TAM Asset Management is using an array of alternative investment strategies to lower volatility, diversify risk and add alpha.
The macroeconomic outlook is uncertain, geopolitical tensions are rising, a range of elections could yet roil markets, and many investors are concerned about lofty US equity valuations.
One way to deal with the broad range of potential outcomes is to dynamically allocate to different alternative investments as the situation changes, to protect against risks and boost returns, said James Penny, chief investment officer of TAM Asset Management.
Discretionary fund manager TAM allocates 5-15% of its model portfolios to alternatives, using global macro and long/short strategies, broader multi-asset funds, commodities and precious metals.
This is because the world remains in flux, with Penny noting the “inflation dynamic” and “interest rate dynamic” have completely shifted in recent years, while there remains a “roaring economy”.
“In the face of that, you have a lot of challenges on the macro front with two wars and record elections, so your alternatives bucket should look to try and take advantage of that and protect you,” he explained.
The universe of alternative investments is “so deep and so wide, and it's such a diverse toolkit, it's really becoming a phenomenal part of a manager's arsenal”, he added.
TAM invests in three absolute return funds to diversify away from equity market volatility: Fulcrum Diversified Absolute Return, JPMorgan Global Macro and Amundi Volatility World.
Performance of funds over 10yrs
Source: FE Analytics
Fulcrum Diversified Absolute Return is a broad multi-asset fund investing in equities, bonds, currencies, commodities and uncorrelated return streams, such as volatility strategies. It aims to beat inflation by 3-5% over rolling five-year periods with target volatility of 6-8%. In other words, it should beat cash and inflation substantially regardless of the market environment but be less volatile than equities.
Fulcrum’s chief investment officer Suhail Shaikh oversees the fund, which has an FE fundinfo Crown Rating of four.
JPMorgan Global Macro invests in equities, bonds and derivatives (volatility futures, bond futures and equity options and futures), with exposure to emerging and developed markets. Managers Shrenick Shah and Josh Berelowitz aims to keep volatility lower than two-thirds of the MSCI All Country World index over a two to three-year horizon.
This strategy also has a four Crown Rating, placing it within the top 25% of funds for alpha, volatility and consistently strong performance.
TAM’s third absolute return strategy, Amundi Volatility World, invests in exchange-traded derivatives within the listed options market to isolate volatility as an investable asset class. When the CBOE Volatility Index (VIX) rises, Amundi Volatility should also make gains, Penny explained. The fund is negatively correlated to the equity market over the longer term.
Meanwhile in the commodities and precious metals arena, the valuations of mining companies are still fairly low, despite gold hitting all-time highs. TAM is taking advantage of this dynamic by investing in Ned Naylor-Leyland’s Jupiter Gold and Silver fund.
“If you think that the precious metals market still has further to run, which we do, especially within the silver space, then it makes sense that you want to invest in the people pulling it out of the ground and selling it,” Penny said.
Naylor-Leyland has “a huge amount of experience within precious metals” and “understands the market”, Penny continued. “There are not too many of him around, there's not many active precious metals managers.”
The fund is quite niche, however. “It's not a massive position because it's quite volatile. It had a very, very tough 2023, so you need to treat it carefully.”
Its benchmark is a 50/50 split between the gold price and the FTSE Global Mines index but its performance is more correlated to miners than bullion, as the chart below illustrates.
Performance vs benchmarks over 5yrs
Source: FE Analytics
TAM also invests in silver and gold exchange-traded commodities (ETC) from BlackRock, as well as the HANetf Royal Mint Responsible Physical Gold ETC GBP.
The FTSE 100’s steady upward trajectory has further room to run.
As we approach the midpoint of the year, the financial markets present a mixed picture of optimism and cautious anticipation. The FTSE 100, Britain's blue-chip index, has demonstrated resilience and growth, posting a 7% gain year-to-date. This performance, while modest compared to some global counterparts, suggests a steady trajectory that may have further room to run.
One of the key factors supporting this positive outlook is the upcoming UK general election. Contrary to what might be expected, the election appears to pose minimal risk to market stability. Current polling indicates a likely Labour victory, potentially by a significant margin. This scenario, somewhat surprisingly, is viewed with relative equanimity by the markets.
The Labour party, under Keir Starmer's leadership, has made concerted efforts to present itself as fiscally responsible and business-friendly, allaying many of the concerns that might typically accompany a shift from Conservative to Labour governments.
This political landscape stands in stark contrast to the situation in France, where the rise of far-right parties presents a more volatile and unpredictable scenario. The stability offered by the UK's political outlook, therefore, becomes a comparative advantage, potentially attracting investment flows seeking a haven from continental uncertainties.
From a valuation perspective, the FTSE 100 continues to offer compelling value. Trading at approximately 12x current earnings, the index remains attractively priced compared to many global peers. This undemanding valuation leaves ample room for further appreciation, particularly if corporate earnings continue to show resilience in the face of ongoing economic challenges.
Diving deeper into sectors, energy and utilities stand out as particularly undervalued compared to sectors such as healthcare, IT and industrials. The utilities sector is poised to benefit from the anticipated shift towards an easing cycle in monetary policy. As central banks, including the Bank of England, begin to contemplate rate cuts, the steady income streams offered by utility companies become increasingly attractive to yield-seeking investors.
Across the Atlantic, the US market continues to be dominated by the relentless surge in big tech stocks. Companies such as Nvidia have seen their valuations soar to stratospheric levels, driven by the artificial intelligence boom and strong earnings reports. Historically, US election years have tended to be positive for stock markets, which could provide further support for this trend.
However, the sustainability of these high valuations is increasingly being questioned. While the momentum behind these tech giants remains strong, the levels of investor optimism and market positioning suggest a degree of frothiness that could be vulnerable to sudden shifts in sentiment. Forward-looking economic indicators are beginning to show signs of weakness, which could point towards a more challenging environment for earnings in coming quarters.
As the year progresses, the focus of market participants will increasingly turn to the Federal Reserve's policy decisions. With inflation showing signs of moderating, expectations are building for at least one interest rate cut before the end of the year. However, the window for such action is narrowing, and each Fed meeting will take on greater significance. The market's desire for monetary easing could set the stage for disappointment if the Fed chooses to maintain its cautious stance for longer than anticipated.
The combination of elevated bullish positioning among investors across the spectrum – from retail traders to institutional money managers – and the concentration of market gains in a handful of large tech companies creates a potentially precarious situation. Should these tech leaders stumble, perhaps due to earnings disappointments or a shift in investor sentiment, it could trigger a broader market sell-off. The risk of a pre-election swoon in stocks is therefore not insignificant, particularly given the high expectations built into current valuations.
For UK investors, this global context presents both opportunities and challenges. While the FTSE 100's relatively modest valuation provides some insulation from the frothiness seen in US tech stocks, the interconnectedness of global markets means that a significant correction in the US would likely have ripple effects across all major indices.
However, the UK market's tilt towards more traditional sectors such as finance, energy and consumer staples could provide a degree of stability in the event of a tech-led sell-off. Moreover, the potential for a shift towards monetary easing could disproportionately benefit UK stocks, given their higher average dividend yields compared to US counterparts.
As we look towards the second half of the year, investors would be wise to maintain a balanced approach. While the overall outlook for UK equities remains positive, driven by attractive valuations and a stable political backdrop, the risks emanating from global markets cannot be ignored. Diversification across sectors and geographies remains crucial, as does a keen eye on evolving economic data and central bank policies.
The coming months are likely to be characterised by increased volatility as markets grapple with the competing forces of optimism around potential rate cuts and concerns over economic growth and corporate earnings. For active investors, this environment may present opportunities to capitalise on market dislocations, while those with a longer-term perspective may find comfort in the FTSE 100's solid fundamentals and attractive valuation.
Chris Beauchamp is chief market analyst at IG Group. The views expressed above should not be taken as investment advice.
Investors continued to buy into the tech story in the first six months of the year.
The first half of 2024 continued to be dominated by a handful of themes as areas such as tech and Indian equities led the market, FE fundinfo data shows.
Investors have had a decent ride over the past six months, with stock markets around the world moving higher despite the year starting with high interest rates, political uncertainty and worries about the global economy.
Below, Trustnet looks at 2024’s opening half from a range of viewpoints to see the market’s best and worst-performing areas.
Performance of asset classes in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
The past six months have been positive for risk assets, with global equities and a broad basket of commodities gaining more than 12%. However, cash outperformed bonds over the period.
Reasons for stronger equity markets will be looked at below, but the lacklustre returns from bonds come down to stickier than expected inflation and the likelihood that there will be fewer and later interest rate cuts.
Rob Morgan, chief analyst at Charles Stanley, said: “While many parts of the bond market haven’t incurred overall losses year to date once you factor in the relatively healthy income they pay, the muted returns aren’t what many investors would have had in mind at the start of the year.
“Yet, from this point on, they could provide attractive returns and a bonus of capital appreciation if interest rates do end up falling a bit more quickly than factored in, for example in the event of a sudden recession. While that is not necessarily a likely scenario it does mean bonds play a vital role in a diversified investment portfolio.”
Performance by geography in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
Within the major equity markets, the strongest performance came from the Nasdaq 100, with a return of almost 18.5%, as investors continued to back tech stocks such as the ‘Magnificent Seven’ (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla). The 16% return in the S&P 500 was also driven by this theme.
Dan Coatsworth, investment analyst at AJ Bell, said: “A big chunk of the best performers on the S&P 500 in the first six months of 2024 is connected to technology and AI [artificial intelligence]. Interestingly, chips giant Nvidia is not the overall best performer despite it being the stock everyone talks about. The top slot went to Super Micro Computer, which designs and builds servers and storage systems.
“The key risk to these stocks and any company seen as an AI winner is that growth rates could moderate leading into 2025, potentially leaving some investors disappointed and leading to widespread profit-taking in the sector.”
India equities were not too far behind the Nasdaq, thanks to a positive economic backdrop, business-friendly government policies, a growing middle class and strong corporate results.
Performance by industry in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
The chart above highlights how the tech theme dominated the opening half of 2024, with the MSCI AC World Information Technology index gaining close to 26%; the MSCI AC World was up 12.2% and every other industry made a lower return than this.
Morgan added: “That the largest seven US companies now account for over 20% of the entire value of global stock markets is certainly pause for thought. History may tell us we should be worried about a market concentration last seen in the late 1990s, immediately before the dotcom bust, but today’s conditions have little else in common with that period."
“This group of companies are established, highly profitable and contain some of the potential longer-term winners from artificial intelligence or other avenues of growth. Shares are expensive in relation to their present earnings and are vulnerable to growth falling short of expectations, but it’s hard to argue investors have lost touch with reality.”
Performance by investment factor in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
Putting all of the above together explains how performance by investment factor played out in 2024’s opening half: the momentum, growth, quality and large-cap factors are all applicable to the Magnificent Seven and similar stocks.
The difference between winning and losing investment factors continues to be significant, with more than 20 percentage points between momentum and value stocks while the gap between large-cap and small-cap stocks is in excess of 10 percentage points.
Performance of commodities in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
The final chart sheds more light on what was behind the 12% rise in the broad S&P GSCI index. Cocoa prices have jumped 126.6% over the past six months, largely down to a global cocoa shortage: harvests in West Africa, which accounts for about 80% of the world’s cocoa output, were hit by drought.
However, investors are likely to be paying more attention to gold with the yellow metal rising 13.6% despite persistent selling by investors in the West. Charles Stanley noted that central banks, investors and households in the East have become heavy buyers of hold, especially in China.
“In many ways, the renewed popularity of gold is linked to the trend of deglobalisation and heightened international tensions as central banks increasingly crave a non-politicised reserve asset,” Morgan said. “As the world continues to fragment geopolitically this trend could continue.”
There will be lots more deals for UK companies in the second half of 2024, according to Peel Hunt head of research Charles Hall.
The UK market will continue to shrink this year if a new government does not get to grips with rampant merger and acquisition (M&A) activity, according to Peel Hunt’s Charles Hall.
The head of research has previously warned that the UK small-cap market may cease to exist in a decade if the current pace of deals keeps up and remains concerned heading into the second half of 2024.
In the first half of the year alone, bids were made for UK companies worth some £43.1bn. The table below shows the split between the FTSE 100, FTSE 250 and the FTSE Small-Cap index.
Source: Peel Hunt
Some 9% of the FTSE 250 in monetary terms has been bid for, although this includes the approach for UK fund platform Hargreaves Lansdown, which has since been promoted back to the FTSE 100.
“It has been particularly noticeable in recent months that corporates have been the main acquirers. This suggests to us greater confidence in the economic outlook and the interest rate environment,” said Hall.
“It also shows the attractiveness of UK companies and the potential for synergies in a low-growth environment.”
However, he noted it was “surprising” to see relatively low activity from private equity, where he estimated there was some $4trn of cash waiting on the sidelines for new deals.
“We expect this to change as financing conditions improve, which means that private equity is likely to be a more active acquirer going forward,” he said.
As such he sees no signs of UK M&A slowing down in the second half of the year.
What is behind this?
Hall suggested the big catalyst has been the consistent withdrawals from UK equity funds, with investors pulling money out of domestic-market portfolios for 36 consecutive months.
This has left many domestic companies languishing on low valuations, making them ideal targets for overseas or private equity bids.
Additionally, when these bids come in, shareholders are “more readily agreeing” to a deal as they have performance targets and liquidity issues to meet, he said.
A third potential reason is boards are more likely to agree to an offer as well, increasing the chances of deal completion, with a key catalyst for this being that scale is becoming increasingly important.
What about new launches?
Hall noted there has been a “limited appetite” for initial public offerings (IPOs) as management teams have been “questioning the rationale of being quoted”, although added there have signs of life more recently.
“The IPO market has reopened with the recent listings of Raspberry Pi and Aoti. However, the scale of departures dwarfs the new entrants and we are continuing to see the smaller company sector diminish rapidly,” he said.
What can be done about it?
Hall said it was “vital” for UK economic growth that these trends are reversed and the UK market remains well stocked, particularly at the smaller end. He said small-caps are the “lifeblood of economic activity”.
Yet the market is shrinking, sas the below chart shows, both in market capitalisation terms as well as the number of options available to investors.
Source: Peel Hunt
Hall said there were a number of measures that could be put in place to counteract some of the demand-side problems caused by fund flows away from UK funds.
Increased UK allocation by pension funds and insurance companies and the proposed UK ISA to encourage domestic investment by retail investors were two that have been well covered for some time.
In addition, he suggested removing stamp duty to ensure that “the UK is competitive with the US” as well as reducing cost of ownership and improving liquidity.
Lastly, he suggested developing a UK wealth fund, perhaps through reinvesting the investment in NatWest.
“Enacting all of these measures would require a small initial investment from the government but we anticipate would deliver a material long-term improvement in the UK equity market, economic growth and tax take,” he said.
“The demand side requires urgent attention by the new government if we are to retain our growth companies and to ensure that the equity market can provide long-term growth capital.”
Nick Ford, who manages the Premier Miton US Opportunities and US Smaller Companies funds, is retiring.
Premier Miton has hired Alex Knox, a US small and mid-cap (SMID) specialist at Federated Hermes, to co-manage its Premier Miton US Opportunities and US Smaller Companies funds.
She replaces Nick Ford, who will retire at the end of September after almost 40 years in the investment industry. He joined Premier Miton in 2012 from Scottish Widows Investment Partnership.
Hugh Grieves, who has co-managed the US Opportunities fund with Ford since 2013 and the Smaller Companies strategy since 2018, is staying on and will work alongside Knox when she joins next month.
Knox has spent the past 15 years with Federated Hermes, where she co-manages the US SMID Equity strategy. The $999m fund is a top-quartile performer in the IA North American Smaller Companies sector over three years and has an FE fundinfo Crown Rating of four, placing it in the top 25% of funds for alpha, volatility and consistently strong performance over this time.
Performance remains above the Russell 2500 index and the average peer over five and 10 years as well, as the below chart shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The £1.6bn Premier Miton US Opportunities fund is third quartile over five years and fourth quartile over one and three years, compared to peers in the IA North America sector, reflecting a market where recent performance has been concentrated amongst a handful of tech giants – a tough environment for funds that hunt further down the market cap spectrum.
The fund pursues a high conviction approach with a concentrated portfolio of 35-45 holdings. Its largest positions are Graphic Packaging Holdings, Raymond James Financial, Tetra Tech, Charles Schwab and Intercontinental Exchange.
The £35m US Smaller Companies fund is fourth quartile in the IA North American Smaller Companies sector over three and five years but third quartile over one year.
UK investors also backed European and emerging markets equities, while shunning US equities.
UK investors added £1.4bn to global equity funds in June, according to data from Calastone, making it the most popular category last month.
Since the beginning of the year, investors have added a total of £7.6bn into global funds, with only North American funds doing better, having attracted a total of £7.8bn since 1 January.
However, investors shunned North America in June, with very slight withdrawals of £0.6m from the sector despite the strong performance of the US equity market.
This lack of interest in US equities impacted funds with an environmental, social and governance (ESG) mandate, which are typically heavily weighted toward big technology names such as Microsoft and Nvidia.
As a result, ESG funds shed £179m, marking the first month of outflows for the category since December 2023. Indeed, UK investors added £5.1bn into ESG funds between January and May.
Edward Glyn, head of global markets at Calastone said: “The US market valuation is not cheap, and this means investors are hoping that earnings growth will deliver, as the prospect for multiples to expand further is surely limited at present.”
Source: Calastone
In total, UK investors poured £11.4bn into equity in the first half of the year, with £1.7bn added in June alone. This marks the best six months for equity funds on Calastone’s 10-year record.
Glyn added: “Hopes for cheaper money after the painful rate squeeze of the past two-and-a-half years are the clear driver of record flows into equity funds so far this year.”
European equities and emerging markets were also popular with investors, as inflows reached £714m and £269m, respectively in June. These inflows ended two months of net selling for emerging markets funds.
Outflows from UK equity funds slowed, with investors cashing in £522m over the month. As such, June was the least bad month so far in 2024 for funds focusing on the domestic equity market. Since the beginning of the year, investors have withdrawn £3.8bn from UK equity funds.
“Large markets such as the UK and Europe are trading on less challenging valuations, while many emerging markets are set to benefit from the weaker dollar and a nascent commodity boom,” Glyn said.
Source: Calastone
In spite of hopes for interest rate cuts, bond funds also experienced outflows amounting to £471m as investors favoured equities. Over the past two months, investors have withdrawn £1.1bn from bond funds.
Glyn said: “The outflows from fixed income funds in the past two months are harder to understand. If investors truly believe rates are coming down and will stay low, then there are capital gains to be made in the bond markets. Perhaps the allure of equities simply looks too strong at present.”
Since the beginning of 2022, inflows into bond funds have reached £8.3bn, which is more than twice that of equity funds, which only received £4bn over the same period.
“The current picture may simply reflect a rebalancing of investor appetite,” Glyn added.
Investors also fled property funds, with £48m leaving the sector in June. A beneficiary of those withdrawals has been money-market funds, which have attracted inflows each month since January, with April 2024 being the only exception. In June, investors added £247m to money-market funds.
Experts explain how to best capture the growth of the technology sector.
IA Technology & Technology Innovation has been the best-performing Investment Association (AI) sector since the beginning of the year as stocks related to the artificial intelligence (AI) trend, such as Nvidia, have continued to outperform.
Although there are fears that AI might currently be in a bubble, leading to comparisons with the dot-com crash of the late 1990s, some opinions suggest the AI megatrend is just getting started.
But technology is not restricted to AI, with other developing trends in this sector, such as the Internet of Things, cybersecurity and robotics, for investors to get excited about.
Performance of best-performing sectors YTD
Source: FE Analytics
Below, experts suggest funds for investors seeking dedicated exposure to a sector with multiple layers of secular growth, while also warning that such exposure comes with greater risks.
Polar Capital Global Technology
David Holder, senior investment research analyst at Square Mile Investment Consulting and Research, picked Polar Capital Global Technology, which he called an “attractive proposition” for long-term investors.
The fund is managed by Nick Evans, Ben Rogoff, Xuesong Zhao and Fatima Lu, who aim to identify disruptive trends and the companies poised to benefit from them.
AI is the major theme running across the portfolio, with Rogoff describing himself and his colleagues as “AI maximalists”. As a result, more than 90% of the portfolio is exposed to companies the managers see as AI enablers in areas such as cloud computing and semiconductors as well as to beneficiaries and early adopters of AI.
Earnings growth is a key parameter for the managers, as they believe it drives share price appreciation, while they also include macroeconomic considerations in their investment process to help identify new themes within the industry.
Performance of fund over 10yrs vs sector
Source: FE Analytics
Holder added: “They favour firms with established, profitable business models, high barriers to entry and tight management cost controls, which they believe are poised for rapid growth as they enter mainstream use.
“They adopt a bottom-up approach to stock selection and attend up to 1,000 company meetings each year as well as industry conferences to ensure they keep abreast of the rapidly changing technology landscape.”
Investment trusts
Dan Coatsworth, investment analyst at AJ Bell, also commended the fund managers and their investment strategy.
However, he pointed to the investment trust version of the fund, Polar Capital Technology Trust, as it is trading at a roughly 10% discount.
Dzmitry Lipski, head of fund research at interactive investor (ii) also pointed to Allianz Technology Trust, which has been managed by Mike Seidenberg since 2022.
Similar to Polar Capital Technology Trust, Allianz Technology Trust trades at a discount of approximately 10%. Both funds are also similar in terms of fees, each charging around 0.80%.
Performance of investment trusts over 10yrs vs sector
Source: FE Analytics
Recently, a panel of experts indicated a preference for Allianz Technology Trust as it holds more off-benchmark positions and because the team is based in Silicon Valley, California, where the action takes place.
Targeted approach
Lipski also pointed to iShares Automation & Robotics ETF for more adventurous investors seeking exposure to a specific area of the technology sector.
The exchange-traded fund (ETF) tracks the STOXX Global Automation and Robotics index, composed of companies that generate significant sales from robotics and automation across developed and emerging markets.
The five largest country weights are the USA, Japan, Germany, Taiwan, and the UK, while top holdings include Nvidia, SAP, Workday, Keyence and Autodesk, among others.
Performance of funds over 5yrs
Source: FE Analytics
For investors who specifically focus on AI, Sheridan Admans, head of fund selection at TILLIT, mentioned Sanlam Global Artificial Intelligence. This fund not only invests in the theme but also incorporates AI into its investment process.
Admans said: “By leveraging a bespoke AI tool developed in partnership with Orbit Financial Technology, fund managers can uncover valuable investment opportunities across a diverse range of sectors.”
About half of the portfolio is composed of technology companies, with the remainder invested in stocks from other sectors that utilise AI to enhance their products or services.
Stick to global
Experts also emphasised that it is possible to capture the effects of technological development while benefiting from diversification through global growth funds.
For instance, Lipski and Admans both highlighted Scottish Mortgage’s emphasis on technology-driven businesses.
Admans said: “This long-term strategy is particularly attractive for investors looking to capitalise on transformative technological advancements and disruptive innovations.
“By including private technology companies that are typically inaccessible to retail investors, Scottish Mortgage offers unique exposure to some of the most dynamic and forward-thinking enterprises globally.”
Performance of funds over 10yrs vs sectors and benchmark
Source: FE Analytics
Tom Stevenson, investment director at Fidelity Personal Investing, picked Rathbone Global Opportunities Fund, which counts Nvidia and Microsoft as its top two holdings. This positioning reflects the belief of managers James Thomson and Sammy Dow that AI could drive half of all incremental GDP growth over the next decade.
Stevenson said: “The companies they invest in can be of any size, although their sweet spot is mid-cap growth stocks in the developed markets. The managers’ speciality is spotting these businesses before they become household names.”
Admans also highlighted Blue Whale Growth. The fund focuses on quality large- and mega-cap companies with a long-term growth trajectory.
Technology accounts for 41% of the portfolio, while North America – the home of the world’s leading tech companies – makes up 75% of the geographic allocation.
Performance of fund since launch vs sector
Source: FE Analytics
However, Lipski reminded investors that the technology sector is dominant in indices, meaning that passive and benchmark-aware active funds will already be heavily exposed to the sector.
He concluded: “Investors looking for technology exposure should therefore take into account not only their specific objectives and attitude towards risk, but also the type of strategy they are buying and given its unique importance, their view on FAANG stocks.”
Buffettology’s sibling fund has built a position in Vimto owner Nichols.
The SDL Free Spirit fund has completed a “stealth” purchase of a new holding in Nichols plc – better known for its main brand, the fruit cordial and soft drinks Vimto.
Eric Burns, who manages the small-cap sibling of SDL UK Buffettology, said he built the position slowly and “under the radar” to avoid disturbing the share price and was therefore able to buy at “consistent prices, rather than going in aggressively and moving the price against you”.
Burns made his first purchase on 8 May and has built his position in Nichols up to a 3% weighting in the £68.4m portfolio, which now holds 27 stocks.
Listed on the alternative investment market (AIM), Nichols is “an example of a steadily growing business” whose revenue and profitability have been growing “not spectacularly, but nicely,” the manager said.
Performance of stock over 1yr
Source: FE Analytics
Vimto has “brand power” and a big following in the Middle East, especially in Saudi Arabia. At Iftar, the fast-breaking evening meal during Ramadan, people traditionally have a glass of Vimto cordial with their meal, Burns said.
His main reason for investing in Nichols now is a strategy pivot. The company is exiting some low-profit activities within the more capital-intensive ‘out of home’ segment (think soda fountains at cinemas and leisure centres, which were badly hit by Covid) to focus on its core UK packaged and international soft drinks markets.
“They are still in the ‘out of home’ market, but they've substantially rationalised it and diverted their investment attention to the other two sides, which for us is the main thrust of the business,” said Burns.
The manager is expecting the operating margin, return on equity and cash conversion to improve over the next one to five years, especially because the starting valuation is “very attractive” and because it has a cash position of £60m, which could come into use for a special dividend, share buybacks or “a sensible small acquisition”, the manager speculated.
“We think we have spotted the inflection before others as the shares are hardly expensive, trading on a current year cash-adjusted price-to-earnings ratio of around 13x and providing a free cash flow yield of around 6% and growing.”
Other recent moves in the SDL Free Spirit portfolio include exiting a company called EKF Diagnostics on the back of “amber flags following a few changes at the C-suite level” and “squandered chances” from the windfall during Covid.
Two more holdings are “on the naughty step” and being cut, Burns revealed.
One of these had two profit warnings and did an acquisition funded by debt, going from a net cash position to a geared position, which “exacerbated the downside”.
“With Free Spirit, we tend to be fairly small shareholders, so when we've tried to engage with management and not been heard, as in this case, that's a real negative.”
On the opposite side of the spectrum, Burns and his team started to build another new holding during June, a business “where we believe there is a sea change in capital allocation taking place for the better under a relatively new CEO”. He declined to name the stock as he builds a position slowly and steadily over the coming months.
Performance of fund against sector and index over 1yr
Source: FE Analytics
The Free Spirit fund has had a positive run since it launched five years ago, beating the IA UK All Companies sector with a 28.9% return. It subsequently fell into the third quartile over three years, when it lost 10.1%, and over 12 months, as shown in the chart above.
“Performance over the last one and two years has been painful, and we say that as managers with skin in the game, as we are all invested in the funds ourselves,” Burns said.
“But because our process is set in stone, there's not an awful lot of levers we can pull. With hindsight, if we'd have pivoted to oil and gas two and a half years ago, the performance would have been a lot better, but our methodology doesn’t allow that, and we're willing to sacrifice the short-term to stay true to our values and deliver in the long term.”
The future leader's decisions could have profound implications for the country's social fabric.
The 2024 US presidential election is shaping up to be a major turning point for the country, as several key issues dominate public debate. As in 2020, Donald Trump and Joe Biden face off on almost every issue, be it economic, societal, environmental or geopolitical.
But this time the dynamics have changed. The current president is facing criticism over the rising cost of living, the number-one concern of Americans.
Although disinflation has begun, the cost of living has risen by almost 25% in four years, mainly due to global factors (international production chains, energy and raw material prices), but the majority of voters see the Republican candidate as better placed to manage purchasing power issues.
So, with six months to go before the election, the latest polls show president Biden trailing Trump in the key swing states that Biden had previously won in the 2020 elections.
Admittedly, the election is far from a foregone conclusion, not least because the winner-takes-all system allows candidates to win all the major electors, even if the state is well divided between the two candidates overall.
In 2016, Trump won by just a few thousand votes in Michigan, a Democratic stronghold at the time. One of the reasons had been abstention, which, after the record turnout of 2020, could climb again in 2024.
This trend is fueled by the desire of American Muslims to protest against Biden's “immutable” support for Israel, but also by a certain weariness with the American electoral landscape.
At the same time, although he remains popular with voters on social and health issues, Biden is losing ground with Hispanic, black and Asian demographics, which make up around a third of the electorate and are traditionally Democratic.
Thus, the third candidate, usually relegated to the background, this time occupies an increasingly important place in the polls. Robert Kennedy, whose anti-establishment and controversial ideas are close to those of Trump, but whose ecological and liberal rhetoric leans more towards Biden, could therefore steal votes from both candidates. Several other factors, such as Biden's health, Trump's controversial statements and even his conviction, could influence the final result.
Ideologically, the two candidates present diametrically opposed visions, which are also reflected in the concerns of the electorate. While Democrats fear the rise of fascism/totalitarianism and extremism, Republicans fear the loss of the country's historic values and a progressive decline.
Immigration, seen as a source of insecurity and unemployment by Trump, is seen by Biden as an opportunity for diversity and economic growth, and should therefore occupy a prominent place.
The healthcare system will also be at the heart of the campaign, with voters divided between reducing the role of government and expanding federal programs such as Medicare.
Through the prism of protectionism, the Republican candidate is also expected to focus on geopolitical issues and America's international relations, particularly with China and Russia.
Finally, Biden will have to address the difficult transition to renewable energies, while taking into account the potential impact on the traditional energy industry, while Trump maintains climate-skeptic positions.
In addition, social and civic issues will be omnipresent, particularly through some major points of disagreement that illustrate the country's strong polarization: LGBTQ+ rights, abortion rights and gun legislation.
Overall, the future leader's decisions could have profound implications for the country's social fabric.
Christophe Boucher is chief investment officer and Benoit Begoc is a Quantitative Strategist ABN AMRO Investment Solutions. The views expressed above should not be taken as investment advice.
Investors are taking advantage of the high yields available from bonds.
Private investors have been ploughing money into bond funds and direct fixed-income holdings to take advantage of elevated yields, with coupons of 4-5% from gilts and 5.5% from sterling-denominated investment grade corporate bonds.
Fixed income allocations have risen by 195% amongst interactive investor’s (ii) customers over the past two years, with gilts making up the bulk of this increase. Assets held in direct gilts are up nearly 21-fold since 30 June 2022, ii revealed, while investors also put money into corporate bond funds across a range of sectors.
Part of the reason for this surge in activity is the fact that major central banks have postponed interest rate cuts this year as inflation proved stickier than expected, meaning bond yields have remained elevated.
Jim Cielinski, global head of fixed income at Janus Henderson Investors, said this has “extended the opportunity for fixed income investors to lock in some attractive yields”.
“Investors are being paid to wait for rate cuts to emerge. Yields are at levels that typically pay well above inflation and offer the prospect of capital gains if rates decline.”
Bond yields are well above inflation
Sources: Janus Henderson, Bloomberg
April LaRusse, head of investment specialists at Insight Investment, agreed, noting retail and institutional investors are “looking to lock in absolute yields”, which is “creating a positive environment for issuance, which has picked up strongly in the first half of 2024”.
The vast majority (86%) of global fixed income assets are now yielding 4% or more, versus less than 20% in the decade leading up to the pandemic, according to data from LSEG Datastream and the BlackRock Investment Institute. Several sectors within the bond markets are even offering yields comparable to the long-term returns associated with equities, as the chart below shows.
Bonds now rival long-term equity returns
Source: Insight Investment and Bloomberg, data to 31 May 2024
With investment-grade credit, the entry yields tend to indicate the total returns investors will receive in the medium term, said Nachu Chockalingam, senior credit portfolio manager at Federated Hermes.
Investors moving into investment grade credit now with yields at 5.5% should receive annualised returns of about 5.5% over the next three to five years. “For the fairly low credit risk that you're taking, you're getting a pretty decent yield,” she said.
The composition of returns may change over the next 12 to 18 months as the rate component declines but the spread increases, she added.
Starting yields versus 5yr annualised returns for global investment grade bonds
Sources: ICE Bond Indices, Federated Hermes
Most experts agree that the direction for interest rates – and therefore bond yields – is downwards, although fund managers and economists differ in their predictions for the speed and timing of cuts. When bond yields fall, prices rise, so investors should make capital gains from their bond positions.
Joe Little, global chief strategist at HSBC Asset Management, thinks this bodes well for bond portfolios. “We think the environment of renewed disinflation and policy pivots signals a return to fixed income in the second half of the year. There are more central banks cutting rates now, and that has a big effect for bond market performance,” he said.
However, Joost van Leenders, senior investment strategist at Van Lanschot Kempen, expects yields to remain at elevated levels even after monetary policy easing gets underway. “Even though inflation should moderate further, and central banks will cut rates, we think the room for yields to fall is limited. Yield curves are significantly negative in the US and the Eurozone, which shows that falling inflation and lower policy rates are anticipated,” he explained.
Even the most benign of inflationary environments can nibble away at your purchasing power, warns Hargreaves Lansdown.
Annuities have grown in popularity over the past few years as interest rates have risen on the back of rampant inflation.
And with inflation seemingly tamed, for now, and interest rates expected to start coming down over the next six months, some may consider it a good time to buy one before the yields on offer are reduced.
But retirees must remain vigilant to the potential for inflation to rise again, said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. People who retire at 65 might live for another 20 to 30 years or more, making inflation one of the biggest enemies to their savings.
“Even the most benign of inflationary environments can nibble away at your purchasing power over that time,” she warned, while a period of double-digit inflation “can bite huge chunks out of your plans”.
One option is to get an annuity that rises in line with inflation. Hargreaves Lansdown’s research shows that a 65-year-old with a £100,000 pension can get an RPI-linked annuity paying up to £4,540 per year.
They could also get up to £5,157 per year from an annuity that escalates at 3%, meaning the total income will rise by a fixed amount each year.
However, the same 65-year-old with a £100,000 pension can get up to £7,222 per year from a single life level annuity with a five-year guarantee – over £2,000 more per year than they would have got three years ago.
Current annuity rates versus inflation
Source: Hargreaves Lansdown
Both of the latter options are “far lower than you would get with a level annuity”, said Morrissey, but reward those that live longer. As such, retirees need to consider what is best for them.
“You will need to try and work out how long it will take for the income of your escalating annuities to catch up with the starting income from the level one,” she said.
For example, it would take 12 years for the escalating 3% annuity to catch up to the current income, meaning the 65-year-old would have to wait until they are 77 before their income hits £7,222.
“It would also take around 21 years before you had taken the same overall amount of income (approximately £144,000) that you would have taken from the level product,” she calculated.
Meanwhile, the RPI-linked annuity rising at 5% per year would take 10 years to match current payouts and 20 years before a retiree had received the same amount as the level option.
“Of course, if RPI inflation were higher you would make up ground more quickly, but lower inflation means it could take you longer. You need to think carefully about how long you are likely to live to come to the best decision for you,” Morrisey said.
Another option for retirees is to take out part of their pension, rather than their full amount, and annuitise it in slices, rather than all at once. The rest of the pot could then be invested for capital growth.
“This way you also have the benefit of securing higher annuity rates as you age and if you develop a condition where you qualify for an enhanced annuity then you could get a further boost in income that can help you fight the impact of inflation over time,” she said.
Hawksmoor’s Mackie shares his favourite funds to play the domestic market.
There is a broad opportunity set across all sections of the UK equity market, with stocks in most sectors trading cheaply compared to their history, according to Ben Mackie, portfolio manager at Hawksmoor Asset Management.
“The valuation opportunity is very broad in the UK, spanning across the market-cap spectrum,” he said. “Every kind of UK portfolio is now cheap relative to its history – unlike Japan, which has re-rated and where value has moved down the market-cap spectrum".
As such, Hawkmoor’s multi-asset portfolios have gone with a 20-30% allocation to the domestic market and to harness all the opportunities available, the managers are opting for portfolios that are “cheap, have lots of marginal safety and a real blend of styles”. They also maintained a bias to smaller companies.
The first fund Mackie highlighted was WS Gresham House UK Multi Cap Income.
“That's a significant position for us. It’s less value-orientated and more looking to buy good-quality businesses,” he said.
Performance of sectors over 3yrs
Source: FE Analytics
It is run by FE fundinfo Alpha Manager Brendan Gulston and Ken Wotton, who focus on profitable small and mid-cap companies that generate high cash levels.
RSMR analysts praised the fund’s underlying income stream, which is “well diversified across industries”, and the “stable and resilient” dividend. It is currently yielding 3.8%.
Mackie balanced out this fund’s open-ended, multi-cap quality approach with several mid and small-cap strategies in different styles.
“While good opportunities are spread across the whole market, small-caps is where we're seeing most value,” he explained.
The asset class has been “a painful place to be” in recent years, with the average UK small-cap fund and trust dropping approximately 30% between October 2021 and October 2023, as shown in the chart below.
Performance of sectors over 3yrs
Source: FE Analytics
But the manager maintained his conviction in this space and his first pick here was Aberforth Smaller Companies.
The Aberforth team has “a traditional value approach”, complementing the Gresham House fund.
The trust is trading at a wider-than-usual 10% discount and was recently picked by Tillit’s Sheridan Admans as an ideal strategy to dip your toes back into smaller companies.
Performance of fund against sector and index over 3yrs
Source: FE Analytics
To counter the negative momentum in small caps, Mackie chose two other trusts whose managers build meaningful positions in companies and drive change from within to generate extra value.
“We have some specialist investment trusts that take influential stakes in companies and are very happy to roll their sleeves up and engage,” he said.
Hawksmoor uses Odyssean, which is managed by Stuart Widdowson and Ed Wielechowski, and Wotton’s Strategic Equity Capital. Both have a FE fundinfo Crown Rating of five – the highest score.
Odyssean is a £214.9m strategy and the second-best performer in the IT UK Smaller Companies sector over the past five years.
The trust is proving popular with fund selectors and was recommended by Numis, 7IM, Winterflood and Blyth-Richmond Investment Managers. Several fund pickers said the trust was worth buying even at a premium.
With Strategic Equity Capital, Mackie repeated his conviction in Gresham House’s Wotton.
“Effectively, what we’re doing is looking for talented managers – those who align with us culturally, are talented stock pickers and stick to the process,” he said.
“Ultimately, these portfolios will move around and we're not trying to second-guess their positioning. It's more about how they think and whether they are genuinely skilful.”
Trustnet looks at the funds and investment trusts that have flourished and floundered so far this year.
Technology stocks, Indian equities and UK smaller companies have all enjoyed a strong year so far, while Latin American companies and government bond investors have struggled, according to data from FE Analytics.
The first half of 2024 has been dominated by macroeconomics and in particular central banks, who have had to wait a lot longer than was initially expected to cut interest rates.
Indeed, as it stands, only the European Central Bank (ECB) has managed to drop rates so far, with the Federal Reserve and Bank of England both remaining in wait-and-see mode.
This has impacted many asset classes but in particular bonds, where investors had hoped that rate reductions would lead to capital gains for government bonds.
It resulted in both IA UK Index Linked Gilts and IA EUR Government Bond sitting among the worst five performing Investment Association (IA) sectors over the past six months.
Yet it was not all bad news for assets that usually do better when rates fall.
Tech stocks (which should benefit from lower rates as they reduce the discount put on their future growth figures) have continued to soar on the back of the artificial intelligence (AI) boom, with IA Technology & Technology Innovation the top-performing sector of the year so far.
Source: FE Analytics
Here, the average fund has made 16.8% in 2024. The market continues to be dominated by the Magnificent Seven, with Nvidia briefly climbing to become the world’s largest company last month, before it slipped back and returned the crown to fellow tech giant Microsoft.
As such, eight of the top 20 funds over the past six months had a technology focus, with the likes of Janus Henderson Global Technology Leaders, iShares S&P 500 Information Technology Sector UCITS ETF and L&G Global Technology Index Trust among the top 10 funds so far in 2024.
This small basket of stocks also helped to propel the IA North America and IA Global sectors to among the top five best-performing peer groups in the first half of the year.
While much of the global equity market’s performance has become more concentrated in recent months, other areas also shone.
Indian funds continued their meteoric rise, with the average fund in the IA India/Indian Subcontinent sector up 16.3%, just behind the tech sector.
The country has been the beneficiary of investors turning away from China, which has been under pressure for the past two years, with India becoming something of an emerging market darling of late.
The recent general election result, in which prime minister Narendra Modi won in a less convincing style than expected, did little to dissuade investors. However, no India funds appeared in the top 20 funds of the year so far, as the below table shows.
Source: FE Analytics
China was not the only emerging market region navigating difficult waters. The IA Latin America sector was the worst performer over the first six months of the year, down 15.3%.
Part of the fall could be the sector giving up its gains over the past two years. In 2022 the average Latin America fund made 16.4% while in 2023 it made 23.2%.
Another potential reason is the disappointing performance of Brazil, where president Luiz Inácio Lula da Silva’s plan to reduce spending, along with a surprise cut to rates from a divided central bank, has caused turmoil in markets.
Yet Brazil’s underperformance does come as a surprise, considering the market is often viewed as a barometer for commodities, which have performed well in 2024 so far.
Four Brazil funds and six broader Latin America funds appeared in the 20 worst performers list, which also featured several funds investing in specific renewable energy sectors, such as Active Niche Luxembourg Selection Fund Active Solar and Invesco Solar Energy UCITS ETF, which have been the two worst performers of the year so far.
Renewable energy companies tend to be highly leveraged and the postponement of interest rate cuts is likely to have hurt performance.
There were some positives closer to home, where UK small-caps have flourished. The IA UK Smaller Companies sector was the fourth-best performer over the year-to-date, up 8.9%.
The sector has been under the cosh for the past few years as interest rates have risen, but has come back to the fore this year as investors forecast lower rates. It has also been given a lift from both the Conservative and Labour parties, who have committed to encouraging cash into UK companies, with proposals ranging from a UK ISA to encouraging pension funds to invest more in domestic stocks.
Turning to investment trusts, they have been a real mixed bag so far this year, with some niche sectors such as IT Farmland & Forestry, IT Growth Capital and IT Leasing leading the way, while property has been the main area investors would have wanted to avoid.
Source: FE Analytics
In terms of individual trusts, technology and UK smaller companies investment companies dominate the top 20, while on the downside, trusts investing in real estate and renewable energy have dropped off, as have a number of venture capital trusts.
Japan’s Canon is muscling into the chips industry.
The availability of semiconductors has been a primary force in markets over the past few years and so far, just a handful of companies have been able to benefit from this trend.
While Nvidia is the clear winner on the global stage, the European semiconductor darling has been ASML – a company that has an 8.2% weighting in the Comgest Growth Europe ex UK fund, co-managed by James Hanford.
Comgest’s investment process requires managers to challenge each other on their positions and Hanford takes pride in being able to play devil’s advocate for ASML’s position as the fund’s top holding.
While he remains confident in the company’s strong competitive advantage, he is having to defend it against a new technology application from Japan.
As time goes by, new competitors are bound to disrupt some of the certainties in the chips space and one company with a good chance of doing precisely that is the Japanese optical, imaging and industrial product maker, Canon.
“Canon has been quite vocal about a technology called nano imprint. Currently, it is used to make CDs through a stamp, but Canon is looking into applying it for semiconductor-making as well,” the manager explained.
“The company has a whole research department engaged in this. I've spoken to a lot of people in Japan and Taiwan about these efforts in nano imprint and for now I'm not concerned about Canon from a competitive standpoint against ASML. But we’re keeping an eye open and always pushing ourselves to find where we could be wrong.”
Performance of stock over 1yr
Source: Google Finance
While Canon might be onto something that may come to fruition in the long term, the biggest threat to ASML’s investment case today doesn’t stem from Japan, but from China.
In January and April 2024, the US asked its allies to stop selling high-end semiconductors to China, which has hit ASML.
“The revenue of the semiconductor industry as a percentage of global GDP has only been going up in the past 50 years and is now at 0.7%. As human beings, we want better, including better electronics, which require chips, so demand isn’t a problem,” Hanford noted.
“The key problem is that it’s an extremely geo-sensitive industry. Overall, this is a good thing for ASML, because it's creating excess demand, but in the short term, restrictions by the US on what ASML could ship to China is definitely the main risk.”
Semiconductors sales relative to global nominal GDP (in % of GDP)
Source: Deutsche Bank Research, IMF, WSTS.
Comgest Growth Europe ex UK has been co-managed by FE fundinfo Alpha Managers Alistair Wittet and Franz Weis since 2014, joined by Hanford in 2023.
Square Mile Research analysts rate the fund for its distinct bias to quality growth companies and its managers’ stock selection skills.
Performance of fund against sector and index over 1yr
Source: FE Analytics
“The team's edge is their company analysis, and, as such, we would expect longterm returns to be primarily driven by stock contribution, although sector and country allocation can also have an influence at times,” they said.
“The performance can be highly variable and we would anticipate this fund to do well when the growth style is in favour, as well as when investors are focusing on company fundamentals. More broadly, we believe this is a solid longterm offering for investors seeking exposure to some of the region's leading companies.”
Perhaps big premiums for are a thing of the past but a shrinking in discounts seems likely.
It is unlikely that July’s general election will move the dial for the UK stock market – the outcome is seemingly well-known and, anyway, both main political parties seem to be business-friendly.
Still, many column inches have been used up debating whether the FTSE will prefer a Conservative victory, or a Labour triumph, and which sectors might benefit from either outcome.
Of the many investment company sectors that look cheap today, infrastructure and renewables must be close to the top of the list, and there are some potentially positive snippets in manifestos to confirm that.
The valuations of the assets owned by infrastructure and renewable energy investment companies are sensitive to changes in interest rates, so rates’ astonishing ascent have hit them hard.
In addition, with a return of well above 4% still available on safe assets such as UK government bonds (gilts), some may wonder why they should take on the equity risk provided by listed infrastructure or renewables trusts?
These companies were popular in a world of near-zero interest rates because their yields, which were typically in the range of between 3% and 7%, offered a big advantage over gilts, where the yield was as low as 0.25%.
The drawback was that this meant they traded very expensively, with double-digit premiums not uncommon. Those days are well and truly over. The median discount in the infrastructure sector is about 21%, and in the renewable energy sector it’s 31%, according to the Association of Investment Companies.
The big factor driving share prices over the past 12 months or so has been expectations of just how fast interest rates will fall. The European and Canadian central banks have already cut once, but the Bank of England and the US Federal Reserve are expected to hold off for at least a few months yet.
The potential for higher for much longer clearly isn’t ideal and increases the risk, so share prices have waxed and waned alongside rate cut expectations.
Yet perhaps now is the perfect time to start looking at the sector again. The yield spread over gilts is looking healthier once more, with the median infrastructure trust offering 6.3% and the median renewable energy trust offering 8.2%.
There’s clearly a political will to improve the UK’s infrastructure, as there is for pension funds and retail investors to take bigger stakes in domestic assets. Aside from UK equity funds, the infrastructure and renewables sectors provide us with an opportunity to do just that.
But deep-lying issues remain, not least the fact that the UK’s planning laws desperately need reforming. It takes four years to sign off major infrastructure projects, for instance.
Both Labour and the Conservatives are committed to reducing this, and encouraging more private investment in UK infrastructure, but this is neither going to be easy nor quick.
Not only do investment companies provide the opportunity to invest in British infrastructure, but they also offer investment opportunities in other jurisdictions. Geographical diversification is important in infrastructure assets, as well as in equities.
BBGI Global Infrastructure’s globally diversified portfolio of 100% availability-style social infrastructure assets provide it with highly predictable revenues and strong inflation linkages. It can maintain its dividend for more than a decade without having to make any new investments.
Its biggest investments include bridges in California and Ohio, Australian prisons in Northern Territory and Victoria, a health clinic in Liverpool, and motorways in the Netherlands and Germany.
On the renewables side, not only does Octopus Renewables Infrastructure invest across several different countries, including the UK, Ireland, France and Finland, but its carefully thought-out approach to diversification also means its portfolio is spread across several different proven technologies, such as onshore and offshore wind, solar and energy storage systems.
We may not be returning to zero interest rates, so perhaps big premiums for infrastructure and renewable energy companies are a thing of the past, but a shrinking in discounts seems likely.
Falling interest rates should make these trusts attractive again and while politicians’ ability to get their agendas through is questionable, there’s a positive direction of travel, so perhaps big discounts will end up being well in the rear-view mirror, too.
David Brenchley is an investment specialist at Kepler Partners. The views expressed above should not be taken as investment advice.
Trustnet reveals where investors should have put their cash last month.
Indian equity funds topped the performance charts last month, in spite of the disappointing election result for Narendra Modi.
While the market was expecting a landslide victory for the incumbent prime minister of the most populous country in the world, Modi failed to win an outright majority.
After an initial knee-jerk reaction at the beginning of May, Indian equities rebounded and continued their meteoric rise, with the IA India/Indian Subcontinent sector gaining 8.1% in June alone.
Ben Yearsley, director at Fairview Investing, said: “Fund managers who invest in India say the crucial aspect of the coalition is that it still has infrastructure spending as the key priority.”
Source: FE Analytics
The IA Technology & Technology Innovation sector finished second, gaining 6.4% last month.
Nvidia briefly overtook Microsoft as the world’s largest company, with both companies, along with Apple, now valued at over $3trn.
The IA Asia Pacific Excluding Japan sector secured the third position, followed by IA North America and Global Emerging Markets.
At the bottom of the tables, Latin America was the worst-performing sector in June, dropping 5.8%. Mexican equities, the second-largest component of the MSCI Latin America index, declined by 10% as the market reacted negatively to the election of Claudia Sheinbaum.
Yearsley said: “The Mexican market fell sharply on the news as Sheinbaum is seen as very left wing, [although] it has recovered slightly over the course of the month.”
European equity markets were roiled by French President Emmanuel Macron’s decision to call a snap parliamentary election. As a result, the IA European Smaller Companies, IA Europe Excluding UK and IA Europe Including UK sectors all performed poorly in June.
Although the US and UK elections are yet to play out, the French vote is causing the most concern,. Yearsley said.
“The reality is that in the US, Biden and Trump aren’t a million miles away on policy nor are the Tories and Labour in the UK. France may well be the one to watch as that could cause EU earthquakes especially if the exit polls are correct.”
At the funds level, the top 10 was dominated by funds from the IA India/Indian Subcontinent and IA Asia Pacific Excluding Japan sectors, including Stewart Investors Indian Subcontinent Sustainability, Alquity Indian Subcontinent and FSSA Asia All Cap.
However, JPM Emerging Europe Equity took the top spot, returning 20.3% in June.
Yearsley said: “For context, this fund has lost 98.9% over five years due to Russia’s invasion of Ukraine, so the sharp rise is small comfort.”
Source: FE Analytics
Climate change was a common theme for funds at the bottom of the table, with seven out of 10 of the worst performers being climate or energy transition funds.
Active Niche Luxembourg Selection Fund Active Solar was the poorest-performing fund of the month, tanking 18.8%.
Other underperformers include Invesco Solar Energy UCITS ETF, GMO Climate Change Investment and Schroder Global Energy Transition.
Yearsley said: “Is it the lack of rate cuts that is still doing the sector down, or is it more fundamental in that the energy transition will take much longer than previously indicated by (clueless) politicians?”
Amongst investment trusts, Indian equity and technology strategies ruled the roost, as with open-ended funds.
However, more specialist sectors came to the fore as IT Insurance & Reinsurance Strategies and IT Financials & Financial Innovation took the third and fourth spot.
IT Latin America was the worst-performing trust sector, falling 6%. It should be noted that the sector only has one constituent, BlackRock Latin American.
Source: FE Analytics
It was also a challenging month for the IT Commodities & Natural Resources and IT China/Greater China sectors, which lost 5.5% and 5%, respectively.
However, Yearsley noted that indicators are improving in China with signs of a pickup in activity driven by the service sector.
He said: “Stimulus measures have cranked up to offset the property downdraft. That appears to be paying dividends with the May PMI figure of 54 the highest since July 2023. Interestingly fund managers are starting to talk in more positive terms about China and that it might not be uninvestable after all.”
At the individual trust level, Gresham House Energy Storage Fund jumped 27.8% after announcing a battery leasing deal with Octopus.
Augmentum Fintech and Allianz Technology Trust finished second and third, after returning 15.5% and 14.6%, respectively.
Source: FE Analytics
At the bottom of the tables, Regional REIT Limited dropped 30.8% and is as such the worst-performing investment trust of the month.
Seraphim Space, the best-performing investment trust so far this year, also struggled in June, falling 17.5%.
Yearsley concluded: “Another interesting month for markets with the two most expensive areas, India and tech, leading the way. Will nothing derail these stories? In India it seems unlikely now the election is out the way, but will the lack of rate cuts eventually do for the Nasdaq?”
Market leadership may extend to cyclicals in the third quarter, according to BlackRock’s CIO of fundamental equities in Europe.
Several industries are set to flourish as we enter the third quarter of 2024, with Europe and the UK being the key beneficiaries, according to Helen Jewell, chief investment officer at BlackRock fundamental equities, EMEA.
The opportunity is so great that European shares could overtake their US counterparts in the near term. “European shares have lagged those in the US over the past decade. We now believe that, at least in the short to medium term, this dynamic could reverse,” she said.
Jewell pointed to four tailwinds set to spur Europe’s resurgence. Firstly, earnings growth momentum is likely to continue as companies have significantly reduced their debt levels and invested in future growth, while profitably remains robust despite the higher energy, materials and labour costs of recent years.
Second, the European Central Bank’s initial rate cut is already proving beneficial for companies and consumers. This “should continue to provide a boost to an economy that is already showing signs of life”, with the composite purchasing managers’ index rising in the past six months.
Further impetus should come from favourable valuations. European shares currently trade at a roughly 40% discount to US peers, versus a historical average of about 20%. She also pointed to the high quality of many European companies, which have been able to grow their earnings regardless of macroeconomic or central bank policy fluctuations.
Finally, Jewell expects market leadership to broaden across several sectors, as the chart below shows.
Source: LSEG DataStream, BlackRock Investment Institute.
“The earnings revision ratio for global stocks is back above zero – which means a greater number of companies are seeing upgrades to earnings forecasts than downgrades,” she said.
“Simultaneously, rate cuts may support more cyclical areas of the market, so even as artificial intelligence (AI) remains in focus, we expect to see a broader set of winners for active managers to unearth – a ripe environment for stock selection.”
Jewell highlighted several cyclical sectors she expects to benefit from falling rates and healthier economic activity, as well as long-term structural changes such as decarbonisation, reshoring, and the rise of AI.
First, the renewable energy sector should recover as some of the headwinds that have constrained activity begin to ease. Higher rates have hindered the financing of renewable energy projects and rising inflation has put pressure on raw material costs.
Meanwhile, the secure income streams that utilities deliver will become more attractive to investors once cash savings rates drop below 4-5%.
Construction volumes are set to rebound from their 14-year lows in Europe. As the supply of some materials remains constrained, a strong pricing environment should benefit construction and construction material companies, as well as providers of energy efficiency solutions. Buildings account for 40% of global carbon emissions, Jewell explained, and as governments and businesses race to hit net-zero targets, these companies “are well placed to deliver strong earnings over the long term”.
Semiconductors should continue to flourish due to structural advantages. “Different parts of the semiconductor industry have been in different cycles. While smartphone and PC chips have seen the beginning of a post-Covid recovery, electric vehicle sales growth is slowing and there are some concerns,” she said.
“In the long term, data-centre demand will boost several companies within the semiconductor industry. Increased capital expenditures in 2024 will benefit semiconductor companies, especially those in Europe that have dominant positions in the semiconductor equipment market.”
Other sectors where BlackRock sees opportunities include: luxury goods, where pricing power for the best-managed brands remains strong; banks, which are being supported by share buyback programs, even as rates come down; and healthcare, given that some of the world’s most innovative and profitable healthcare companies are domiciled in Europe.
The managers of Evenlode Global Equity explain why there has been “a remarkable narrowing of the index”.
The US and global equity markets became even more concentrated in the second quarter of this year, with a handful of companies delivering the bulk of returns.
Apple, Microsoft and Nvidia – the three largest stocks in the US – now comprise 20.4% of the S&P 500 index, a weighting that has not been this high for at least 40 years, according to John Plassard, senior investment specialist at Mirabaud Group.
Market concentration was an issue last year when artificial intelligence (AI) propelled the Magnificent Seven to new heights but it has intensified in the past couple of months, said James Knoedler, co-manager of Evenlode Global Equity.
The MSCI World has risen 13.1% this year to 26 June in sterling terms. However, the MSCI World Equal Weighted index only gained 3.7%, which shows how the largest stocks have delivered a disproportionate share of performance. “It’s really unusual to see this level of dispersion,” Knoedler observed.
Last year, the difference between the MSCI World and its equal-weighted sibling was less stark – 4.7 percentage points over 12 months compared to 9.4 percentage points this year so far. In other words, there was a smaller gap between the best and the rest last year.
Total returns of indices last year and YTD
Source: FE Analytics
It has not always been so. During the past decade, the equal-weighted global index has lagged its market-cap sibling by about three percentage points, and over 30 years their performance is more or less the same, Knoedler said. “It’s not like Moses came down from Mount Sinai with the eleventh commandment that you’re always going to have equal-weighted underperforming.”
What this means for active managers is that their relative performance has hinged upon whether they own enough of the largest companies in their benchmarks, which is counterintuitive given that active managers are supposed to deviate from the benchmark and find even better stocks.
As a case in point, the fundamentals of the companies in the Evenlode Global Equity fund are solid, delivering double the earnings and revenue growth of the benchmark in the past quarter, yet the fund has underperformed on a relative basis.
“It has been a tricky year after, frankly, three and a half years when things went pretty well,” Knoedler acknowledged. “You have these moments in markets which test your conviction that your philosophy and processes are set up the right way.”
Performance of fund vs benchmark and sector since inception
Source: FE Analytics
The market has been behaving unusually due to two seismic events, Knoedler believes. “You have occasional one-off shocks that occur in the market and we've had two that've happened within a year."
One of those events was Nvidia creating $60bn of free cash flow “out of nowhere” over the past 18 months. The other was the US Federal Reserve calling the top of the hiking cycle at the end of 2023 – a major shock that drove a powerful rally in companies geared to interest rates and economic cycles.
As a result, global equity markets have cycled through three stages since late last year. “What goes bonkers initially is stuff that's very highly linked to rate policies, so the small regional banks in America and European small-caps. And they actually faded as this year has gone on because rates haven't come down as quickly as hoped,” Knoedler said.
In the first quarter of this year, those sectors passed the baton onto large banks, industrials, cyclicals and retailers – “stuff where we're not really present”.
The rally excluded the companies Evenlode favours, which have durable competitive advantages and deliver predictable cash flows.
“I think it just reflected the notion that winter was over, you could get out of the igloo and you didn't really need defensive, predictable, cash flow growth companies as much, and you could try other stuff,” he reflected.
This was followed by “a remarkable narrowing of the index” in the past few months, but Knoedler and co-manager Chris Elliott expect the short-term phenomenon of extreme concentration to dissipate eventually, making way for broader-based stock market performance and a return to fundamentals.
“It's not a bad time to be an investor. There are a lot of good quality companies out there and they're doing pretty well,” Knoedler concluded.
Trustnet researches the 10 cheapest active global funds with less than £100m in assets under management.
Smaller funds can afford to be more nimble and take advantage of market volatility in a way that is hard to replicate for their larger, and therefore more rigid, peers, but a big drawback is they tend to cost more.
With less money under management firms typically hike up the cost to make the portfolio profitable, while larger funds can drop their prices thanks to economies of scale.
For instance, Nick Wood, head of fund research at Quilter Cheviot, considers funds with less than £100m in assets under management (AUM) to be sub-scale.
He said funds with less than £100m in assets are “too small” for institutional investors to consider as they typically do not want to own such a large percentage of any one fund, which puts a block on these funds growing and gaining enough assets to begin lowering prices.
And this is borne out in the numbers. The average fund in the IA Global sector (including passives) charges about 0.8% in ongoing charges. For ‘sub-scale’ funds, this rises to 1%.
However, there are exceptions to the rule. As such, below, Trustnet highlights the 10 cheapest active funds in the IA Global sector with less than £100m in AUM.
Source: FE Analytics
With a size of £91.4m and an ongoing charge figure (OCF) of 0.23%, Invesco Global Ex UK Enhanced Index (UK) is the cheapest ‘sub-scale’ fund in the IA Global sector.
The fund has been managed by Georg Elsäesser since 2021 and Michael Rosentritt since 2023 and is based on a systematic factor-based investment process focusing on momentum, quality and value.
Relative risk is managed using an analytical tool that recommends trades to enhance portfolio exposure to selected stocks within established risk and return parameters.
The managers also limit risk at the country, sector and industry levels when building the portfolio. For instance, the fund is slightly underweight technology and the US relative to its benchmark, but marginally overweight financials and Japan.
Performance of fund over 3yrs and 10yrs vs sector and benchmark
Source: FE Analytics
The fund has outperformed both the IA Global sector and the MSCI World over one, three, five and 10 years.
Next up is the £3.4m Liontrust GF International Equity fund, which has an OCF of 0.25%. A distinctive feature of this fund is that it excludes the US from its investment universe and seeks opportunities in Japan, the emerging markets, and Europe.
While the fund lacks exposure to US tech heavyweights, it still maintains a significant allocation to the information technology sector through companies such as Taiwan Semiconductor Manufacturing Company, Keyence, and Mercadolibre.
However, consumer discretionary remains the largest sector weight in the portfolio, including holdings such as China’s Trip.com and India’s MakeMyTrip.
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
Since its launch, Liontrust GF International Equity has slightly outperformed its benchmark but has significantly lagged behind its peer group, primarily because its mandate restricts investments in the narrow cohort of US tech stocks that have driven the market in recent years.
Another fund among the 10 cheapest global funds with less than £100m in AUM is IQ EQ Low Carbon Equity managed by Des Flood. The fund invests in businesses considered leaders in addressing climate change within their respective sectors, with companies such as Microsoft, Quanta Services and Siemens among its top 10 holdings.
It also excludes companies that profit from the exploration, extraction or burning of fossil fuels.
IQ EQ Low Carbon Equity was launched in 2018 and sits in the third quartile of the IA Global sector over five years. However, it has demonstrated lower levels of downside risk over the same period, as indicated by its maximum drawdown score of -14.3%, ranking 49th out of 405 in the IA Global sector. In comparison, the benchmark's maximum drawdown over the same period was -15.7%.
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
Storebrand Global ESG Plus Lux, managed by Henrik Wold Nilsen, also follows a fossil-fuel-free investment approach, but takes additional environmental, sustainable and governance (ESG) criteria and sustainability factors into consideration.
Investee companies must have a high Storebrand sustainability rating and be aligned to the UN’s sustainability goals. Moreover, the fund invests up to 10% of its assets in businesses related to clean energy, energy efficiency, recycling and low-carbon transport.
Performance of fund over 3yrs and 10yrs vs sector and benchmark
Source: FE Analytics
Up next, the £45.6m Stewart Investors Worldwide Leaders Sustainability fund charges investors 0.55% – one of the higher figures on the list but still far below the average IA Global fund’s costs.
Managed by FE fundinfo Alpha Manager David Gait and Sashi Reddy, the fund invests in large- and mid-caps across both developed and emerging markets. For instance, India holds the second-largest country weighting in the fund after the US, with Indian company Mahindra & Mahindra as its top holding.
Gait and Reddy aim to invest in high-quality companies positioned to both contribute to – and benefit from – sustainable development. They assess businesses on three metrics: quality of management, quality of the company and quality of the company’s finances. The fund sits in the second quartile of the IA Global sector over 10 and five years, as the below chart shows.
Performance of fund over 3yrs and 10yrs vs sector and benchmark
Source: FE Analytics
Finally, the £5.3m IFSL Marlborough Global SmallCap charges investors 0.56% to get an exposure to small- and mid-caps across the world.
A smaller fund can be advantageous when investing in small-caps, with experts previously indicating a preferred size range of £60m to £200m for small-cap funds.
However, IFSL Marlborough Global SmallCap is more tilted towards mid-caps, which constitute 60% of the portfolio.
The industrials sector represents more than 50% of the portfolio, making it the largest sector weighting, while the US accounts for 55% of the portfolio (it’s largest country exposure).
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
Since launch, the fund has outperformed both the IA Global sector and its benchmark, despite a period that has favoured more liquid and resilient mega-caps.
Rory Stokes also explains why he is worried about central banks getting monetary policy wrong…again.
Sometimes it is better to be lucky than good, although it helps to be both. The latter is something that has helped propel the Janus Henderson European Smaller Companies fund to the top of the charts over the past decade.
Managed by Rory Stokes, the portfolio has returned 200.1%, over 10 years making it the best-performing portfolio in the IA European Smaller Companies sector.
Yet he admits he has not got everything right. For example, the manager failed to spot the Covid pandemic in 2020 and was also caught out by Russia’s invasion of Ukraine in 2022.
Performance of fund over 10yrs vs sector and benchmark
Source: FE Analytics
Despite this, his fund held up well during both periods thanks to its process of investing in a range of different buckets. “The major advantage of investing across the corporate lifecycle and maintaining a balance of various styles is that different bits of the portfolio can do the heavy lifting at different times,” he said.
In 2020, his allocation to early-cycle names, including an online German pharmacy, a bike helmet safety company and computer gaming companies, all helped bolster returns.
Fast forward to 2022 and at the start of the Russia-Ukraine conflict the fund’s energy names and financials as well as exposure to more mature companies and undervalued businesses, came to the fore.
Below, he explains discusses his issues investing in lastminute.com, how Europe is a growth market (despite investors’ preconceptions) and why he is worried about central banks getting monetary policy wrong…again.
What is your investment strategy?
We're looking to get a good balance of growth and value. We try to have exposure across the entire corporate lifecycle, whereas most of our peers just invest in quality-growth names.
Typically, about 40% to 50% of our investments could be classified as quality growth and approximately 5% to 10% of the portfolio is allocated to early-stage companies experiencing rapid growth and improving returns.
But what really differentiates us is our exposure to both mature companies where we believe management can achieve better returns and deliver solid cash flow, as well as to ‘bad’ companies that currently do not earn their cost of capital, but where we see potential catalysts for change
With that mixture, we end up with a portfolio that still has a lot of growth in it, but is as cheap as the benchmark whereas our peers typically look more expensive.
What has been your best stock over the past 12 months?
It’s been Alzchem, which is a little known specialty chemical company from Germany. It's still cheap because it's very unknown in the broader market. It is the only European producer of creatine.
Many people who like going to the gym take creatine, which helps them get an extra two or three reps out of their weight training sessions. Since the pandemic, people have embraced going to the gym and using creatine due to its physiological and mental benefits.
Alzchem also has a product called nitroguanidine, which is an accelerant used in artillery shells. The EU has given the company a big grant to boost its production and help guarantee the security of supply of NATO ammunition.
Performance of stock over 1yr
Source: Google Finance
And the worst-performing stock?
The most burdensome active position has been lastminute.com, an online travel agency. It has been through a number of challenges in recent years and the pandemic was clearly a big blow for the business.
That was then compounded by the senior management being accused of having mismanaged the equivalent of furlough payments in Switzerland. The CEO was arrested.
There's been lots of management changes and the new CEO is very good, but the company now has to navigate a conflict with Ryanair about being able to buy Ryanair flights.
Performance of stock over 1yr
Source: Google Analytics
What is the biggest misconception about European equities?
The biggest misconception is that there is no growth. To an extent, that has been true in the large-cap space, but there's a handful of names that are bucking that trend.
Within European small-caps, there is a lot of growth. Of course, there are pockets of low growth, but you don’t need to be exposed to them. It's a heterogeneous area, which means you can also find earnings growth, and since it’s a neglected part of the market, you don't have to pay very much for that at the moment.
Europe is seen as sclerotic and boring, but I think there are a lot of opportunities. There's a lot of tech, great businesses and growth and that's probably not adequately recognised by the broader investment community.
What is your main source of worry when it comes to European small-caps?
A consistent worry is policy error. Central banks’ response to the pandemic was too aggressive and they were also too slow to respond to the inflation shock. The worry now is that, in an attempt to establish credibility, they keep rates too high for too long.
I also worry about the broader geopolitical risks that everybody else talk about. But the lesson I've learned over the past 24 years in the small-cap space is that random stuff just happens and most of the time, you don't see them coming.
The important thing is to size your positions so that you can get out of them when you need to. You need a willingness to recognise that when information changes, you have to rotate the portfolio.
What do you do outside of fund management?
I like riding my bicycle. I coach my children's football and play the Nintendo Switch with them. Those things take up most of my time.
Fund managers believe the US market’s dominance can continue.
Earlier this week, reporter Jean-Baptiste Andrieux asked fund managers whether the US’ dominance over the past decade and the market’s willingness to eschew price and focus on growth potential could continue.
Their answer: yes.
There were a plethora of reasons given, such as that the US is full of tech disruptors who are of higher quality than overseas rivals, make more money and are benefiting from healthier macroeconomics.
Even on valuations the managers were unconcerned. Getting technical, Gerrit Smit, manager of Stonehage Fleming Global Best Ideas Equity, expected earnings growth for the S&P 500 to be close to 10% per year over the next three years.
As such, despite being on higher price-to-earnings ratios, future growth should more than offset this over time.
But this begs the question – why invest in an active fund? According to the latest MSCI World factsheet, the premier global equities index is 70.9% weighted to America.
Yet, if the active managers quoted in the story are correct and the US will continue to drive markets forward, then they will need to be overweight this figure to outperform.
So how can active managers hope to stand a chance against the passive titans? The most common answer is stock selection. Fund managers argue that their research and ability to uncover stocks is better than others and therefore they should have an edge.
Certainly, fund managers can outperform the index by picking good companies either in the US or in other markets, something highlighted by news editor Emma Wallis last week when she looked at the UK stocks able to beat most of the Magnificent Seven.
And there will be more examples in other markets too of individual stocks able to produce the type of returns investors have come to expect from US tech giants.
But the issue is that they are harder to find and – while all fund managers believe in their ability to spot them – few can do so consistently.
Managers often say they do not need to get everything right, they just need to be right more than 50% of the time, which is true, but even this hit rate is difficult when the passive index has been so strong.
Indeed, just 20% of the IA Global sector (52 out of 245 eligible funds) have beaten the MSCI World over the past decade after fees, a figure that drops to 18% over five years and just 13% over three years.
So by suggesting that US exceptionalism can continue over the next decade, active managers have perhaps inadvertently given justification to their greatest rivals – passives.
The most sensible option appears to be basing a portfolio around a global tracker and having other funds at the margins.
However, there are some funds that have an even higher weighting to the world’s largest market than the MSCI World. In the IA Global sector, 46 out of 564 funds are overweight the US, with passives accounting for many of them (particularly the ones that track other, even more US-heavy, indices).
But there are active funds with overweight positions including Smit’s Stonehage Fleming Global Best Ideas Equity fund, which has a 71.7% allocation to the US. The active fund does have the edge on the MSCI World over 10 years after fees, up 249.4% versus the benchmark's 225%, although it has struggled over five and three years.
Whether this is enough to justify spending 0.81% per year in ongoing charges, rather than the 0.12% charged by the cheapest trackers, is up to investors to decide.
Invesco, Evenlode and Troy have all channelled more than a fifth of their global equity income strategies into UK-listed dividend payers.
The UK was one of the world’s best performing stock markets for the past three months, beating US and global equities hands down. One quarter does not atone for a decade’s underperformance but it does shine the spotlight on the UK’s nascent recovery, attractive valuations and wealth of high-quality, dividend-paying companies.
A handful of global equity income managers are well placed to profit from the UK’s turnaround, with more than a fifth of their portfolios in domestic equities.
Although income funds often favour UK and European stocks because they tend to pay higher dividends than US-listed companies, a 20% allocation is still a large bet, particularly compared with the MSCI World and the MSCI World Quality Dividend index, which have just 4% and 6% respectively in Britain.
Global equity income funds with more than 20% in the UK
Source: FE Analytics, funds’ factsheets
Why are these funds overweight the UK?
Several of the funds’ managers said they were overweight the UK for stock-specific reasons, at a time when many high-quality UK companies are cheap.
Stephen Anness, head of global equities at Invesco, said: “We have been able to find several businesses at attractive valuations in the region. Part of this is linked to the UK now being such a small part of the overall index that it does get less attention from a lot of global managers and therefore you can find some really interesting opportunities and hidden gems.”
James Harries, senior fund manager of the Troy Global Income strategy, added that despite the UK being "deeply out of favour", it has "a number of global companies that offer a compelling combination of quality and long-term income growth".
Michael Crawford, chief investment officer at Chawton Global Investors, said he looks for quality companies delivering a high return on invested capital, where capital allocation drives shareholder value, and these qualities are more evident in the UK and Europe.
As a result, the WS Chawton Global Equity Income fund has had a significant overweight to the UK since inception in April 2019. Next and Bloomsbury are its largest two holdings.
The UK stock market isn’t the British economy
The high UK allocation is a bit of a misnomer, Anness pointed out, because so many UK-listed companies are global businesses earning more of their revenues abroad.
For example, the Invesco Global Equity Income fund’s biggest position is 3i, a private equity investment trust that earns 97% of its revenues outside the UK and has a large holding in Action, Europe’s fastest-growing non-food discount retailer.
“We see this as nothing less than one of the best businesses on the continent – hidden within a financial company. Action currently has more than 2,300 stores across Europe and plans to open 400 a year by 2026. We estimate it could take almost 20 years to saturate Europe alone so there is a very long runway for growth,” Anness said.
Invesco’s next two largest UK holdings, Rolls Royce and Coca-Cola Europacific Partners, are “multinational companies where the UK is very small component of overall revenue, they just happen to be UK listed,” he said.
Evenlode also looks at its geographical exposure through the lens of where revenues are generated, said investment analyst Rob Strachan.
Evenlode Global Income currently has 23% in UK-listed stocks, near the top of its historical range. Its UK exposure has varied between 16% and 24% since inception in 2017, but revenues from the UK have always remained below 5%.
“We are well positioned in certain high-quality, multinational, UK-listed businesses that look relatively good value compared to our wider investable universe, such as Unilever, RELX and Diageo,” Strachan explained.
“The largest position in the fund is currently Unilever, reflecting its globally diversified portfolio of brand intangible assets, distribution advantages and attractive relative valuation.”
Unilever also features within the top 10 holdings of Trojan Global Income and VT Vanneck Global Equity Income, which have almost a third (32%) and a quarter (24%) of their portfolios in the UK, respectively.
In addition, Troy holds British American Tobacco, RELX and Reckitt Benckiser, while Vanneck owns Rio Tinto and Hargreaves Lansdown. The investment platform’s share price has soared in the past couple of months after it received bids from a consortium of private equity firms led by CVC Capital Partners.
Stock selection can override asset allocation
A large UK weighting has been a drag on performance given the relative gap between the UK and US stock markets for the past decade. However, some of the funds have made up a lot of that ground through stock selection and Invesco Global Equity Income stands out as a top performer.
Performance of funds vs sector and MSCI World over 3yrs
Source: FE Analytics
Stock selection within the UK has helped the fund. Invesco owns Rolls Royce, which soared 198% in the 12 months to 26 June 2024, while 3i delivered total returns of 70.7%.
Global equity income funds in general were at a relative disadvantage last year when the Magnificent Seven contributed more than 50% of the MSCI World index’s returns, Anness pointed out.
“When seven out of over 1000 companies make up more than half of the total return of a major index, being benchmark agnostic (or underweight them) can be extremely painful. On top of that, the bedrock of our philosophy is a focus on cash flows, dividend-paying companies and a strict focus on valuation. Given that only three of the Magnificent Seven pay a dividend we tend to be underweight these companies… and yet we still beat the market.”
Top contributors last year included Broadcom, chemicals company Celanese, BE Semiconductor Industries (Besi) and private equity manager Kohlberg Kravis Roberts (KKR), in addition to Rolls Royce and 3i.
“I suspect few would have guessed that in the year of artificial intelligence, Rolls Royce would have outperformed Nvidia, or that a lesser-known chemicals company, Celanese, could outperform Apple,” Anness pointed out.
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