There is a big debate in the investment management industry on whether fund managers should have significant amounts of their own money invested in their funds.

On the one hand, putting their own cash in aligns interests with shareholders, which in theory should keep them from making poor decisions. On the other, some argue their salary and bonuses are already linked to their portfolio’s success, so there is no need.

Mick Dillon and Bertie Thomson seemingly take the former view, piling almost all of their own money into the Brown Advisory Global Leaders fund, which they co-manage together.

Dillon said: “Bertie and I have only two investments. We are partners and shareholders at Brown Advisory and we invest in Brown Advisory Global Leaders and that’s it. We’re all in: my wife's money's in, my kids money's, everything is invested. I'm a big believer in people who eat their own cooking and put their money where their mouth is.”

Of course, this comes with its own concerns, such as whether the fund is risky and if it is suitable as a one stop-shop. Dillon had an easy response, however: “Clearly, I don't think it's that risky or I wouldn't have everything in it.”

His confidence comes from his companies’ fundamentals, with an average return on capital more than twice that of the broader market. “They typically grow faster than their industries because they are taking market share,” he said.

Although valuations are “maybe 15-20% more expensive than the benchmark on a one-year view”, over the longer term, "you're going to compound something that's twice as good as the benchmark for return on capital and is growing slightly faster, and you only paid 15% more".

Fortunately for the managers, Brown Advisory Global Leaders has delivered top-quartile returns over three and five years and pulled ahead of both its sector and benchmark since inception in November 2017, as the chart below shows.

Performance of fund vs sector and benchmark since inception

Source: FE Analytics

Below, Dillon tells Trustnet about his rules for selling and how he works with behavioural coaches to make better decisions.

What is a global leader?

For every investment we ask: how does that company help its customers solve a problem or achieve their goals? Frankly, how do they make their customers’ lives better?

When you get a business whose customers are happy, who come back again and again because the business is solving a problem and creating value for them, that company will have a long relationship with its customers. Ultimately, that’s what creates a ton of value for shareholders.

We have a team of investigative analysts who talk to customers to understand why they want to come back. Our favourite piece of feedback is when a customer says, ‘it’s not cheap, but it represents good value’. That tells you it’s not about being the cheapest on the market, it’s about solving customers’ broader problems.

What do you look for in a stock?

We look for a 20% or higher return on capital, which means these companies are efficient at turning revenues into cash flow. Then lastly, it has to be cheap. We want double-digit returns in the strategy on an absolute basis. With every investment, we need to believe we can make 10% a year for five years, so over 50% compounding.

What’s has been your best investment recently?

General Electric (GE) is already up more than 70% since we bought it in April/May last year. It has a 70% global market share in narrow-body aircraft engines. Its engines are more fuel efficient than anyone else’s, which saves money for airlines and is also great for the environment. Its after-market business, which sells parts to maintain planes, is incredibly valuable for customers and profitable for GE.

And your worst?

Not investing in Nvidia. In October 2022 we did a full investment review of Nvidia. At the time, it was within 5-10% of what we thought was a five-year, double-digit annual internal rate of return, so easily a 50% upside.

But we didn’t invest because we wanted to buy it 5-10% cheaper and we fundamentally mis-calibrated what artificial intelligence (AI) was going to do for that business.

How do you work with behavioural coaches?

We sit down with a behavioural coach once a quarter who uses data and analysis to help us avoid classic behavioural mistakes. We've got a whole bunch of processes now to use in different scenarios. I think of them as game plans.

One of our rules is, if an investment falls 20%, we either have to buy more or get out. About 70% of the time it works, so it's not perfect, but the odds are in our favour. That changes the psychology in the room from a negative event where we've lost money, to a positive event where I can tell you with 70% certainty that we'll make a good decision today.

In February last year, Google did a disastrous product demonstration and was considered an AI loser. We had to do a drawdown review on it; either buy more or get out. We bought more.

At the drawdown reviews we ask, will I care about this issue in five years’ time? I don't think I'm going to care about Google’s bad product demo.

We think it’s highly unlikely that anyone will disrupt Google’s search or cloud businesses. The transformer technology that enables generative AI – the ‘T’ in ChatGPT – was invented at Google.

How has working with coaches impacted your sell discipline?

If we're selling for a broken thesis, more often than not, we're right and the stock continues underperforming, so our rule is to get out within a week. That came from working with the coach.

When we sell on valuation, we always sell too early, but that's okay because we're going to take that capital and put it somewhere else.

What do you enjoy doing outside of investing?

I grew up on a farm in rural Australia so I like anything outdoors to switch off. I enjoy cycling, surfing, hiking, even gardening.

Markets have gone gangbusters over the past few years and investors have finally decided to take the plunge and get back into stocks.

This is according to the latest Schroders UK Financial Adviser Pulse Survey, which showed 49% of advisers reported that their clients, who have been holding cash over the past few years, are now more likely to consider returning to investment markets or have already invested.

It is understandable why investors waited for the market to calm down. In an era of rising rates, many chose to pull their money out of stock market investments and channel it into cash savings accounts and money market funds, which offered decent returns for the first time in more than a decade.

Yet perhaps the question should be why now? On the face of it, it makes logical sense. Markets have held up surprisingly well over the past two years, despite inflation and interest rates rising sharply. Since January 2022, for example, the S&P 500 is up 24.3%, despite losing 8.3% in 2022.

In theory, with interest rates peaking – and likely to come down in the coming months across the world – this should benefit big companies such as the Magnificent Seven tech names, which should have been hit hard by rising rates.

Higher rates, after all, increase the discount rate. Or put more simply, why pay up for a growth stock with high risk in the hopes it can deliver future returns, when you can get more than 5% in a bank account today?

But there is a chance that investors have left it too late. For example, despite being hammered in 2022, the S&P 500 Information Technology sector has rocketed and is now 54.1% higher than it was at the start of 2022. Many could have therefore missed the boat.

Yes interest rates are expected to fall, but the market has, in my view, become too myopic on this one data point.

Overlooked factors, such as wars breaking out around the world, elections in hundreds of countries and the perceived end of globalisation through trade tensions – particularly between China and the US – make the situation less straightforward than simply: ‘interest rates will fall so stocks should do well’.

For an example of this, we do not have to look too far back in history. The Schroders report noted 41% of advisers reported that their clients are now bullish compared with only 17% in November 2023, while just 10% are bearish.

This is the strongest balance of sentiment since May 2021 when market optimism surged as economies started to recover from the initial impact of the pandemic and first lockdown.

Here investors were singularly focused on the Covid recovery narrative and eschewed fundamental investment principals. They focused on the feel-good story. Yet while those that invested in May 2021 enjoyed some upside early on, they would have then been hit by the falls in 2022.

As mentioned, those that held on for the long-term have been rewarded in the years since, but it is human nature to sell when things are falling. Which is something we can infer from the data, with many clients moving to cash in 2022 as markets were falling.

There are good reasons to invest today but investors looking to get back into markets on the hopes of interest rates falling should remember that it is often something unexpected that derails markets.

Therefore, it is crucial that any money added over the coming months is with the knowledge it will be tucked away for years, and won’t be pulled out at the first signs of trouble.

Investors have benefited from several rallies since the beginning of the year, with a range of indices reaching all-time highs, including the S&P 500, the Nikkei 225 and even the FTSE 100. This has left some investors feeling uneasy about lofty valuations.

For investors on the lookout for more attractively-priced opportunities, Rob Morgan, chief investment analyst at Charles Stanley, pointed to three underappreciated sectors.

First up is the UK, which despite the recent rally, remains cheap compared to its international peers and its own historical valuations.

Although Morgan finds UK equities attractive across the board, small- and mid-cap (smid) stocks are even cheaper than FTSE 100 blue-chips and should benefit from an improving economic backdrop, as well as renewed interest from private equity buyers, he said.

Moreover, the liquidity profile of UK equities, especially in the smid-cap space, has significantly diminished,  which means “it won’t take much for them to surge”, according to Morgan.

For investors hoping to benefit from a re-rating of UK cheap stocks, he suggested Fidelity Special Values and Man GLG Undervalued Assets.

“Fidelity Special Values focuses on finding underappreciated bargains in an already cheap market,” he said.

“Man GLG Undervalued Assets also adopts a value-focussed approach while aiming to ensure good quality.”

Performance of funds over 10yrs vs benchmark

Source: FE Analytics

Although Morgan has a preference for UK smid-caps, he also expects the FTSE 100 to perform well. Given its large weightings in banks, oil companies and commodities, persistent inflation should be a tailwind for the blue-chip index.

Mining is another underappreciated area that Morgan highlighted.

Although mining companies have faced issues such as poor capital discipline, failure to control costs and overleverage in the past, they are now benefiting from the transition to a low-carbon economy.

Morgan said: “It will require a lot of raw materials, especially metals and we’re now seeing a scramble for raw materials. In spite of this, mining companies are under-owned as their growth potential is underestimated.”

Miners tend to pay dividends, although they can be lumpy. Morgan also warned that mining is a highly volatile sector and that investors should get in with a five- to 10-year view.

For investors capable of stomaching this volatility, Morgan recommended WS Amati Strategic Metals.

Performance of fund over 10yrs vs benchmark and sector

Source: FE Analytics

“The fund takes a highly active approach to investing in the mining sector, aiming to actively manage an optimal combination of precious, specialty and base metals at any given time,” he explained.

“It holds a concentrated portfolio of 35 to 45 companies, including higher risk smaller stocks, so the individual selection by its managers will have a significant bearing on returns. In particular, it targets specialty metals companies which will play a future role in the global energy transition such as battery metals like lithium which is vital in electric car batteries.

“It’s definitely not for the faint hearted but could be an interesting satellite holding in a portfolio for the long term.”

Finally, Morgan also finds Japanese small-cap growth stocks compelling, as they remain attractively valued compared to the rest of the market.

Japanese large-cap exporters have made significant strides in a short amount of time as corporate reforms narrative has played out, with the weak yen providing an additional tailwind. Therefore, they are not as cheap as they used to be.

However, Japanese companies focusing on the domestic market haven’t benefited to a significant degree from those tailwinds, especially in the small-cap growth space where valuations have derated as global interest rates rose and the yen fell.

As a result, they are now far cheaper and widely overlooked, but could benefit from global interest rate cuts as well as their own organic growth over time.

To gain exposure to this space, Morgan highlighted Baillie Gifford’s Shin Nippon trust, which has struggled since late 2021.

Performance of investment trust over 10yrs vs benchmark and sector

Source: FE Analytics

“Shin Nippon’s collection of small, more growth-orientated companies have been of little interest to their traditional domestic buyers who have favoured dollar-earning exporters or simply investing overseas.

“However, following a brutal derating, there appears to be value on offer with growth companies on undemanding valuations. It might be a slow burn, but as sentiment improves and, ideally, the yen stabilises, it could be a profitable area to focus on,” Morgan explained. 

“This trust is a higher risk option in an already-specialist area as it has gearing of around 20%, plus the discount to NAV of the shares fluctuates. At the moment it is around 15%, but recently it was as much as 20% having traded at a very small premium at the start of 2022.”

The disparity between the valuations of the cheapest and most expensive stocks is historically wide globally but especially so in the US.

Wide spreads are indicative of uncertainty, according to Sam Witherow, a portfolio manager in JPMorgan Asset Management's international equity group. The gap between cheap and expensive stocks has been wide since the pandemic but the pockets of cheapness have shifted, reflecting an evolution in the sources of uncertainty. 

“The baton of controversy has been passed from one group of stocks to another,” Witherow said. “Rolling controversy has played through markets.”

At the start of the Covid-19 pandemic, valuations of the “work from home losers” such as restaurants and airlines, were “in the doldrums”, he explained. Then the baton passed to stocks that were “crimped by huge rises in energy prices”. Next, as interest rates rose, companies hit by the higher cost of borrowing were discounted.

Today, “historical defensives” are cheap, such as utilities and consumer staples. “They don’t have the jazzy artificial intelligence (AI) story,” he pointed out, describing them as “boring stocks”.

In the past, income investors flocked to these sectors for their dividends but now, with bonds and cash offering decent yields, their relative attractiveness has diminished.

As a result, consumer staples are “getting more and more attractive” given their cheap valuations. Coca-Cola is one of the £730m JPM Global Equity Income fund’s top 10- holdings.

Boring defensive stocks are attractively valued compared to cyclicals

“The market is getting its head around this transfer and tricky hand-off between price-led growth to volumes-led growth,” Witherow continued. In other words, companies that hiked up prices in the past couple of inflationary years are starting to lose market share as consumers find cheaper alternatives elsewhere, so they are having to become less aggressive with price hikes and promotions.

“There’s always a pocket of controversy somewhere that we’ll exploit,” he added. “Now the opportunity is in boring stocks.”

Utilities are the JPM Global Equity Income fund’s biggest active overweight, with a 7% allocation, representing an overweight relative to the MSCI AC World benchmark of four percentage points.

The fund owns four utility companies in the US, where electrification has been “turbocharged by data centre demand”. These companies are paying dividends of 4% and are trading on 15-16x earnings, which is a post-financial-crisis low point. “A 4% yield compounding at 7% is a really nice total return from a regulated asset,” he explained.

He also holds a couple of utilities in Europe, where the grid needs to be reorganised to be fit for purpose and to incorporate renewable energy.

Exploiting these revolving pockets of controversy has paid off for the JPM Global Equity Income fund, which is the third-best performer in the IA Global Equity Income sector over 10 years, fourth over five years and seventh over three years to 11 June 2024.

Performance of fund vs benchmark and sector over 10yrs

Source: FE Analytics

That being said, sector allocations are tilts, not large bets. Witherow and the fund’s co-managers Michael Rossi and Helge Skibeli (an FE fundinfo Alpha Manager) endeavour to keep sector and regional exposures broadly similar to benchmark, believing that their expertise lies in stock section, not macro calls.

The fund aims to deliver a yield that is 20-50% higher than the broader market, plus an income that is compounding faster and, finally, fewer dividend cuts than the broader market.

Witherow expects the portfolio to deliver 8% dividend growth per annum for the next five years, which is about 50 basis points higher than the MSCI AC World index benchmark.

JPM Global Equity Income is slightly underweight the US, where dividends in general are lower than the UK and Europe, but its underweight is much smaller than most global equity income funds, Witherow said.

He thinks the Magnificent Seven, which dominate most global benchmarks, warrant their valuation premiums because of their superior earnings growth. Now that several of them have started to pay dividends, they also fall within his remit.

Meta Platforms, Alphabet and Salesforce all initiated dividends this year and Witherow bought shares in Meta the day it announced its dividend. It is currently the fund’s fifth-largest holding.

Microsoft is the global equity income strategy’s largest holding and although it pays a modest yield, it has strong potential for dividend growth, he noted.

Witherow is concerned, however, that consensus expectations for corporate profitability are too lofty and too complacent. Margins have come down since 2022 but are not far off their all-time highs. Companies have multiple challenges to deal with including slowing inflation and slowing real growth but sticky wage inflation, he said, and these challenges are not fully priced in.

Football squads and equity portfolios both need attackers and defenders – high growth, high risk forwards who should score goals, combined with companies or players that hopefully offer some stability and prevent you conceding too many losses at the other end.

You might feel that the entire transfer market is quite inflated at the moment, so I would remind investors at all times to keep within the ‘Football Financial Fair Play’ regulations, which stipulate that you do not spend more than you earn and threaten your long-term survival.

The Goal Keeper: Solid and strong, nothing getting past this one

Chubb: Outstanding value at approximately half the market multiple, this insurance company offers stability, longevity and now has the backing of Warren Buffett and Berkshire Hathaway. The change in the world’s climate has arguably changed the dynamics for property/casualty insurance forever and whilst we will all pay more in premiums, companies such as Chubb should continue to benefit.

Defence: Playing four at the back

Consumer staples make good defenders, while fullbacks in the energy and retail sectors can get up the pitch when the economy is flowing forward.

Hershey: Shares in the 130-year-old iconic chocolate company have fallen 24% over the past year due to the impact of cocoa prices skyrocketing to an all-time high in April 2024. But from this point, I would bet that the commodity price goes down and as it does, Hershey’s earnings and stock will recover.

Kenvue: This company is a spin-out from healthcare giant Johnson & Johnson and now owns several consumer brands we all know and love, such as Listerine and Neutrogena. The shares have fallen in their first few months of trading ahead of the sale of J&J's remaining 9% holding but with this transaction now completed, from here we have good value for steady, predictable GDP-level growth.

Cheniere Energy: A leading player in liquified natural gas exports from the US, whose business and share price benefitted hugely from the disruption to energy prices in 2022 as a result of Russia’s invasion of Ukraine. Now, we have come full circle with a politically motivated pause on development announced by US president Joe Biden in January 2024 which has hurt the stock. Trading at under 8x last year’s earnings, any reversion to the mean or an election victory for Donald Trump should see it perform well over the next year or so.

Walmart: Whilst Amazon gets all the attention, the world’s largest retailer is quietly improving all the time, turning its stores into fulfilment centres so that its online business is outgrowing its major competitor – by 21% in the most recent report. A sleeping beneficiary of the deployment of artificial intelligence (AI) over time, this should be a core holding and is my team captain.

Midfielders: They can defend on valuation and join the attack with growth

Knife River: Smaller companies such as Knife River have dramatically lagged their larger brethren during this period of higher interest rates and tech obsession. Knife River is a construction materials and aggregates company, which is likely to see an uptick in its business as all this well-publicised reshoring and grid transformation money gets put to work. You do need to actually build all these data centres and the power plants to run them, before you can enjoy all this AI stuff!

Amgen: This biopharma giant is on a mere 15x price-to-earnings ratio, based on the growth expected from the existing portfolio. But it also has a product for the GLP-1 obesity and diabetes market in trial currently. Based on early results, Amgen has a reasonable shot of disrupting the two leaders (Eli Lilly and Novo Nordisk) with a product that works just as well but will be much cheaper and easier for patients to take, as it only needs a monthly injection rather than the current weekly treatment required by alternatives.

Covenant Logistics: A small niche player in transport, partly a play on a recovery in the truckload cycle, this company also operates in two specialty and less-commoditised businesses: it takes live chickens and pigs to market and transports weapons and systems for the military. You can imagine the specialist equipment required for the former and security clearance for the latter to see that this business is therefore more predictable and profitable.

Attackers: High risk, they are on the pitch to score goals

Seagate: The world leader in the commodity business of hard disk drives. Is that exciting? Yes, when there is a new product cycle starting and the market has yet to fully appreciate it. It is called heat assisted magnetic recording (HAMR) and I believe Seagate has a lead over their competition. If correct, it should gain share with its customers, who are all the giant cloud companies, as they start to deploy this new storage disk from next year.

Qualcomm: My own Harry Kane. Qualcomm has moved a lot this year already, despite losing business to China’s Huawei. Momentum should stay with Qualcomm, if you believe that an AI-related upgrade is coming to mobile phones. Its chips go into both Android and Apple, but while the iPhone maker would like to get rid of them it clearly cannot (because Qualcomm’s technology is superior to anything Apple has in-house) and now, for the first time, its Snapdragon semiconductor is going into the latest PCs announced by Microsoft.

Knight Swift Transportation: Overcapacity of trailers, under-supply of drivers and over-inventory at retail stores has led to a collapse in the earnings of the leading truckload carrier in the US. It has reached the point where pricing is at or below breakeven for many routes, so companies are just starting to say no to business. It is called a cycle and the time to buy is when it looks horrible but before the turn. I expect earnings to trough within six months and then triple off the bottom over the following year to 18 months. An interest rate cut will goose the stock, but usually by then you will be too late to buy.

Julian Wheeler, is a partner and US equity specialist at Shard Capital. The views expressed above should not be taken as investment advice.

FE fundinfo Alpha Manager Nick Train has revealed his plan to increase his holdings in Burberry, Sage, and Experian.

In Finsbury Growth & Income Trust’s latest factsheet, Train stated these three FTSE 100  businesses are executing on their stated strategy, “albeit to greater or lesser success” in the short term.

“For each we believe successful implementation of the stated strategy should lead to higher future earnings and a higher [price-to-earnings] P/E rating for those earnings,” he said. “Accordingly, we intend to add to each when we judge appropriate.”

Burberry’s shares are down 27.2% since the beginning of the year. The luxury fashion house reported a 4% decline in revenue in the past year, bringing it to just under £3bn.

Although Train expects further revenue declines this year due to ongoing challenging market conditions, he highlighted that the company is now attractively valued.

Performance of share YTD vs index

Source: FE Analytics

He said:  “We note that at today’s market capitalisation of £3.6bn, Burberry is valued on c1.25x historic revenues. This seems low for a business that has generated operating margins of over 16% per annum on average for the past decade and will definitely be too low if the current, relatively newly installed, CEO, CFO and head of design can restore excitement to the brand and grow revenues again.”

Sage also disappointed investors as the software company's growth expectations were slightly revised downward. However, this has not dampened Train's optimism about the company's prospects.

“As long-term holders we must avoid being backward looking, but have to note that the new medium-term forecasts for Sage, of its revenues growing at high single or low-double digits, would have appeared incredible five years ago, when the company was struggling to grow at all,” he said.

Performance of share YTD vs index

Source: FE Analytics

Moreover, Train explained that Sage should benefit from two “big opportunities”. One of these is the growth of its Intacct subsidiary in the US and other geographies, while the other is to capitalise on new artificial intelligence (AI) enhanced services to deliver substantial efficiency gains.

“There are few listed UK companies with a global strategic opportunity comparable to this and Sage’s current market capitalisation of c£10bn could be much higher, we expect, if it can execute on that opportunity,” Train said.

Earlier this year, Train shared a list of six FTSE 100 companies that he believes will benefit from the advancement of artificial intelligence. That list already included Sage.

Another company in this list was Experian, which Train is intending to top up as well. Unlike the two previous holdings, Experian has performed well recently, with its latest results prompting analyst upgrades for the company’s medium-term revenue growth and higher profit margins, which Train assesses as credible.

Performance of share YTD vs index

Source: FE Analytics

He said: “The lessons we have learned from watching successful digital and software businesses over the past decade is that growth rates and profitability can scale as such companies’ services become increasingly valuable to a growing customer base. Experian is one of a relatively small set of UK-listed companies that offer participation in such effects.

“Those lessons also suggest that the ostensibly “high” prospective P/E that Experian trades on, of c28x, is, in fact, not high at all and the shares offer good value.”

Finsbury Growth & Income achieved a total return of 1.6% in May, while its year-to-date performance stands at 0.1%, according to FE Analytics.

Performance of investment trust in May and YTD vs sector and benchmark

Source: FE Analytics

Less than half (48%) of alternative trust boards are well set-up and effective, according to wealth asset manager Quilter Cheviot.

Board composition and effectiveness are two of the three main factors used to assess alternative investment trusts within Quilter Chievot’s engagement programme.

The wealth management business gave a green, amber or red score to each investment trust in the private equity, infrastructure, multi-asset, macro and music royalties sectors, with less than one in two achieving a green light for both categories.

Board composition, which measures the degree of independence, diversity and skillset within the board, had both the highest percentage of green ratings (67%) and the largest proportion of red ratings, with nearly a quarter (22%) of trusts showing a lack of independence, manager representatives, poor oversight or little diversity.

The second factor is board effectiveness, or the ability and willingness to challenge the investment adviser and be open to shareholder feedback. Here, fewer than three in five (59%) trusts received a green rating.

This is an area in particular need for improvement, according to Quilter Cheviot’s head of investment fund research Nick Wood, with communication around gearing, discount management and performance fees atop the issues.

“We want to see trusts communicate clearly and effectively with us, especially around issues pertaining specifically to their structures,” he said.

“It isn’t the case that alternatives are opaque on these sorts of themes, but shareholder communication needs to improve to ensure investors understand exactly what it is they are buying in to and how they expect it to perform.”

The third factor was responsible investment disclosures, especially real-life examples of how the trust approaches stewardship and the integration of environmental, social and governance (ESG) factors within its investment process.

In this category, alternative trusts were found to be ahead of the wider market, with just 7% being given a red grade. However, only 19% of boards scored a green rating and the overwhelming majority (74%) were crossing the line on amber.

This is a result of the disconnect between responsible investment processes and the disclosure of such activities, said head of responsible investment at Quilter Cheviot, Gemma Woodward, who however noted that the direction of travel in this space is good.

“There is room for improvement when it comes to the corporate governance practices of alternative investment trusts. Investor expectations change over time with a fast pace of change, some can be left behind,” she said.

“Nevertheless, we have already seen some very positive improvements from some boards and we look forward to working closely with the 27 we have engaged with here to help them improve where possible.”

With all the three categories combined, only four investment trusts qualified for a triple-green rating.

The report on alternatives follows a first part that was carried out on the broader equity trust sector in September 2023.

The comparison of the two is illustrated with the chart below, which highlights some discrepancies in the factors assessed but a similar performance on average.

Comparison of alternatives versus equity trusts

Source: Quilter Cheviot

If you travel to some parts of the US, you’ll see massive construction projects going on in many cities such as Columbus, Ohio and Phoenix, Arizona. From a distance, they look like football stadiums but actually, they’re six times as big as that.

What you’re looking at are new chip plants being built with government support as part of the nearshoring trend set off to revolutionise supply chains and decrease dependence from China. Intel is currently building in Columbus and TSMC in Arizona, as Markus Hansen, portfolio manager at Vontobel’s quality growth boutique, explained.

Hansen is investing in a number of stocks that should benefit from the nearshoring trend and, in his opinion, will do well come rain or shine as they are losing the element of cyclicality they used to have. Below, he highlighted four stocks that fit this trend.

Vulcan Materials:  With its cyclical side disappearing, the core quality business grows

We begin in the US, where Vulcan Materials makes crushed stone, or in technical terms, aggregate. Aggregate goes into two major things: roads and construction projects.

As such, the company is benefiting both from the nearshoring trend and from the “massive infrastructure programme” taking place in the United States.

Performance of stock over the past year

Source: Google Finance

“Instead of outsourcing chips production to Asia or manufacturing in cheap countries, the Inflation Reduction Act has encouraged American technology firms to bring those back to the US, which is why you see Intel and TSMC building these huge sites,” the manager said.

“But roads and infrastructure are also key – not just from and to the new plants but beyond. Infrastructure used to be pretty bad in the whole country and that's changing. This whole bulk of spending is going to be a 10 year process, which Vulcan will benefit from.”

Traditional roadbuilding has become a much more significant part of the business because roads have to be maintained every year, which is “a nice sustainable growth business over time”.

“The stock is going from what people used to perceive as a cyclical business to more of an actually predictable growth-type businesses,” Hansen said.

“The construction side is a cyclical business, but the company is reducing its exposure there. With the cyclical part disappearing, the core quality business grows.”

Ashtead: Its new app is changing a fragmented industry

Listed in the UK, Ashtead is an example of an industrial company whose business is mostly in the US – under the name Sunbelt – and will also benefit from the construction bonanza. It makes rental equipment for construction, maintenance and services.

Performance of stock over the past year

Source: FE Analytics

Generally, builders don't own their equipment but rent it, and that used to be a very fragmented industry. Sunbelt bought up these renters over time and created a franchise network. Today, they operate through an app, removing the need for subcontractors.

“Sunbelt has about a 15% market share and is looking to get that to north of 20%, because there’s still a big pie, which is still very fragmented to bring in,” Hansen said.

This part of the business has some cyclical elements to it, but the manager is excited about the developing services and maintenance side.

“The beauty of that is that, if the economy collapses tomorrow, offices will be empty but landlords are still required by law to maintain things like air conditioning, lighting, electrical and fire systems,” he said.

“So as that becomes a bigger portion of the business, we get more predictability in the earnings stream.”

Vinci: Its construction business is a fantastic cash cow

For an example of a European business, Hansel picked French concessions and construction company Vinci, which operates a toll road and an airport business, but the manager was more enthusiastic about its road construction activity, which he defined “a fantastic cash cow”.

Performance of stock over the past year

Source: Google Finance

“Once you build a road, you constantly have to maintain it, and generally, once a municipality has signed with a company, you have that contract for the rest of eternity,” he said.

ASML: Its order book is going to look pretty formidable

Remaining in Europe, for a much more recognisable name, the manager highlighted ASML, the leading manufacturer of machines that make silicon wafers.

As the only company that has the extreme ultraviolet lithography (EUV) technology, it was already the top player in the sector. But, according to Hansen, now it's an even better beneficiary.

Performance of stock over the past year

Source: Google Finance

Every chip manufacturer in the West has been told they cannot use Chinese technology in their chip plants, so now there's only one provider – ASML.

“The order book is going to look pretty formidable and it has very strong pricing power,” the manager said. “The stock has done well, so it's not that the market doesn't see this, but the predictability of the order book has improved dramatically and therefore it can carry a higher rating for longer now, because it’s just sitting in a great spot.”

Fund managers are divided on how many times they expect the US Federal Reserve to cut rates this year, following its decision yesterday to keep rates on hold.

Pictet Wealth Management expects two cuts in September and December while Nomura Asset Management thinks it is too early to rule out a summer cut and has put derivatives in place to profit from surprise cuts in July and September. Nikko Asset Management expects one cut this year, but Fidelity International is bracing itself for no cuts at all. This is all a far cry for the six cuts the market had priced in back in January.

Salman Ahmed, global head of macro and strategic asset allocation at Fidelity, said: “Our base case is zero cuts this year but if progress on inflation continues over the summer months or labour markets start to show some signs of stress, we do see the likelihood of one cut this year rising.

“That said, the US economy remains resilient and yesterday’s release was affected by vehicle insurance and airfare components, which means the bar for cutting to start remains high.”

The lack of consensus among asset managers and economists reflects divisions amongst the Federal Open Market Committee (FOMC) itself.

Eight officials have pencilled in two cuts this year, seven members expect one cut and four predicted none, although no-one is gunning for a hike. Chair Jay Powell has said one or two cuts are both plausible outcomes.

Xiao Cui, senior economist at Pictet Wealth Management, said the Fed has become extremely data dependent and that interest rate decisions will be driven by inflation and employment data. “The labour market is gradually balancing so the burden of proof lies on the inflation side,” she said.

Ahmed agreed: “We have seen the Fed completely abandon any kind of reliance on forecasting to set policy, so we continue to foresee the current data dependency in policy and markets to remain in place.”

What does this mean for bond markets?

Inflation remains stubbornly above target on both sides of the Atlantic, said Richard “Dickie” Hodges, manager of the $2.3bn Nomura Global Dynamic Bond fund, which “implies great caution on the part of central banks in moving to cut rates”.

“For now, as the market continues to guess when cuts will finally be delivered, bond yields will likely trade within a range (as they have for months now),” he said.

Hodges has invested in emerging market bonds, additional tier ones (AT1s) and convertible bonds, which will all “perform well when cuts are finally delivered” and “deliver positive yields in the meantime”.

Nomura also has call options in place on five-year US Treasuries. “The expiries are after the July and September Fed meetings, allowing us to capture some of the upside that would result from a (surprise) cut at that meeting. A form of insurance in case we are wrong,” Hodges explained.

The biggest risk facing bond markets is that the European Central Bank starts to walk back the two to three cuts that are priced in for this year, Hodges warned. “We therefore have credit hedges in place through credit default swap (CDS) index contracts, the notional size of which equates to 31% of the fund’s net asset value.”

Janus Henderson Strategic Bond and Jupiter Strategic Bond are the largest funds in the IA Sterling Strategic Bond sector, suggesting significant demand from investors.

Both funds are managed by experienced and respected teams. For instance, FE fundinfo Alpha Manager Ariel Bezalel has been at the helm of the Jupiter fund since 2008. Meanwhile, Janus Henderson Strategic Bond has been managed by John Pattullo since 1999 and Jenna Barnard since 2006, although Pattullo will retire in March 2025.

Paul Angell, head of investment research at AJ Bell, said the funds approach duration in a similar way.

 “Both funds are genuinely dynamic in their duration positioning, which is surprisingly rare when compared to most funds in the IA Sterling Strategic Bond sector.

“An appetite for duration risk was particularly evident during the years of low interest rates through the tail-end of the 2010s, when the managers of both funds were willing to buck wider consensus and take sizeable duration positions as part of a 'lower for longer' interest rate trade,” he explained.

“The funds have been similarly positioned in their duration positioning in recent years with both now operating near a maximum long, given their managers' concerns with economic growth and expectations around falling inflation.”

Trustnet asked experts about the differences between the funds, their personal preferences, and whether they would suggest any other strategic bond funds besides those two.

How do they differ?

Eduardo Sánchez, associate research director of fixed income, alternatives and multi-asset at Square Mile Investment Consulting and Research, highlighted Jupiter’s barbell approach, combining high-quality credits with highyield bonds.

In comparison, Janus Henderson Strategic Bond has reduced its position in high-yield credits. While this is a sign of prudence, it has caused the fund to underperform compared to Jupiter.

Performance of funds over 3yrs

Source: FE Analytics

Angell said: “Janus Henderson typically invests in what it sees as lower beta, defensive credits in sectors such as telecoms, software and healthcare, whereas the Jupiter team typically has a broader and more active approach to allocating across sectors, depending on where the managers see the best opportunities through time.”

In addition, Jupiter Strategic Bond allocates to emerging market debt, while the Janus Henderson fund avoids this part of the market.

Janus Henderson Strategic Bond has two-thirds of its portfolio invested in AAA to A-rated bonds, which is more than twice the allocation of the Jupiter fund.

Which fund do experts prefer?

While considering both funds to be “solid” options, Sánchez prefers Janus Henderson Strategic Bond. He highlighted the experience of the portfolio managers and their top-down macro expertise.

Yet, he also warned that they can “get stuck to their views”.

“When these go against market moves, the strategy can experience sustained periods of underperformance given their willingness and patience to allow their thesis to play out,” Sánchez said.

Performance of fund since launch vs sector

Source: FE Analytics

Jason Hollands, managing director at Bestinvest, also opted for the Janus Henderson fund. He emphasised the depth of resources available to the managers, including the ability to leverage a team of 20 credit analysts based in London and Denver.

He added: “The key Janus Henderson strengths in my view are the flexible approach and strong risk management mindset, which has helped the fund perform well across different market conditions.”

Yet, Sam Benstead, fixed income lead at interactive investor, favours Jupiter Strategic Bond, stressing the strong absolute and risk-adjusted returns since inception.

Performance of fund since launch vs sector

Source: FE Analytics

He said: “Bezalel has been happy to own fewer UK government bonds to achieve this, and currently has debt from the US, Brazil, New Zealand and Australia in his top 10.  Around a quarter of his fund is in sterling-denominated bonds compared with 37% for Janus Henderson.

“Both funds have a similar duration and amount invested in government bonds, but Jupiter has a higher yield because it owns more lower-rated bonds. Janus Henderson has 90% in investment-grade bonds and Jupiter has only around 40%.

“Investors looking for higher yields are better served by Jupiter, but the downside is that the bonds could perform worse if there is a recession and doubts over the credit worthiness of companies.” 

Are there better alternatives?

While Janus Henderson Strategic Bond and Jupiter Strategic Bond are the largest funds in the IA Sterling Strategic Bond sector, it is worth noting that they have both lagged behind their peer group over the past 10 years.

As a result, investors may prefer to bet on a strategic bond fund with a lower profile but a more appealing recent track record.

Both Hollands and Angell pointed to TwentyFour Dynamic Bond and Invesco Tactical Bond, which are both best ideas funds with flexible mandates.

Performance of funds over 10yrs vs sector and benchmarks

Source: FE Analytics

Angell said: “The managers of the TwentyFour fund have made the most of its dynamic asset allocation, as well as its holdings in high-yielding collateralized loan obligations, whilst the Invesco fund positioned well into the rising interest rate environment.”

As for Sánchez, Waverton Sterling Bond and Aegon Strategic Bond are his preferred choices alongside Janus Henderson Strategic Bond.

Performance of funds over 10yrs vs sector and benchmark

Source: FE Analytics

The Waverton fund, managed by James Carter and Jeff Keen, aims to offer investors a blend of income and capital growth with low correlation to equities and high-yield debt.

Sánchez said: “We believe this to be an attractive feature making the fund a core fixed income offering, providing diversification benefits in risk off periods.

“However, the fund is also flexible enough to manage credit exposure actively, including high yield credit and emerging markets debt, to deliver income. 

“In addition, we like the managers’ high conviction approach which emphasises a high-quality portfolio, with a minimum 80% exposure to investment grade rated bonds and a self-imposed minimum interest rate risk exposure of at least five years.”

The Aegon Strategic Bond fund is an active, unconstrained strategic bond strategy consisting of a dynamic blend of global fixed income instruments, constructed to maximise risk-adjusted total returns through the market cycle. It is co-managed by Colin Finlayson and Alexander Pelteshki.

Sánchez added: “The process relies on six areas of alpha generation: asset allocation, credit risk, duration, yield curve, stock selection and sector selection. The managers blend top-down views with bottom-up security selection, with alpha coming from the different factors in different ways depending on the market environment, seeking to exploit long term and short-term market opportunities and inefficiencies.

“This combines to make the fund a compelling option for investors seeking a blend of income and capital growth through a dynamically managed portfolio of fixed income assets.”

The Chinese equity market has been on a downward trajectory since early 2021 and despite short rallies in late 2022 and early 2023, and again this year, overall, the country has been mired in a savage three-year bear market. Consequently, the relative performance of Asian and emerging market equity funds has hinged upon their exposure to China.

Some funds such as Jupiter Asian Income have pulled out of China altogether while other managers have been ramping up their allocations as the stock market has gotten cheaper and cheaper. Managers at Matthews Asia, Federated Hermes and Fidelity International fall into the latter camp.

China vs Asian and global equities over 3yrs

Source: FE Analytics

Matthews Asia has been overweight China for three years in its Emerging Markets Sustainable Future and Emerging Markets Small Companies strategies. Portfolio manager Vivek Tanneeru said that after the sell-off in 2021, some Chinese companies became available at “very attractive multiples”, which is why he went overweight through stock selection.

The $3bn Federated Hermes Asia ex-Japan fund has stuck with China for even longer. Deputy manager Sandy Pei said the strategy has been overweight China and Hong Kong for as long as she can remember – apart from a brief period at the end of 2020 and in the first quarter of 2021 when the fund was underweight. The current allocation of 17% is close to the fund’s 20% cap on single country exposure.

The small-cap focused Fidelity Asian Values trust has an even higher allocation, with 31% in China and an additional 9% in Hong Kong-listed stocks as of 30 April 2024, the most it has ever allocated to those markets.

All three managers are overweight due to stock-specific opportunities. Pei said that “after a three-year bear market, everything is cheap in China”. Valuations are attractive across the board, encompassing both high quality and low quality stocks.

“We’re willing to pay £100,000 for a Ferrari but we’re equally happy to pay £5,000 for a Ford, so long as we’re getting a bargain,” she explained. “In China today there are lots of £100,000 Ferraris and £5,000 Fords.”

For instance, Tencent is the highest quality company in China and is trading on a valuation of 14-15x earnings, she said, as well as paying dividends and buying back its shares.

Pei also pointed to solid fundamentals. Last year Chinese companies achieved earnings per share growth of 15% yet the stock market de-rated due to negative sentiment. This year, she expects earnings to continue growing and hopes the stock market will not suffer any further de-rating. Many companies have strong balance sheets and cash flows, she said, and dividend yields provide downside protection.

Pei acknowledged that trade sanctions are an issue for some companies but said the market is broad, diversified and cheap, so fund managers can cherry pick companies with good risk/reward characteristics in areas where they wish to take on exposure.

Tanneeru agreed. He is “staying out of areas where there is obvious friction between the US and China”, but “embracing opportunities that come about because of these trade frictions”, such as China’s efforts to develop a localised supply chain.

He thinks that small and mid-sized companies focusing on mainstream technologies such as semiconductors will not be a focus for sanctions (which he expects to target large companies with cutting-edge technologies) and will have ample opportunities to grow their revenues.

Tanneeru views sustainability as an alpha generator in Asia and said China is at the front and centre of addressing climate change. The country has an 80-90% market share in the solar power supply chain and half of the world’s wind power capacity.

In electric vehicles, Chinese companies have taken over from Tesla to dominate the market, he said, and the world’s largest battery company resides in the country. China also has a colossal network of high speed trains which have been reducing emissions.

Asia is a world-leader in innovation and intellectual property, he continued, accounting for about two-thirds of global patent filings for the past few years. And in healthcare, “Chinese companies are among the world leaders in cutting-edge innovative cancer therapies”.

He also believes there is “discovery alpha” in finding Asian small and medium-sized companies, given 47% of the stocks in his target universe are not covered by sell-side research.

Tanneeru, who manages Matthews Asia’s Emerging Markets Sustainable Future, Emerging Markets Small Companies, Emerging Markets Discovery, Asia Small Companies and Asia Sustainable Future strategies, said his funds outperformed in 2020, 2021 and 2022 through diversified exposure to companies in different industries and factors.

The past year or so has been more of a struggle, when some stock selection decisions underperformed and China suffered a particularly sharp sell-off at the end of last year. “China accounted for well over 100% of the underperformance drag,” he said, given that performance was positive in other countries.

Going forward, China offers attractive growth compounding opportunities and attractive valuations, Tanneeru said, although he expects China’s recovery to be gradual.

The traditional investment portfolio, epitomised by the 60:40 split between stocks and bonds, has long been considered a safe and reliable strategy for balancing growth and risk. Either times were good and stock prices went up, or the economy faced troubles and investors flocked to the safety of bonds, pushing up their prices.

However, as 2022 showed, stocks and bonds tend to move together in periods of high inflation, significantly reducing bonds’ ability to diversify your portfolio when faced with an inflation shock. And it’s likely we will see more inflation shocks over the next 10 to 15 years, driven by three key factors. 

First, the era of globalisation that defined the past several decades appears to be fading. Rising trade barriers, tariffs, and protectionist policies are increasingly hindering the free flow of goods and services. At the same time, rhetoric around immigration has grown more heated and restrictive in many countries.

Second, labour shortages will become more pronounced as demographic shifts and changing workforce dynamics take hold. An aging population in many developed countries, coupled with a decline in birth rates, is reducing the labour pool.

Moreover, the lingering effects of the Covid-19 pandemic have accelerated shifts in employment preferences, further exacerbating labour scarcity.

Third, climate change is increasingly disrupting supply chains, reducing agricultural yields, and increasing the costs of raw materials.

This means investors will need to consider looking beyond public markets to help build diversified and therefore resilient portfolios. Here’s where alternatives come in.

Alternative investments are a broad category encompassing private equity and private credit, as well as hedge funds and ‘real assets’. Real assets which include real estate, infrastructure, transport, and timber, have historically demonstrated low correlations with traditional asset classes, offering investors broader diversification opportunities.

Real estate and infrastructure tend to be leased to occupiers or operators on long-term leases, with clauses that allow rental increases at certain time periods, either by a fixed amount, or in line with a price level.

These built-in escalation clauses allow cash flows to grow over time. This last quality is especially attractive in a world of more frequent bouts of unexpected inflation – inflation that would otherwise eat into investment returns.

The equity market is changing

In addition to the challenges posed by a changing macroeconomic environment, the investment landscape is also changing, with companies choosing to stay private for longer.

In 1999, the median age of a company at IPO was four years; by 2020 this had risen to 12 years. As a result, the number of publicly listed companies has been steadily declining.

Between 1997 and 2022, the number of US listed companies fell by more than 30%; in the UK it fell by almost 60%. If you only focus on traditional public markets, public equity now provides exposure to a dwindling proportion of the total equity universe. 

The flipside to a dwindling public equity universe is a rapidly expanding private equity universe. In fact, private equity now comprises 85% of the total investable equity universe and provides investors with access to some of the fastest-growing companies that are simply not available through public markets.

By investing in private markets, investors can participate in the value creation process and potentially capture outsized returns.

Gaining access

Alternatives have traditionally been the preserve of institutional and high-net-worth investors alone, but regulation is playing a key role in changing that. The introduction of frameworks such as the European Long-Term Investment Fund (ELTIF) and the UK Long-Term Asset Fund (LTAF) aim to provide retail investors with access to long-term, illiquid assets while ensuring appropriate investor protections.

As these regulations evolve, they may further democratise access to alternative investments and expand the opportunities available to investors.

Of course, investors must approach these assets with a clear understanding of their unique risks and considerations, such as illiquidity and the importance of manager selection.

But given the combination of broader diversification, protection against inflation, and access to a wider opportunity set, these investments are no longer just alternative. They’re essential.

Aaron Hussein is a global markets strategist at JP Morgan Asset Management. The views expressed above should not be taken as investment advice.

It is arguably more challenging for retail investors to spot mispriced opportunities. Unlike the most promising growth stocks, underappreciated companies rarely make the headlines, and when they do, it’s often for negative reasons.

Yet, they can be a cost-efficient way to make profits. For instance, buying shares in the then-unloved and therefore cheap Rolls Royce one year ago would have delivered better returns in sterling terms than investing in any of the expensive and well-known Magnificent Seven, including Nvidia.

Likewise, Marks & Spencer’s recovery has delivered returns exceeding those of most US artificial intelligence beneficiaries, and at a cheaper price.

Performance of stocks over 1yr (in sterling)  

Source: FE Analytics

So how do professional contrarian investors identify these turnaround stories?

According to FE fundinfo Alpha Manager Alec Cutler, who runs Orbis Global Balanced and Orbis Global Cautious, there are plenty of signs in publicly available information that can suggest an opportunity.

These signs could include fearful headlines or headlines suggesting hope after a long period of dread, broker commentary that misunderstands the business, or commentary starting to connect the dots after a long period of not getting it, a falling share price, or a share price that stops declining even when the company reports tough conditions.

He said: “As a contrarian, you never really know what the catalyst is going to be. You try and find things that are cheap, where you can see a contrarian case. But you never really know what the thing will be that shifts the market’s view.”

An example Cutler gave is electricity infrastructure stocks. While he did not know what the catalyst would be at the time of purchase, they benefited from the artificial intelligence rally, as this technology requires a lot of electricity.

“You can pay up for Nvidia, or you can buy an electric utility of all things. It’s pretty cool to see that,” he said.

However, Dmitry Solomakhin, portfolio manager of Fidelity FAST Global, warned that contrarian investing is a time-consuming process with no “hard and fast rules”.  

He structures his approach in three steps. The first is to find a business that is fundamentally of good quality but may have been mismanaged or gone through operational or financial issues. Then it is important to ensure the company acknowledges these issues and is willing to address them. Finally, the management and the board need to be capable of executing the necessary changes.

Rolls Royce, which remains his largest holding today, “was lacking cost and financial discipline, but it is now being fixed”, Solomakhin said. “There have been very significant improvements in cash flows and financial returns and it now in an even stronger competitive position today.”

Due to the nature of contrarian investing, Tom Matthews, co-manager of the JOHCM UK Dynamic fund, emphasised that this investment style requires both discipline and patience.

Discipline is needed when selecting which assets have the potential to be turned around. Moreover, investors must ensure they are paying the right price for the expected future cashflows, with an “acceptable margin of safety on top”.

As for patience, he believes investors should hold back until a new management team reveals a strategy focused on unlocking value and the benefits of the turnaround start to accrue to shareholders.

Matthews added: “At UK Dynamic, our holding period for stocks is often well over five years. Good things do come to those who wait!” 

What financial ratios can investors use?

One of the first things James Henderson, portfolio manager of Henderson Opportunities and Lowland Investment Company, considers when looking for a mispriced opportunity is a company’s sales volumes.

 “Firstly, it’s a good indicator of size – where market cap tends to fluctuate, sales volume provides us with a solid number to start from. It is particularly important for us because it gives us an indication of existing demand,” he explained.

“When a company is in trouble, it might not be making a proper margin on its sales, or it might even be making a loss, but the sales number tells us what scope there is for improvement of those margins once other issues have been addressed. This helps focus a company on the changes they need to make to return to proper profit margins.”

The main metric Henderson uses is the enterprise value-to-sales ratio, which indicates how much it would cost to buy a company in the context of its sales.

Debt is another factor that Henderson considers.

He said: “Often in these cases, debt is too high so we need to understand how it is going to be paid down. We then need to assess whether a company is going to invest in its own products to improve their offering sustainably. So, we look at the debt position when we make the initial investment, and we have to see a path from there to bring it down.”

To identify contrarian opportunities, Solomakhin relies on free cash flow, which is a measure of profitability representing the remaining cash after capital expenditures have been subtracted.

He said: “I look at the normalised free cash flow the business should be able to generate three to five years out if the turnaround is successful. If it offers over 15% free cash flow yield to enterprise value on these normalised numbers, it is quite attractive.”

Beware of value traps

Contrarian investing is not without risk as turnaround stories might never materialise.

Mark Landecker, portfolio manager of Nedgroup Contrarian Value Equity, explained:  “Value traps occur when a company’s cashflows fail to inflect. There are two clear cases when this can occur.

“First, a company’s end-markets are too structurally challenged and its revenues and cashflows collapse faster than it is able to re-allocate capital to new, higher returning parts of the business.

“Second, a company’s starting debt position or transformational capital investment requirements are too high, meaning that cashflows never reach inflection point.

“Any combination of these can lead to the equity value of a company being significantly diluted as investors are required to inject further capital.”  

Solomakhin added that misses are part and parcel of investing in contrarian opportunities.

“Given that I only look at challenged businesses with turnaround potential, any mistake that I make will almost certainly be a value trap. If I am good, then my single stock ‘hit rate’ will be around 54-55%, which means in 45-46% of cases I will be involved in value traps,” he pointed out.

An example of a stock that did not live up to his expectation is Tripadvisor. He explained that the company used to have a strong competitive moat due to the large user base and a database of consumer reviews. However, it then tried to compete directly against its own customers, such as Booking.com or Expedia, and failed. Moreover, the company’s competitive moat has weakened over time.

An increasing number of financial advisers are working with discretionary fund managers (DFMs) to build bespoke model portfolio solutions (MPS) – as opposed to using off-the-shelf funds for their clients.

Just under a third (31%) of financial advisers responding to a survey from FE fundinfo said they had implemented a custom MPS in partnership with a discretionary fund manager. Another 13% of respondents expect to start using bespoke solutions in the next one to three years.

There remains a cohort of advisers who are unconvinced about the benefits of bespoke solutions, however. A fifth of respondents said they would not use a custom MPS while an additional 36% said they were unsure.

Tax changes, meanwhile, have prompted almost a fifth (19%) of advisers to implement a customised MPS. The capital gains tax allowance has been gradually reduced over the past few years and stands at £3,000 for the 2024-25 tax year.

Other than investment performance, advisers said their priorities when choosing an MPS were: integration with platforms and research tools (cited by 70% of respondents); clear, transparent and client-friendly reporting documents (61%); contact with the investment team (58%); and choice of term lengths and risk profiles (57%). A fifth of financial advisers said they wanted to have input into their DFM’s investment strategy.

Advisers ranked asset allocation as the most important factor for selecting a customised MPS. They also prized fund analysis, portfolio and governance, reporting and communication, portfolio design and analysis, and operational excellence and trade validation.

Ed Margot, head of client investment strategy at FE Investments, said: “The rules of investing and financial advice haven’t changed – empathy and communication are still highly prized. An MPS that can get the message across, can support the financial adviser, and deliver positive outcomes across term length and risk level, is a valued strategic partner.”

There is growing scepticism among financial advisers’ clients about the validity of sustainable investing. This year, 33% of advisers said their clients were unconvinced by environmental, social and governance (ESG) investing, compared to just 11% in FE fundinfo’s 2022 survey. This considerable shift could reflect concerns about greenwashing and/or disappointing investment performance.

Meanwhile, advisers were optimistic about the Financial Conduct Authority’s Consumer Duty, which was introduced on 31 July 2023, with 45% of respondents saying it would have a positive impact on advice provided to clients.

As a result of Consumer Duty, advisers are putting more emphasis on evidencing that clients’ needs and outcomes have been met and are spending more time on suitability assessments and client communication.

Although most (82%) of respondents said Consumer Duty has not changed what they look for in a centralised investment proposition or MPS – for the 18% of advisers where it has been an influence, they are now focusing more on value for money and fees.

FE fundinfo’s survey was conducted between November 2023 and February 2024 and was completed by more than 160 financial advisers.

A change of manager and renewed interest from shareholders have propelled Majedie Investments from a discount in the high twenties in 2022 to just 11% today.

Since the start of last year, the investment trust has made 31.3% on a total return basis, propelled by its discount narrowing, making it the top performer in the IT Flexible Sector.

The trust appointed Marylebone Partners as its investment manager in January 2023 and switched to a ‘liquid endowment’ investment strategy, with a return target of inflation plus 4%. The portfolio is split between external managers (56% of the trust), direct investments (24%), hard-to-access special investments (10%) and finally, bonds and cash (10%).

Performance of fund vs sector and indices since January 2023

Source: FE Analytics

Majedie recently announced its results for the six months to 31 March 2024, during which time its discount narrowed from 18.7% to 7.6%, although it has widened since then. The trust achieved a net asset value total return of 13.3% and a shareholder total return of 28.1% during the six-month period. Its total assets rose to £165m.

Given the discount has already come in substantially, Trustnet asked experts whether investors have missed the boat or if the trust still represents good value, and if there are any other similar multi-asset trusts that investors should consider instead.

Juliet Schooling Latter, research director at FundCalibre, said Majedie is now trading “at the slightly more expensive end relative to its long-term history” but for investors with a long time horizon, it is “likely to still represent a strong opportunity”. She also believes there are catalysts for the discount to continue narrowing.

“The whole investment trust sector has been considerably affected by worsening financial conditions and technical issues over the past few years, resulting in an almost synchronous widening of discounts. If factors that helped cause this decline, such as higher rates, inflation and less investor confidence, were to improve, and assuming the trust's underlying holdings continued to perform, there is no reason there might not still be a healthy upside for investors,” she said.

“Should wider financial conditions improve, coupled with the implementation of a promising new strategy, we believe there is still plenty to play for at Majedie.” 

William Heathcoat Amory, managing partner at Kepler Partners, concurred. “We think the first year of the manager’s tenure represents a solid foundation for showcasing the potential of a liquid endowment-style model. If the managers deliver in line with their objectives, there’s scope for the current 11.4% discount to narrow further.”

Heathcoat Amory views Majedie as a “return-seeking diversifier” because it is correlated to stock markets, but aims to have lower volatility than equities. “Majedie has the potential to provide exposure to genuinely differentiated sources of returns,” he said.

Another differentiating factor is its fee arrangements. Marylebone Partners receives a flat fee based on the trust’s market capitalisation, not its net asset value, so it’s interests are aligned with shareholders.

James Carthew, head of investment companies at QuotedData, was less enthusiastic. “Majedie was struggling a bit before Marylebone Partners was appointed. It had created a great deal of value by establishing Majedie Asset Management (MAM), but its sale to Liontrust Asset Management did not end well (it exchanged its stake in MAM for Liontrust shares that then fell in value) and the funds that it was invested in were underperforming their benchmarks,” he recalled.

When asked to suggest alternatives, Carthew and Schooling Latter both pointed to RIT Capital Partners, which invests third-party funds and direct equities like Majedie, and has some private market holdings to boot.

Carthew said: “RIT Capital is trading on a discount of 27.2%, which reflects some investors’ (irrational in my view) dislike of its private equity holdings. RIT is committed to reducing the exposure to this part of the portfolio and is keen to narrow its discount.

“As a trade, to me RIT Capital might be a better bet. Majedie has had a good run over 2024, but RIT could catch up as it achieves some disposals from its private equity portfolio at premiums to carrying value (past disposals have followed this pattern).”

Schooling Latter pointed out, however, that “RIT’s performance has been less impressive with the trust on one of its widest discounts in its history. Poor sentiment and share price weakness have arguably gone too far, and it does certainly look cheap.”

Meanwhile, Majedie’s chairman Christopher Getley was bullish about the trust’s ability to continue its strong run, noting the “breadth of ideas” that have contributed to recent outperformance.

“Returns have been generated from positions in areas as varied as biotech, software, Chinese and copper stocks, as well as credit opportunities,” he said.

External managers made the biggest contribution to performance in the six months to 31 March, returning 9.1%, led by the Helikon Long/Short Equity fund. Other external managers include biotech specialist Paradigm BioCapital, Praesidium Strategic Software Opportunities, deep value manager CastleKnight, and several managers with expertise in stressed or distressed credit, including the Millstreet Credit fund.

Dan Higgins, chief investment officer of Marylebone Partners, described the trust’s investment philosophy as long-term fundamental investing, taking advantage of market inefficiencies and embracing alternative return sources.

“I don’t think I’ve ever used the word ‘differentiated’ as much as in the past 18 months,” he admitted. The trust “frankly only has the right to exist if it is offering something truly differentiated that shareholders can’t get elsewhere.”

Monthly real GDP is estimated to have shown no growth in April, the Office for National Statics (ONS) has announced today.

Following a stunted 0.4% uptick in March, experts are now blaming the weather for the disappointing figure of last month.

Lindsay James, investment strategist at Quilter Investors, said: “Persistent rain has kept consumers from spending and caused economic growth to grind to a halt, with sectors such as retail, construction and pubs all severely impacted”.

AJ Bell head of financial analysis Danni Hewson also wasn’t surprised by the reading, as ‘rain stopped play’ for builders, who shunned roof tops, as well as for shoppers, who deserted high streets in favour of their warm, dry sofas.

The figure hides a weak outcome for manufacturing, construction and industrial production, which worries Hewson. Output has fallen for three consecutive months, with “little surprise” that so much focus has been placed on housebuilding by political parties, all hoping their policies can deliver a sustained growth spurt for the UK.

There also was a stronger-than-expected services sector, however, which was possibly driven by ongoing wage growth, according to Neil Birrell, chief investment officer at Premier Miton.

But this slowdown won’t be moving the needle at the next meeting of the Monetary Policy Committee on 20 June.

“No one set of numbers will drive the Bank of England’s interest rate decision, but policymakers will now be looking to inject some stimulus as soon as they feel it is safe to do so," he said.

James echoed this, noting: “Wage inflation remains elevated and consumer price inflation is expected to tick higher in the coming months, and thus the Bank of England won’t want to deviate from its strategy just yet.”

On a positive note, the weather has improved of late, likely boosting May’s reading, according to James. Hewson also registered “a frisson of excitement in the air” that big events such as the UEFA Euro Cup and Taylor Swift’s Eras tour will help deliver “a decent boost” to the economic picture by the time we get the half-year result.

It may have flown under many investors’ radars, but the best-performing investment trust so far this year specialises in private space tech businesses.

Since the beginning of the year, Seraphim Space has surged by 94.8%, nearly 40 percentage points ahead of the runner-up, Foresight Sustainable Forestry Company.

While Seraphim Space’s performance in 2024 has been stellar, it follows two consecutive challenging years, with the investment trust’s share price falling 64% in 2022 and 23.9% in 2023.

Performance of investment trusts YTD vs sector

Source: FE Analytics

Therefore, this outperformance is more of a recovery, as investors are warming up to riskier assets.

Rob Morgan, chief investment analyst at Charles Stanley, said: ”The NAV [net asset value] has remained much more stable, illustrating that sentiment around the perceived value of the underlying assets, which are all private companies, has varied markedly over this time and accounts for most of the change in the share price.

“One of the main factors affecting the trust, as well as many others in the growth capital sector, is rising interest rates. This makes the cost of funding higher, as well as depressing the value attributed to future income streams. This double whammy has affected a lot of pre-profit company shares in both public and private markets.”

As a result, the investment trust is still down 34.3% since its launch and had even lost three-quarters of its IPO price by summer last year.

Performance of investment trusts since launch vs sector

Source: FE Analytics

Winterflood Securities believes that Seraphim Space’s sell-off has been overdone and added the investment trust to its recommendation list at the beginning of this year.

Shavar Halberstadt, equity research analyst at Winterflood, said: “Our thesis at the start of year was relatively straightforward: Seraphim Space benefits from structural tailwinds in the shape of rising spending on defence and climate monitoring solutions.

“It had been de-rated to a level that we viewed as preposterous, with a share price essentially implying that all but its top two holdings were worthless. This despite tangible progress at the company level, with multiple holdings awarded large government contracts and partnering with established aerospace and defence players, indicating a stickiness of revenue that often eludes early-stage companies.

“Furthermore, additional details on profitability of large holdings were expected and delivered in March, and the fund would be a general beneficiary of rate cuts and IPO green shoots. Substantively all of these dynamics played out as expected over the year to date, and the market concluded, rightly in our view, that Seraphim Space had been woefully oversold.”

Charlotte Cuthbertson, co-manager of MIGO Opportunities Trust, who holds shares in Seraphim Space in her own investment trust, added that half of the portfolio companies are either profitable or nearing profitability.

Can Seraphim Space soar even higher?

Although some shareholders might prefer to cash out after such a strong surge, Winterflood assessed in March that Seraphim Space had more room to run. This was based on guidance on profitability, discount metrics, and portfolio company fundraising and operational progress.

Halberstadt said: “Listed portfolio company AST SpaceMobile is up +250% over the last month, following a $100m partnership with Verizon; portfolio company Voyager Space saw Mitsubishi join its ‘Starlab’ effort to build the next International Space Station; funding rounds for ICEYE and Xona were oversubscribed; while Tomorrow.io was awarded a $10m DoD contract, amongst other developments. Thus, we believe Seraphim Space continues to be well positioned.”

Yet Darius McDermott, managing director of Chelsea Financial Services and FundCalibre, does not expect to see returns of that magnitude going forward, as the “easiest money” has probably already been made. However, he noted that as the trust is still trading at a discount of around 30%, there is still potential for further narrowing over the longer term.

Should you get on board?

Although space-related technology is an exciting area and represents a new frontier of growth potential, Morgan emphasised the high-risk profile of Seraphim Space.

Therefore, he recommended that investors adopt a very long-term horizon with Seraphim Space and size it appropriately in a portfolio.

“This holding should very much be a satellite position at the very fringes of an investor’s universe (no puns intended!) It’s esoteric nature, concentration in both theme and number of stocks makes it more akin to holding an individual share than a diversified fund. That said, it could be an interesting long-term investment and it captures the imagination – something to get kids who are interested in space also interested in investing perhaps.”

James Carthew, head of investment companies at QuotedData, agreed and added that the trust is a unique proposition, even among space funds.

He said: "The few other space funds that investors can access tend to be more exposed to big aerospace and defence stocks that have a side-line in space, whereas Seraphim is more focused on unlisted companies that would be impossible for most investors to access any other way. It is a diversifier, therefore, but it has been volatile and that may continue."

Due to the risky nature of the investment trust, McDermott called on investors to do a lot of research on the trust’s underlying holdings if they are considering buying it.

He stressed that space tends to be highly capital intensive and difficult to make returns from.

“This trust is highly concentrated and much of its performance will depend heavily on its largest positions in ICEYE, D-Orbit and All.SPACE,” he said.

“The environment has become much tougher for earlier stage businesses in the higher interest rate environment. The trust is also quite small and illiquid. Given it is mostly invested in private companies, the NAV is highly uncertain.”

Finally, Cuthbertson said she would look to top up her position if the share price weakens from here.

She concluded: “Seraphim Space gives investors exposure to fast-growing companies in the space sector. Space is becoming increasingly important due to its growing impact on critical industries such as communication and defence. Its exposure to defence is particularly pertinent in the current geopolitical environment where defence budgets are increasing worldwide.”

People keep talking about when the UK market is going to turn, but very few realise it probably already has. There have been signs particularly in the small-cap arena, as the asset class has silently climbed up the 2024 performance table and leapfrogged to the very top earlier this month.

Jonathan Brown and Robin West, managers of the £146m Invesco Perpetual UK Smaller Companies trust, have been patiently watching this trend since the autumn of last year, when they started to crank up the gearing on the trust from 0%, where it has been since 2011, all the way to the current 5%.

Their decision to take up more debt and increase the exposure to the market was based on a combination of favourable conditions measured through multiple lenses, including valuations, momentum and earnings momentum, economic outlook and geopolitics.

“Valuations had looked attractive for a long time and we felt inflation was about to peak. Then, we started to see the beginnings of takeover activity, so we put on 1% to 2% and waited to see how the market would fare,” West said.

“Our confidence has increased since then and we’re now geared between 5% and 6%.”

The pickup in market momentum over the past quarter has been a reason for the increase in optimism, but the most convincing parameter for the managers was valuations.

“We looked at the valuations of smaller companies in the past 30 years. When they traded on similarly low multiples as they do today, the average return was 19% over the next 12 months and 36% over the next two years,” West continued.

On top of that, the UK is one of the biggest underweights globally and is “definitely on sale” at the moment, with the MSCI UK index more than 30% cheaper than the MSCI World index, as the chart below illustrates.

UK price/earnings relative to the world

Source: Factset, MSCI, Principal Asset Management. Data as of December 31, 2023.

This value is not only clear to the managers but also to private equity and corporates, which have been snapping up bargain after bargain in the UK. It is also apparent to other investors too, they noted.

“At the end of March 2024 for the first time in the past two years, the institutional trading system at Merrill Lynch went from showing the UK as a net sell to having net buyers,” West said.

“That's a reason why we think the discount that the UK is trading at will close, and that was one of the key factors behind our decision to introduce gearing.”

To those that aren’t convinced the market has already turned, Brown suggested looking at the performance of the FTSE 250 index.

Performance of index over 1yr

Source: FE Analytics

It bottomed at the end of October last year, but has recovered over 25% since then.

“It's not a question of when the market is going to turn, it's already turned thanks to better sentiment about inflation and interest rates, the cheapness of the UK and takeover bids, whose cash gets reinvested back into the market as well,” he said.

“With the economic situation further improving and the future interest rate cuts, we can see a push even further. That's not well understood by investors. After a period of being in the doldrums, the market has had a very strong six or seven months, and for where valuations are, it's got a very long way to run still.”

Our fund’s exposure to bonds rated B and below has rarely been lower. This part of the market is a natural hunting ground for us, given its explicit mandate to deliver high income. Yields remain higher here than in BB and above. So, why steer away from it?

There are two sides to this. One is the presence of attractive alternatives, both in outright yields and on a risk-to-reward basis. With the rise in interest rates, yields on higher quality bonds, in BB and investment grade, have been good. There is no need to chase income.

The flip-side of this positive is a concern that the yields offered on assets in the lower part of the credit quality spectrum do not justify the risks.

Source: Invesco

Competing forces - growth versus re-financing risk

As shown in the chart above, our exposure to lower quality bonds has continued to fall in the past couple of quarters, despite this market segment being bolstered by improved growth data and rising hope of a soft economic landing. High yield bonds have outperformed investment grade.

Source: Invesco

Growth is good for high yield. High yield companies tend to be more indebted and so have higher debt-servicing costs relative to their earnings. This means they are more sensitive to changes in earnings. As an asset class, high yield is more correlated with equities than more rate-sensitive investment grade and government bonds.

With earnings holding up well across the corporate sector, commonly followed metrics for high yield, such as the ratio of debt to EBITDA and interest coverage, are looking healthy. Default rates and default expectations have also remained within the normal range.

Source: Invesco

My reason for concern about lower-quality credit is not that I see an immediate risk of an earnings recession. It is to do with re-financing risk.

For several years before 2022, ultra-low interest rates enabled bond issuers to finance very cheaply, with historically low coupons.

Source: Invesco

This changed in 2022. Higher interest rates meant the high yield bond market had to adjust to remain competitive. The price of these low coupon bonds fell below par and the coupons on new bonds began to rise.

New bonds have to offer a yield that is competitive with the secondary market. At current market yields, that means coupons on new bonds, issued at par, will have to be substantially higher.

The charts below compare the weighted average coupon of high yield bonds with the market yield. In both the European and the dollar markets, coupons are substantially below the yield. Unless the yield drops, issuers will have to pay more coupon to close this gap.

Source: Invesco

Source: Invesco

Spreads are not unusually high. In fact, they are well below average. As the chart below reminds us, the dominant driver of today’s higher yields are interest rates.

Source: Invesco

While interest rates remain high, high yield issuers face a re-financing challenge. According to Bank of America research, 25% of the US high yield market will be free cash flow negative if they have to carry out the next two years of re-financing at current rate expectations. In other words, these companies’ balance sheets don’t work unless the Federal Reserve cuts more than is currently priced.

Taking a step back, this environment is a little counterintuitive. Better growth conditions pose a threat to the high yield market. Higher earnings will increase the ability of corporates to service their existing debt, but if interest rate expectations stay high (in part because of better growth), then many will struggle with re-financing.

What this means for my portfolio

Monthly Income Plus is built on fundamental credit research and bond selection. I am wary of the re-financing risk faced by high yield and I have reduced exposure to that part of the market. But that doesn't mean I will avoid it altogether.

These risks may offer opportunities at the individual company level. High yield companies, as a whole, will have to pay more interest. Some companies will struggle in this environment.

I will be aiming to avoid them through careful credit assessment. But others will be able to manage. That a company has to pay more to its creditors is not necessarily a bad thing, especially if you’re the creditor.

We have already seen good companies coming to the market and paying coupons several percentage points higher than when they borrowed a few years ago. We’ve been happy to invest and to take those coupons.

Rhys Davies, manager of Invesco's Monthly Income Plus fund. The views expressed above should not be taken as investment advice.

More than half of the world’s population will head to the polls in 2024 with the US and UK among numerous countries with potential political upheaval in the remainder of the year.

It is a tricky period for politicians, according to Jean Boivin, head of the BlackRock Investment Institute, who said voters are “expressing frustration” with the ongoing rising cost of living around the world. Yet a change in government may not be the catch-all solution, he warned.

“We see many incumbent leaders or challengers constrained in any response, notably due to high public debt somewhat tying their hands,” he said.

Taking the US as an example, Boivin noted both incumbent president Joe Biden and former president Donald Trump – who will do battle once again in the upcoming election – swelled fiscal deficits to stimulate growth during the Covid pandemic, leaving them somewhat hamstrung.

“No matter who wins, deficits are set to remain historically large. Neither is charting a path to a sustained reduction in deficits,” he said.

In fact, both presidents could increase inflation through their measures. Trump has proposed a 10% levy across-the-board tariff for imports and a 60% tariff on Chinese goods, while Biden is expected to keep his current protectionist policies, like higher tariffs for some sectors, industrial policies favouring domestic production and the use of export controls.

Meanwhile, changes to immigration would have implications for inflation as the US faces a shrinking working-age population, said Boivin.

“On energy policy, the Inflation Reduction Act (IRA) and its low-carbon transition investment incentives are in focus. If Republicans control Congress, they may revise or repeal parts of the IRA to fund tax cuts.”

It is for this reason he believes the Federal Reserve will need to keep rates high for longer, as increased deficits should lead to persistent inflation.

“We think that, and markets needing to absorb large bond issuance, will spur investors to demand more term premium, or compensation for the risk of holding long-term US bonds,” he said.

However, the firm is bullish on the US equity market, maintaining its overweight position, although Boivin added that he will “eye the key policy areas of the presidential election”.

“US stocks notched fresh highs last week and are up nearly 13% this year,” said Boivin, although all eyes are currently on whether the Federal Reserve will cut rates in the near future.

“We expect key data – like last week’s US payrolls and this week’s US CPI – to drive Fed decision-making. Even with easing likely on the horizon for the Fed and already underway elsewhere, this is not your typical rate-cutting cycle, in our view.

“The red-hot US payroll data reinforces what an unusual environment this is for the start of a global easing cycle. We don’t see central banks cutting far and fast.”

Away from the US, the Indian election threw up a moderate surprise. Although prime minister Narendra Modi secured a third term, he had to enlist help through a coalition after failing to win a majority.

“That could slow some reforms – but it doesn’t change the long-term benefits from the confluence of mega forces, like a young population and digitalising economy,” said Boivin.

In Europe, despite the resurgence of right-wing parties in recent years centrist parties are still expected to keep control of the European Parliament, although he questioned whether certain governing parties could struggle,  such as French president Emmanuel Macron who called a snap election in France after his party suffered a big loss.

In the UK meanwhile, a decisive victory for one party could “create the political breathing space to address the UK’s structural issues, such as weak productivity growth”, said Boivin.

“Beyond potential policy changes, a July election could allow the Bank of England to start cutting rates once it’s over – a reason why we like UK bonds. On a strategic horizon of five years and longer, we like government bonds in the euro area and UK on expectations for lower interest rates.”

Making a career switch is a brave thing to do, especially if taking the plunge and becoming self-employed. There are a litany of things to think about but your pension is probably not one of the first things that comes to mind.

After an office-based career spanning two decades, Louise decided to change direction in her forties and retrain as a yoga teacher, but having made the switch she is now wondering how best to save for her retirement given her relatively-new self-employed status.

She is already ahead of the curve in planning for her future, given that only 20% of self-employed people are saving into a pension plan, according to Hargreaves Lansdown. Furthermore, Louise is fortunate enough to have a final salary pension fund, having previously worked in the public sector, as well as a defined contribution pension fund from her previous full-time private sector job.

She now supplements her teaching income with short-term corporate contracts and these part-time jobs come with pension payments. This has left Louise with several different pension pots and she is considering how best to amalgamate and manage them.

How much should Louise save into her pension?

Lena Patel, a director and chartered financial planner at ISJ Independent Financial Planning, suggested that Louise start by considering what income she needs in retirement, what kind of lifestyle she wishes to lead, and when she intends to retire.

She might prefer to have a phased retirement, continuing to work part-time to supplement her income, Patel added.

Rob Morgan, chief investment analyst at Charles Stanley, suggested one way of doing this is to use an online pensions calculator to help decide how much to save and to see how increasing or decreasing contributions would impact the overall pot.

The calculator will work out what level of retirement income Louise has already accumulated in her existing pension funds and state pension, and how much more she needs to save to meet her goals, he explained.

To give some context around what sort of annual income Louise might need in retirement, the Pensions and Lifetimes Savings Association (PLSA) states that a single person would need £14,400 for a minimum standard of living and £31,300 annually for a moderate lifestyle, including owning a car and having a fortnight’s holiday abroad each year. The full state pension of £11,500 for 2024-25 goes some way towards this.

As a recently qualified yoga teacher, Louise is still building up her business, so can only afford to put a small amount aside each month to save for her retirement, but she anticipates that her monthly contributions will grow over time.

With that in mind, Patel recommended considering other savings vehicles such as ISAs to give Louise the flexibility to access her savings in case of an emergency. ISAs do not have the same tax benefits as pension funds but that is less meaningful for very small amounts and liquidity might be more important, she noted.

Morgan countered that the tax relief on contributions makes pensions an attractive way to save. “For basic-rate taxpayers, the government adds 20% to whatever you contribute. If you’re a higher-rate taxpayer, you can claim up to an additional 20% through a tax return,” he said.

“In addition, you’ll benefit from tax free returns while the pension fund invested, only paying tax when you take money out. Currently the first 25% is tax free up to a certain limit.”

What’s the best way to consolidate various pension pots?

Experts recommended that Louise consolidate her defined contribution pension pots from various employers into one place to make it easier to manage them and ensure nothing gets lost. They agreed that she should keep her final salary pension untouched, however.

Morgan said: “The transfer starts with an application process to the provider you want to transfer to, and they do the legwork for you from there.”

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, advised that “before consolidating, it is important to make sure you aren’t losing any important benefits such as guaranteed annuity rates or landing yourself with high exit penalties”.

The next question is where to pool Louise’s retirement savings. Patel said the simplest solution might involve moving everything into one of the workplace pension schemes that Louise already has, although she should check that the risk profile and investment strategy of the scheme are suitable. Morgan said she might consider consolidating into the best value plan.

Another option would be opening a self-invested personal pension (SIPP). SIPPs give people control over how their retirement savings are invested, but they may only suit people who want to proactively take investment decisions and who have the time and inclination to do their own research.

Louise does not have any prior investment experience and she is looking for some guidance. Therefore, a ready-made fund solution, either within a SIPP or another type of personal pension, might be more suitable, Morgan said.

Morrissey added: “In terms of choosing where you are going to consolidate your pension then it’s important to consider factors such as cost, investment choice, service and support. SIPP/pension providers will offer fund options aimed at those who are unsure about where to invest.

“Ongoing support is hugely important in terms of helping people build confidence in managing their pensions. Some providers will offer webinars, articles, research and even access to financial advice if required.”

How should the pension portfolio be invested?

Patel recommended a high allocation to equities to maximise returns, given that Louise has at least a decade to ride out stock market volatility. She is in her mid-to-late forties and would not be able to access her pension until the age of 57.

Morgan concurred: “My suggestion here is not to be too risk averse. Maximising exposure to equity markets should build wealth better than other lower risk areas, albeit at the expense of greater shorter-term ups and downs. Given the long time horizon until retirement age and continued regular contributions, it’s worth embracing that."

Morgan also suggested delegating asset allocation decisions to a multi-asset fund that covers all the major markets and regularly rebalances.

If you would like your financial situation reviewed by experts, please get in contact with the Trustnet team. You can reach us by emailing editorial@fefundinfo.com.

The ongoing battle for technological innovation between the US heavyweights and their Chinese counterparts is something that will go on for decades, according to Fidelity China Special Situations manager Dale Nicholls.

There have been myriad concerns over the trade war between America and China, causing the manager to work with Fidelity International’s legal and regulatory team to understand potential policies that could come into place.

“In general, we believe that China would be keen to have better relations with the US, and the greater dialogue between presidents Xi Jing Ping and Joe Biden is encouraging,” he said in the trust’s full-year financial results.

“There is no denying, however, that strategic competition between the two countries is going to be a factor that will be with us for decades.”

Mike Balfour, chairman of Fidelity China Special Situations, added this was the major risk to the board’s “cautiously positive outlook” on the country.

“US relations with China have stabilised somewhat, although increasing tariffs and trade restrictions remain a concern. There is a significant risk that relations could worsen and the US may implement measures such as raising tariffs on imports from China to 60%, which would significantly harm Chinese exporters, depress global trade and exacerbate US inflation trends,” he said.

This increase to 60% has been mooted by former president Donal Trump, who is contending to be re-elected later this year, although Nicholls noted that sticky inflation could make this a difficult policy to achieve.

Even if there are further trade sanctions on the way, the country has been “dealing with US tariffs for years” and companies are “well aware of the prospect that they might be higher in the future”.

Despite the potential trade tariff headwind, both the manager and the chairman were “cautiously optimistic” on the outlook for the world’s second largest economy.

For example, Balfour highlighted a strong March reading of the purchasing managers index (PMI) – a measure of the economic health of the manufacturing sector. It moved into positive territory for the first time in six months and was the highest it has been in a year.

Nicholls added consumer confidence could be picking up, having been weak for some time, with deposit growth – the amount people are putting away into savings – slowing, suggesting they are spending more.

“Bank deposits saw huge growth during Covid and household balance sheets are very strong, so there is spending power available, but people need confidence to unlock it,” he said.

Although China’s economy is forecast to slow from its current growth rate of around 5%, Nicholls added that it is expected to remain one of the fastest growing major economies in the world.

“Its gradual shift towards consumption-driven growth, fuelled by an expanding middle class, rising incomes and technological innovation, provides a solid backdrop for companies to thrive,” he said.

At a market level, he noted valuations are at “particularly low levels” and there should be “many opportunities for investors to participate profitably in the recovery”.

These views came in the trust’s full-year report in which it made a total loss of 16.3% for the financial year ended 31 March 2024. This was slightly ahead of the MSCI China Index’s 18.8% fall.

Consumer discretionary stocks were a big relative winner, with four of the firm’s top 10 best performers coming from the sector, including Hisense Home Appliances Group.

“While the ‘white collar’ area of the consumer market has had a tougher time, the lower end has been much more resilient, supported by government stimulus in the case of home appliances,” said Nicholls.

Industrials such as logistics firm Sinotrans also helped the portfolio to beat the benchmark over the past 12 months.

Energy stocks, which make up 2% of the trust, were the biggest gainers in absolute terms, while laggards came from financials and materials, where the trust is overweight, as well as its 3% holdings in the property sector.

He also commented on the trust’s gearing position, which peaked at 25.5% in August last year. “Gearing will naturally be higher when that opportunity set is plentiful and vice versa. Given the significant swings in sentiment towards the China market, we tend to see better risk-reward prospects when sentiment is weak and valuations are lower,” said Nicholls.

Currently it stands at 20.8%, which he noted was “a notable increase since late 2021” and reflects the “compellingly attractive valuations of the Chinese market”.

It was a detractor to performance last year, however, contributing a loss of 3.75 percentage points over the 12 months to March 2024.

Edinburgh-based Baillie Gifford has had a torrid time of late, with just one portfolio among its 46 funds and investment trusts making a top-quartile return in their respective sectors over the past three years.

The Schiehallion Fund was the only one to achieve the feat, despite making a 47.5% loss; most trusts in the IT Growth Capital sector plummeted even further.

Only two further portfolios beat their sectors, with the open-ended Baillie Gifford Responsible Global Equity Income fund and Baillie Gifford China Growth Trust making above-average returns in the IA Global Equity Income and IT China/Greater China sectors respectively. The latter, however, only has three constituents.

As a result, managers at the firm have admitted that mistakes were made over the past three years. Below they highlight key areas that have impacted performance.

Inflation and interest rates

One of the biggest impacts on Baillie Gifford’s growth-oriented suite of funds has been interest rates, which have rocketed in recent years to combat significantly higher than expected inflation.

Chris Davies, co-manager of the Baillie Gifford European Growth Trust, said this was a particularly big factor in Europe where inflation numbers hit double digits in some countries.

“If you go back to 2022, we went into that year with a portfolio that was probably set up to do much better in an environment where rates remained low. That was something we have been open about and was a mistake. We could have been more front-footed about that,” he said.

“There was some endemic inflation in the system anyway coming out of the pandemic but when Russia invaded Ukraine suddenly it just took off and, with that, interest rates moved up quickly, as did discount rates.”

Performance of trust vs sector over 3yrs

Source: FE Analytics

The trust’s overweight to mid- and small-caps, which today make up around 40% of the portfolio, got “whacked” and “hammered” during 2022, he admitted.

Lawrence Burns, deputy manager of the Scottish Mortgage Investment Trust, said if he had “more of an inkling” on the interest rate headwinds the trust faced, he would have made moves “at the margin” to limit losses, but the portfolio would still look broadly similar to today.

“We are investors in long-term growth companies. They are always going to come under pressure if there is a material rise in interest rates. But as we went through that period, we were quite clear that what we thought mattered in the long run was (more than interest rates) does the business work and succeed,” he said.

Burns admitted there were some factors the team could have looked at more, such as companies with greater capital requirements or more debt, noting they could have been “more attuned” and “a bit more alert” that the macro environment was changing.

Performance of trust vs sector over 3yrs

Source: FE Analytics

China

Another area that hampered Scottish Mortgage’s returns was China, with the market taking a battering over the past few years on the back on geopolitical concerns. The MSCI China index, for example, is down 34.8% over the past three years.

“If we’d incorporated some of the geopolitical tensions and the change in the domestic regulatory environment that was largely kicked off around the ANT attempted IPO, we probably would have [implemented] a higher bar for Chinese holdings sooner,” said Burns.

Since then, the trust has reduced its Chinese equity exposure to 10% from 25%, although the deputy manager noted that he is still “very happy to own companies in China”.

Stock selection

For Baillie Gifford Positive Change, two factors (as well as those mentioned above) have hit returns. The first is an underweight to the Magnificent Seven.

Rosie Rankin, investment specialist on the fund, said: “What has been particularly unhelpful for the relative performance of Positive Change over the past six to 12 months has been the incredible performance we have seen from a very concentrated number of stocks – the Magnificent Seven – to which we have a very low exposure indeed.”

Performance of fund vs sector over 3yrs

Source: FE Analytics

Another is the “execution risk”, she added, with some companies failing to match the ambition of their management teams.

Instead, the managers have “learned lessons” from the past few years particularly around risk and the “financial resilience” of stocks within the portfolio.

“We have a broad range of companies from steady growth compounding stocks like Deere with a long track record but then new innovative companies too. We want that balance,” she said.

Future headwinds

Lastly, Burns said he and lead manager Tom Slater have been looking ahead for potential headwinds and highlighted artificial intelligence (AI) as one area where investors can expect to see some volatility.

“There will be future headwinds. It will not be plain sailing for us for the next 20 years. At some point there may be an air pocket in AI demand. There has been a huge investment in AI hardware but whether that matches with demand as people work out how to use them at scale [remains to be seen],” the Scottish Mortgage manager said.

“Others include geopolitical tensions and what that means around the world. We have considered new potential holdings [and asked] what do we want in a more volatile world? Ultimately we are trying to own and back companies that are best placed to navigate that future.”

When James Watt invented the steam engine, people marvelled at its efficiency, but as they used the new technology, they started to fear they would run out of coal.

British economist Stanley Jevons kept a cool head and predicted in his 1865 book, ‘The Question on Coal’, that increased efficiency would drive greater use of the technology and that far more deposits of coal would be found. History proved him right.

Economists call this the Jevons paradox, which happens when better efficiency leads to increased demand and a higher rate of resource use, contrary to mainstream expectations.

Applying this paradox to today’s markets can give investors an edge in recognising areas that are set to flourish, according to Cole Smead, manager of Smead US Value UCITS.

“There's the myth in our cultures that technology will cause us to do more by depriving ourselves. Technology makes us more efficient, but the Jevons paradox continues to play out,” he said.

“I hear time and time again people saying that technology will make our use of energy so much more efficient and therefore we're going to use less energy. The Jevons paradox says that's impossible, and it's also never happened historically.”

An example is gasoline demand, which has never been bigger in the United States, and the same goes for the number of miles driven.

Similarly, people thought the LED light bulb would save energy but instead, we quadrupled the number of light bulbs in our houses and energy demand continued to go up.

“It's a perfect picture of the Jevons paradox. You did not see a decline in consumption like people would have thought,” he observed.

How the Jevons paradox translates to investing

There is one area where demand is accelerating but supply is being cut, making it a great investment opportunity, according to Smead. That area is electricity production – in particular through fossil fuels.

Total electricity demand (left), population (centre) and electricity consumption per capita (right)

Source: Smead Capital Management, International Energy Agency

“Technology causes us to do way greater things and become more efficient. But more efficient doesn’t mean that demand is going down, in fact the curve of electricity use is ever growing,” the manager said.

“And while natural gas has sucked up a bigger share of the total growth, we have slowly been moving away from coal, but move is not relevant whatsoever.”

To illustrate this point, he showed the chart below.

Global coal consumption, 2002-2026

Source: Smead Capital Management, International Energy Agency

“About 13 years ago, the International Energy Agency predicted the world was at peak coal usage. So far, it’s 13 years off and growing. These organisations are wicked smart, but they can be very wrong,” he said.

“If you ever get into a world where supply is dwindling and demand picks up, you can make some fabulous money.”

The manager highlighted three stocks that he believes are poised to benefit from this supply/demand discrepancy.

The first is South African coal exporter Thungela – admittedly a cyclical business that has had periods of underperformance, but it comes with “a nice little buffer”, as 60% of the stock is in net cash.

This means firstly that the company would need to burn a lot of cash before investors make a loss, and secondly, that it can buy back its own shares. The impact of buybacks on return on equity (ROE) is  “one of the most underappreciated ideas in the stock market”, Smead added.

If half of Thungela’s cash was used to finance share repurchases, its adjusted ROE could grow by 30%, he calculated.

Finally, the market is overlooking pure play Canadian oil sands producer Meg Energy and US oil company Ovintinv, Smead said. Jevson’s paradox is at play again, with capital expenditure on oil declining in the western world, shrinking supply for industry, butat the same time, demand is increasing.

Index investing reached a milestone in early 2024, with assets in passive investment vehicles surpassing those in actively managed strategies for the first time. On the surface, the appeal of index investing is compelling: passive exchange-traded funds (ETFs) offer lower costs.

And, in the case of broad-based equity and bond categories, active managers frequently fail to consistently outperform their benchmarks. But cheaper is not always better, and not all markets are alike.

Real estate is one area of the equity market that lends itself to active management. REIT managers who commit time and resources to understanding current property fundamentals, shifting market trends and factors that may affect listed equity performance can potentially spot pricing inefficiencies and rapidly implement plans to generate excess returns.

We believe this advantage is reflected in the performance of the largest active REIT mutual funds relative to passive investment vehicles, despite active funds typically having greater expense ratios.

The modern REIT market offers a diverse opportunity set

When investors think of commercial real estate, they may envision office buildings, malls, shopping centres and apartments.

REIT ownership of these kinds of assets exists, of course. However, REITs have become increasingly specialized in new property types since 2000, shifting the REIT market’s composition away from traditional sectors.

For well-resourced managers, these new sectors provide a broad selection of REIT-owned assets for constructing portfolios, many of which have secular growth drivers.

These include data centres, where companies rent by the kilowatt to connect cloud servers; cell towers that lease space to wireless carriers for 5G networks; high-tech distribution hubs that facilitate next-day shipping on e-commerce orders; climate-controlled food storage facilities; biotech research labs; and senior living centres, just to name a few.

Capitalising on distinct sector characteristics

REIT sectors and companies tend to respond to market conditions very differently depending on factors such as lease durations, types of tenants, economic drivers and supply cycles. These differences have historically resulted in wide dispersion of sector returns in any given period.

More economically sensitive sectors with short lease terms, such as hotels and self-storage, can adjust rents relatively quickly to capture accelerating demand in a cyclical upswing.

By contrast, longer-lease sectors such as net lease and health care have more defensive cash flows that may be more resilient during economic downturns. In 2023, returns between the best and worst sectors were separated by 38 percentage points. In other years, the dispersion has been considerably greater.

We have observed that the difference in returns at the security level within each sector is often similar to the variance at the sector level. We believe this dispersion highlights the opportunities active managers have to enhance returns through both sector and stock selection.

Navigating secular growth opportunities and challenges

As economic cycles progress, property types are likely to have different fundamentals. For instance, the pandemic upended retail, hotels and offices, but benefited technology-related REITs amid acceleration in e-commerce and working from home.

And many sectors and cities continue to feel the lasting effects of the pandemic as flexible work-from-home policies have changed how and where people want to work and live, creating an uncertain outlook for offices.

Consequently, high-quality offices may continue to see healthy demand, while lower-quality assets may experience soft demand for years to come – a distinction not likely to be reflected in passive portfolios.

Active managers can also add value by capitalising on regional differences and trends. Many US residents are moving from dense, high-cost northern and coastal cities to lower-cost markets in the sunbelt.

In global portfolios, REIT managers may assess geographic regions to understand local property supply and demand fundamentals, economic trends, monetary policy and other factors that may affect the operating performance of different real estate companies, as well as the markets valuation relative to other regions.

Anticipating secular trends such as these is a key component of active management since they can present opportunities for active managers to capitalize on diverging fundamentals. For example, the divergence in industrial and office properties.

By contrast, passive portfolios are, by design, not able to allocate assets to capitalise on potential secular growth opportunities, nor can they sidestep sectors that may be facing long-term headwinds. Of course, there is no guarantee that active management can successfully navigate these trends.

REIT managers may also invest based on relative value, seeking to allocate portfolio assets based on merit rather than market capitalization, as is often the approach for many passive index funds.

Investing outside the benchmark – participating in special opportunities such as recapitalizations, private placements, initial public offerings (IPOs) or pre-IPO investments – is another way for active managers to add value.

These activities are not within the scope of passive index-tracking strategies – a notable disadvantage in recent years due to the inability of passive vehicles to get out of the way of the secular declines in retail and offices.

Jason Yablon is head of listed real estate at Cohen & Steers. The views expressed above should not be taken as investment advice.

In both football and investing, picking the best players doesn’t always make for the optimal team; the secret to success is how players’ skills complement each other.

Ahead of the UEFA Euro 2024 football championship, which kicks off on Friday, fund selectors have put themselves in the shoes of football managers to come up with a winning portfolio that strikes the right balance between defensive and offensive plays and has the best chances of coming out on top.

Defenders

Starting with the goalie, it’s all about capital preservation. The Artemis Short-Duration Strategic Bond fund should be able to pull the best saves, according to FundCalibre managing director Darius McDermott.

The fund adapts to changing market conditions by adjusting its allocation to government bonds, investment-grade and high-yield. The focus on bonds with five years or less to maturity “should make it less volatile than the wider bond market”, said McDermott, who also appreciated manager Stephen Snowden’s use of derivatives and futures to reduce risk and manage duration.

The fund has produced a positive return in four of the past five calendar years and also offers an “attractive” distribution yield of 5.21%.

Moving to stocks, Hargreaves Lansdown equity analyst Aarin Chiekrie said that “like the best goalkeeper in the world, it’s hard to see any opponent getting past” ASML, as the Dutch semiconductor company “has a monopoly on the most advanced type of lithography machines used to make the chips that power your phones, computers and even cars”.

As defenders, McDermott chose his back four with some bite.

First up is BlackRock European Absolute Alpha, a long/short pan-European equity fund with a focus on capital preservation and low levels of volatility, but which also managed to almost double the return of the average IA Targeted Absolute Return peer over the past five years, as the table below shows.

Performance of fund against sector over 5yrs

Source: FE Analytics

It is flanked by two bond funds, M&G Emerging Markets Bond and Invesco Corporate Bond, and aided by the Jupiter Merlin Income Portfolio, a “stalwart in the multi-asset sector” designed to provide “an immediate and growing income” as well as the potential for capital growth. 

Chiekrie called four players to the pitch: defence company BAE Systems, which is “almost guaranteed to give you a solid performance”; building company Berkeley Group, which “sits on solid ground, despite the current shaky housing market”; NatWest, which convinced him for its new chief executive officer, strong balance sheet and a prospective 5.6% dividend yield; and AstraZeneca, which is seeking to debut 20 new medicines to help fuel growth by 2030.

Midfielders

Midfield is where matches are won and lost, according to McDermott, who turned to Rathbone Income, Janus Henderson European Selected Opportunities and CCLA Better World Global Equity for “goals, flair and bravery”.

The Rathbone strategy has “one of the best – if not the best – track records among open-ended funds for paying dividends,” he said.

“Manager Carl Stick is somewhat of a contrarian investor, so the fund may lag behind while his peers catch up with the news,” but all of its 30 to 50 holdings are chosen for their high quality and visibility of earnings.

The Janus Henderson portfolio is a jack-of-all-trades, mixing mega and large blue-chip holdings with some mid-caps to achieve additional sources of alpha.

Rising star CCLA Better World Global Equity was launched in 2022 but has proved “very successful since then”, as the chart below illustrates.

Performance of fund against sector and index since launch

Source: FE Analytics

Over in the stocks tournament, Chiekrie put his faith in Belgian drinks company AB InBev, which owns fan-favourite beers such as Budweiser, Corona and Stella Artois.

“Like a midfield maestro dictating the tempo of the game and spraying passes out to all teammates, the group’s diverse portfolio of drinks brands means it has something for everyone this summer,” he said.

The analyst also chose UK-listed Entain, which owns betting houses such as Ladbrokes and Coral.

“It’s been under plenty of pressure from regulators and overall performance has been underwhelming recently, but still, you wouldn’t bet against them turning their form around and making a positive contribution.”

Finally, easyJet looks well-placed with a portfolio of slots at some of Europe’s most valuable airports. It is trading at a cheap valuation despite increased passenger numbers, so there’s scope for this airline to become a fan favourite in the near future, Chiekrie said.

Attackers

For high-octane performance, McDermott has been warming up Fidelity China Special Situations.

Having fallen over 40% since February 2021, the re-rating of China’s equity market has been “indiscriminate”, which has created “plenty of valuation opportunities”.

“With a bias towards smaller and medium-sized companies, this trust is not for the faint-hearted, but manager Dale Nicholls has consistently outperformed his peers and the trust is on an attractive 10% discount,” he said.

For his final two choices, McDermott stuck with recovery plays, this time in the UK.

Liontrust UK Smaller Companies and Schroder British Opportunities Trust  should benefit from the recovery of smaller companies, which, coupled with attractive valuations and an increasing number of mergers and acquisitions, could be a compelling opportunity from here.

Source: FE Analytics

“Backed by a market-leading team, the Liontrust fund has a very clearly-defined investment process based on intangible strengths. Every stock in the portfolio must have intellectual property, a strong distribution network or recurring revenues,” the fund selector said.

Investing in both public and private businesses, Schroder British Opportunities targets ‘high growth’ and ‘mispriced-growth’ companies.

“Although performance has held up well relative to its peers sentiment has been hit hard, with the trust at a near 35% discount.”

Performance of trust against sector over 5yrs

Source: FE Analytics

Completing the stock squad are strikers J D Wetherspoon and Adidas.

According to Chiekrie, Wetherspoons’ low-value proposition means that “it's well-placed to block out the noise of an unsettled economy and just focus on its own game”, having already scored a like-for-like sales rise of 5.2% last quarter.

On the way home from the match, fans are more likely to pick up an original shirt from Adidas, after host country Germany announced fines of up to £4,000 for supporters caught wearing fake shirts.

“After a challenging 2023, which saw revenue and profits wide of the post, Adidas could be poised to score impressive growth this year,” the analyst concluded.

Source: Google Finance

Targeted absolute return funds aim to give investors the smoothest ride possible, making a positive return while mitigating volatility. But in the past three years just seven of the 78 funds in the IA Targeted Absolute Return sector have consistently achieved positive gains, according to data from Trustnet.

We looked at the 12-month track record for these funds in each of the past 24 months – the same metric used by the trade body Investment Association to compare the funds’ performance.

Source: FE Analytics

Two behemoths of the sector appeared in the list. First is the £1.7bn Jupiter Merian Global Equity Absolute Return fund managed by Amadeo Alentorn.

A market neutral long/short portfolio, the managers invest in 466 global companies using the team’s systemic equities approach, which tilts the portfolio between different investment styles depending on the trends within the market.

This is coupled with 318 short positions, which are used to mitigate the volatility of market and gives the managers more ways to generate returns. It has been the best performer of the group, returning 28.5% over the past three years, as the below chart shows, and has the second-lowest fees with an ongoing charges figure (OCF) of 0.83%.

Performance of fund vs benchmark over 3yrs

Source: FE Analytics

The other giant of the sector on the list is the £1.7bn Man GLG Alpha Select Alternative fund managed by Charles Long. It invests primarily in UK stocks but, like the Jupiter fund, takes advantage of short positions to add alpha.  

With an OCF of 1.11%, the portfolio is more expensive than its Jupiter rival and performance has lagged slightly, with the fund returning 26.3% over the past three years.

The second best performing fund on the list over the period was VT Woodhill UK Equity Strategic managed by Paul Wood, which made 28.4%, just 10 basis points below the Jupiter fund.

With £29.2m in assets under management it is by far the smallest in the group and has the highest fees, with an ongoing charges figure of 1.24%.

It is a UK equity fund, with top holdings including Shell (7.5%), AstraZeneca (7.1%) and HSBC (5.8%). Wood dampens volatility by hedging the portfolio, including being able to “fully hedge” the fund, protecting investors from downside risk. The fund has been hedged in 75% of its days since inception, according to the fund’s factsheet.

GAM Star Global Rates, run by FE fundinfo Alpha Manager Adrian Owens, was in third position with a total return of 27.5%. Unlike the strategies above, it focuses on investing in the currency and fixed income markets with no allocation to equities.

Conversely, TM Tellworth UK Select, run by Alpha Manager John Warren and Johnnie Smith, as well as BlackRock UK Absolute Alpha, headed by Oliver Dixon and Dan Whitestone, also made the list. Both are long/short strategies focusing on the UK stock market.

Analysts at RSMR recommended both funds. On the former, they said: “The fund has been managed in a pragmatic, risk aware manner, allowing returns with no market correlation since moving to Tellworth. The accurate monitoring of potential factor risks has been important to this outcome and the team has generated alpha through stock selection.”

On BlackRock UK Absolute Alpha, they noted: “The fund is run by a specialist long/short hedge fund manager who has developed a strong record in this specialist space. His flexible approach to beta (market exposure), varying net long and net short positions has also added value. 

“The manager’s experience, together with the strength of the BlackRock research platform, suggest this fund should be capable of delivering positive returns in most market conditions.”

M&G Global Target Return – run by Tristan Hanson and Craig Simpson – made the lowest return of the group but still achieved the feat of making consistently positive returns on rolling 12-month periods.

The fixed income space has proven to be a difficult area for long-serving managers to excel in recent years.

Indeed, only two ‘veteran’ managers – those who have been at the helm since 2004 or earlier – have made top-quartile returns over the past three years across the IA Sterling Strategic Bond, IA Sterling Corporate Bond and IA Sterling High Yield sectors, according to data from Trustnet.

One of those two experienced managers who have stood the test of time is FE fundinfo Richard Woolnough, who has been at helm of M&G Strategic Corporate Bond since February 2004.

The fund – which Woolnough has been co-managing with Ben Lord since 2021 – has fallen 4.9% over the past three years (to the end of May). Nonetheless, it still ranks 23rd out of 90 in the IA Sterling Corporate Bond sector over that period.

Performance of fund over 3yrs (to last month end) vs sector

Source: FE Analytics

Long-term performance has also been commendable, as the fund sits in the sector’s top quartile over 10 and five years.

Although the M&G Strategic Corporate Bond fund belongs to the IA Sterling Corporate Bond sector, its mandate allows Woolnough and Lord to invest up to 20% in government bonds. Additionally, high-yield bonds should not account for more than 20% of the portfolio.

Analysts at FE Investments said: “The investment process begins by agreeing on a view of the global economic environment and how this will affect inflation and interest rates, particularly in the UK. This helps the managers define the appropriate risk level to employ in the fund and identify sectors and asset classes offering most value.

“Credit analysts at M&G study issuing companies across the UK, Europe and the US in order to identify pockets of value, and the portfolio managers combine these recommendations with their macroeconomic views to finalise portfolio positioning.”

They also noted that, historically, the fund has outperformed peers when credit markets rallied, as was the case in 2017 or the second half of 2020, but lagged during sell-offs, such as in 2018 and March 2020.

The other top-performing fixed income fund manager is Eric Holt of Royal London Sterling Extra Yield Bond in the IA Sterling Strategic Bond sector.

Holt has run the five-crown rated fund since April 2003 and was joined by Rachid Semaoune in 2019. Together, they aim to achieve a gross redemption yield of 1.25 times the gross redemption yield of the FTSE Actuaries British Government 15 Year index.

Performance of fund over 3yrs (to last month end) vs sector and benchmark

Chart

Source: FE Analytics

According to the fund’s latest factsheet, unrated bonds and bonds rated BB or below account for 32% and 42.6% of the portfolio, respectively. This suggests a higher exposure to issuers with poorer credit quality, but also higher compensation due to the associated default risk.

In terms of maturity, half of the bonds in the fund are due to mature within 0 to five years, while 31.6% of the securities have a maturity of more than 15 years.

Over the past three years (to the end of May), the strategic bond fund has returned 12.4%, ranking fourth out of 80 in its sector.

Longer term performance has been even stronger, as Royal London Sterling Extra Yield has been the top-performing fund in the IA Sterling Strategic Bond sector, roughly 16 percentage points ahead of runner-up AXA Framlington Managed Income.

Finally, no veteran manager met our requirements in the IA Sterling High Yield sector.