain elevated and we are being selective there. We continue to see value in private sector banks such as ICICI Bank. Several IT services companies and platform businesses can offer affordable goods and services via new distribution channels. Here, we hold two US-listed global technology services companies with significant operations in India that lessen our relative underweight position to Indian companies.

Andrew Ness is portfolio manager of Templeton Emerging Markets Investment Trust (TEMIT). The views expressed above should not be taken as investment advice.

M&G fund manager and chief investment officer of fixed income, Jim Leaviss is stepping down to pursue a career in academia, with Andrew Chorlton, head of fixed income at Schroders, replacing him at the helm of M&G’s £139bn fixed income division later this year.

Leaviss has worked at M&G for 27 years and managed the M&G Global Macro Bond fund since inception in 1999. He also manages the Global Government Bond strategy.

Eva Sun-Wai and Rob Burrows will become co-lead managers of the Global Macro Bond strategy on 1 August 2024. Sun-Wai has co-managed the strategy since January 2021 alongside Leaviss and is also the lead manager of the Global Government Bond strategy.

Burrows is a fund manager specialising in government bond and macro fixed income mandates and has worked for M&G since 2007.

Darius McDermott, managing director of FundCalibre, is downgrading the Global Macro Bond fund from Elite Rated to Elite Radar as a result of the manager changes. “We have known Leaviss for many years as he has been a huge part of the success behind the fixed income franchise at M&G,” he said.

Chorlton has more than 25 years of experience including a decade at Schroders and has managed global fixed income, US multi-sector and credit strategies. He also led the development of a range of fixed income strategies, including sustainability, quantitative credit, semi-liquid credit, emerging market debt, tax-aware and opportunistic strategies and active exchange-traded funds.

Joseph Pinto, chief executive officer of M&G Investments, said: “With Chorlton’s vast experience as both a fund manager and as a leader, we have appointed a fixed income heavyweight who will lead this highly experienced team at a time where we expect significant opportunities to materialise within bond markets as the rate cycle starts to move.”

He also paid tribute to Leaviss, who he said “has delivered excellent returns for our clients”. He also praised the outgoing fund manager’s “unique way of communicating”, which included “sharing the team’s insights straight from the desk”.

Leaviss himself highlighted M&G’s culture of innovation, having launched the UK’s first pure corporate bond fund in 1994, the first high-yield corporate bond fund in 1998, and then the M&G Optimal Income Fund in 2006, which became one of the largest funds in Europe.

Schroders, which manages over £100bn in fixed income, is not replacing Chorlton directly. Instead, it has created a fixed income leadership team comprising Julien Houdain (head of global unconstrained fixed income), Patrick Vogel (head of credit, Europe), Lisa Hornby (head of US multi-sector fixed income), Abdallah Guezour (head of emerging market debt and commodities), Patrick McCullagh (global head of credit research) and Andrew Moscow (head of fixed income management).

Fund managers are split on whether the chaotic result of the French elections over the weekend is good or bad for the French market.

Alex Everett, investment manager at abrdn, said there was “relief” as Marine Le Pen’s National Rally party was “convincingly denied” their “coveted” absolute majority by a “surprisingly strong result” for the left-wing coalition New Popular Front.

There had been concerns that Le Pen would win, according to Frederic Leroux, a member of the strategic investment committee at Carmignac, after her “headline-grabbing victory in the first round of elections”.

The most likely outcome from the hung parliament is that there will be a deadlock on many key issues, with consensus decisions becoming “particularly rare”, he said.

However, although a hung parliament is arguably the ‘least bad’ outcome, fund managers remain wary.

Everett said: “Once the dust has settled, the deadlock of a hung parliament will prove more damaging than first implied. France’s budget problems have not disappeared. The 20 September deadline for a credible deficit reduction plan looms ever closer.

“Macron’s attempt to force unity has instead fuelled yet more discord. We are sceptical that meaningful budgetary progress can be made, and remain underweight France versus European peers.”

Turning to equities, “the news of the dissolution of the French National Assembly has caused a uniform fall in all French stocks, showing an indiscriminate reduction in allocations to France,” Leroux said.

Investors’ allocations to France could be “permanently reduced” by the election result, he suggested – despite just 20% of companies’ profits in the CAC40 index (the main French benchmark) being generated in France.

However, there could be pockets of investible assets, he noted, including exporters, which “should once again outperform the French equity market”.

Zehrid Osmani, head of long-term unconstrained at Martin Currie, was more bullish than his peers. While the market “might initially worry that a win by the Far Left, which also has fiscal expansion plans, and policy initiatives that would increase wage costs for corporates, would be negative for the French economy”, he was calmed by the fact it failed to get a majority.

The left-wing coalition does not have control of parliament and “will find it hard to find backing for policies that are overly aggressive”, he said, which limits the risk that France deviates from its current policies.

As a result, he suggested the sell-off in French equities ahead of the elections “could be overdone”, also alluding to the index’s large proportion of overseas earnings.

On bonds, Leroux and Osmani differed in their opinions. The former expects the spread between French sovereign credit and their German equivalents to rise. Currently hovering between 70 and 75 basis points, this would increase the cost of French debt and weaken the French economy, he said.

However, Osmani expects spreads to gradually narrow as the market gets to “understand the situation more clearly”.

Looking ahead, the “spectre” of the French presidential elections in 2027 “looms nearer and shouts louder”, he added. It represents the “key risk” that investors should focus on if investing in the country, particularly if the French centrist coalition “do not have a charismatic leader to take over from President Macron, who will be coming to the end of his second and final term as president,” he concluded.

Financial advisers often recommend investors of working age keep six months’ worth of their salaries in cash to avoid having to liquidate investments in case of redundancy or emergencies. For retired investors, the same principle of keeping cash aside to meet short-term needs applies but is amplified.

A buffer of liquid assets, such as cash deposits and money market funds, helps avoid having to sell equities after a market fall and crystallising losses. This is especially important for investors in the decumulation stage who need to mitigate against sequencing risk (making big losses early on when their pension pot is largest).

But how much money should retirees hold in cash and equivalent assets?

Henry Cobbe, head of research at Elston Consulting, recommends that retired investors square off three years’ worth of their income needs into money market funds, which “can be used as a liquid source of yield with near-nil volatility”. Setting aside such an ample buffer enables retired investors to put the rest of their wealth to work in higher risk investments to keep growing their pot.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, believes retired people should have between one and three years’ worth of essential expenses in an easy-access cash account. These savings can be used to “supplement periods of time when volatile investment returns impact how much money you want to take from income drawdown”, she explained.

Other experts recommended hiving off a smaller amount of cash for emergencies, complemented by low-risk investments that could be liquidated if necessary.

Edward Allen, private client investment director at Tyndall Investment Management, said: “I would try to think about likely liabilities, which could range from unexpected health costs to the car breaking down. A sensible range of investments should contain some low-risk assets that could be divested if needed. Assuming those low-risk investments exist, for many retirees the cash buffer need not be huge – sufficient to cover a few months’ expenditure.”

Brown Shipley advises retirees to keep around three months of expenditure in cash as a buffer against unforeseen events, although the exact amount is completely subjective, said Jeremy Croysdill, executive director, wealth planning. “We find some clients wish to keep large amounts in cash, while others will have nearly all their money invested,” he noted.

“Older retirees may have more flexibility with the amount of their emergency fund due to having regular and often guaranteed income from pensions and investments, meaning they don’t feel they need a large pool of liquid capital. But again, it’s hugely dependant on what they find important in the lifestyles that they wish to lead.”

How should the rest of the pot be invested?

Elston, which specialises in research around retirement investing, proposes three buckets for different time segments.

The aforementioned money market funds are used to meet near-term liquidity requirements. Then absolute return or diversified alternatives funds serve as “a stabiliser for the next five years to give above-cash returns but with limited downside risk”, Cobbe explained. Finally, multi-asset income and/or equity income funds provide long-term growth, depending on risk tolerance.

The absolute return, multi-asset and equity income funds would ideally pay out a monthly income stream to help retirees manage their cash flows, Cobbe added. Investors should periodically rebalance their buckets to keep the overall asset allocation on track.

Conversely, Richard Parkin, head of retirement at BNY Mellon Investment Management, thinks bonds will form the core of retired investors’ portfolios, along with equity income and multi-asset income funds. The bond allocation will likely be substantial so needs to work hard by delivering predictable income with some capital growth, whilst also helping to diversify the portfolio and manage risk, he said.

Cobbe, however, does not see bonds as a major investment for retirees because inflation can eat into returns. “For someone aged 65 with average life expectancy, a bond fund isn’t enough to ensure portfolio durability. Whilst higher yields now make for a more interesting entry point, most retirees will need a multi-asset portfolio to last the course. Bonds alone are not enough,” he argued.

Multi-asset and equity funds

For the longer-term tranche, Elston has designed an index of exchange-traded funds (ETFs) with exposure to equities, bonds, listed property and infrastructure securities. The Elston Multi-Asset Income Index uses SPDR Dividend Aristocrats ETFs for equities, which select stocks based on a track record of dividend stability and growth.

Investors can gain access through the VT Elston Multi-Asset Income fund, which aggregates dividends from the component ETFs and makes monthly pay-outs.

For investors wanting to pick funds themselves, a higher risk/return option is Vanguard Global Equity Income, which Cobbe described as a “yield-oriented global equity tracker fund”.

He tipped Invesco Global Equity Income for investors who prefer actively-managed funds. It is managed by Joe Dowling and Stephen Anness and has delivered top-quartile performance over one, three and five years.

Parkin believes equity income funds are ideal for retired investors because they tend to keep pace with inflation and grow their income stream. They usually fall less than the wider market during downturns and are not as volatile as growth-oriented strategies.

He recommended BNY Mellon UK Income, managed by his colleagues David Cumming and Tim Lucas, which is also a top-quartile performer over one, three and five years in the IA UK Equity Income sector.

Active managers often struggle to keep pace with raging bull markets but they are better at cushioning their portfolios against downside risk, Parkin continued, and for retired investors, limiting losses is usually more important than maximising gains.

For more ideas, Trustnet recently asked experts to recommend equity income, multi-asset and bond funds for retired investors.

A benefit of smaller funds is that they can explore opportunities lower down the market-cap spectrum, as they are not constrained by liquidity concerns like their larger peers are.

This can be an advantage in the IA UK All Companies sector, where funds frequently delve into the small- and mid-cap space to find sources of alpha.

However, smaller funds often incur higher fees, and institutional investors typically steer clear of those with assets under management (AUM) below £100m.

Yet, there are always exceptions to the rule. Below, Trustnet highlights the 10 cheapest active funds in the IA UK All Companies sector with less than £100m in AUM.

Source: FE Analytics

The cheapest small active fund in the IA UK All Companies sector is the £20.6m HSBC UK Multi-Factor Equity, which charges 0.11%. The fund, which was launched in August 2020, has made a top-quartile return over three years. 

It uses the FTSE 350 index excluding investment trusts, with managers ranking the stocks in the index based on a number of factors and giving them a weighting in the portfolio accordingly.

The second cheapest ‘sub-scale’ active fund in the list is £14.9m Charles Stanley Equity, managed by Chris Ainscough, Will Dobbs and Morgan Bocchietti.

They invest in UK blue-chips such as AstraZeneca, Unilever and GlaxoSmithKline as well as in investment trusts, with Allianz Technology Trust and 3i Group featuring in the top 10 holdings.

As such, the fund benefited from the artificial intelligence hype that boosted US tech companies by holding the Allianz trust and from the strong outperformance of privately listed Dutch discount retailer Action through 3i Group.

Performance of fund over 5yrs vs sector

Source: FE Analytics

As a result, Charles Stanley Equity sits in the first quartile of the IA UK All Companies sector over five years.

The third cheapest small active fund in the list is the £19.5m VT Cape Wrath Focus, which charges 0.40%. The fund sits in the top quartile of the IA UK All Companies sector over five years and has outperformed its benchmark by more than 22 percentage points.

Also of note in the ‘cheap’ small fund list is the £36.9m Vanguard Active U.K. Equity, co-managed by Baillie Gifford Overseas and Marathon Asset Management.

The fund is packed with UK small- and mid-cap stocks such as 4imprint, Games Workshop and Renishaw and has 78 holdings in total.

With an average price-to-earnings ratio of 17.4x, the fund is more expensive than the FTSE All Share, but it boasts better return on equity and earnings growth rate.

However, this has not translated into superior performance, as Vanguard Active U.K. Equity lags behind both the benchmark and the average sector peer since its launch.

Performance of fund since launch vs sector and benchmark

Source: FE Analytics

In fact, the fund sits in the bottom quartile of the IA UK All Companies sector over three years, ranking 172^nd out of 226.  

Also of note is the £45.3m Rathbone UK Opportunities Fund, which has a mid-cap bias, as manager Alexandra Jackson believes it is where the most exciting and rapidly growing businesses are to be found while offering the best reward for the amount of risk taken.

However, the fund’s mandate allows it to seek opportunities across the entire UK market-cap spectrum, as long as companies exhibit a durable business model with management teams that are capable of seizing growth opportunities in their respective industries.

Moreover, the manager avoids companies that won’t be able to make a profit in the near future or that depend on one or two risky ventures. She will also sell holdings when growth is exhausted or risks have increased.

Performance of fund over 5yrs vs sector

Source: FE Analytics

The fund derated in 2022 as central banks hiked interest rates in response to surging inflation. As a result, Rathbone UK Opportunities Fund has underperformed its average sector peer over five years and currently sits in the third quartile of the IA UK All Companies sector.

Another minnow worth highlighting is the £36.4 TM CRUX UK Special Situations fund, which charges investors 0.67% and seeks mispriced opportunities. The manager, Richard Penny, believes there are two ways to identify businesses that the market underestimates.

One approach is to buy companies that the market perceives to be in distress, but where Penny has assessed the upside and believes the market has overreacted.

The second approach is to invest in value creators capable of compounding returns and growing strongly, but that have not yet been identified by the market.

TM CRUX UK Special Situations has underperformed the IA UK All Companies sector over five years, after derating in 2023, and sits in the fourth quartile of the sector as a result.