Fixed income managers are positive on gilts and see the UK as a ‘haven of political stability’.
The Labour party’s decisive majority in yesterday’s general election should usher in a period of stability, according to fund managers. Keen to avert a Liz Truss-style melt-down in the bond markets, prime minister Kier Starmer and expected chancellor Rachel Reeves have projected an image of fiscal responsibility.
They seem to have convinced the investment management industry thus far, with several bond managers professing favourable outlooks for the gilt market, including Amundi and PIMCO.
Monica Defend, head of the Amundi Institute, said gilts look attractive in absolute terms and compared to government bonds in the US, Germany and France, where debt-to-GDP dynamics look worse.
“While UK fixed income doesn’t have a huge weight in global benchmarks, there may be a case for international investors to reconsider their strategic allocation given it offers a way to add a good-quality yield with interesting diversification characteristics,” she said.
Mark Nash, Huw Davies and James Novotny, who run absolute return fixed income strategies at Jupiter Asset Management, think Labour’s decisive majority could make the UK appear like a “haven of political stability” in contrast to political upheaval elsewhere.
Gilt yields look cheap compared to other countries that have a weak fiscal position such as France, “so there may well be some flows towards gilts from other challenged sovereign bond markets that continue to have political problems now our election is done and dusted”, they said.
The Jupiter trio are concerned about “the perilous scale of the UK’s twin deficits”, but believe economic growth will be the new government’s “get-out-of-jail free card”.
A better trade deal with the EU and liberalisation of the UK’s planning laws could, if successful, stimulate economic growth and dampen inflationary pressure, they said.
Phil Milburn, co-head of Liontrust’s global fixed income team, agreed that economic growth could give “some leeway to government spending plans”. He thinks growth will come from two areas: unwinding trade frictions with the European Union and “attracting long-term capital to reverse the chronic underinvestment over preceding decades”. Freeing up planning constraints for both business and homebuilding would help, he added.
Nonetheless, David Katimbo-Mugwanya, head of fixed income at EdenTree, said incoming chancellor Reeves has her work cut out “to keep the bond vigilantes at bay”.
“In today’s higher interest rate environment, making inroads into deficit reduction plans will be of the utmost importance lest debt sustainability is called into question,” he noted.
Emma Moriarty, an investment manager at CG Asset Management, is concerned that if Labour embarks on a raft of ambitious policies that require an increase in government spending and therefore bond issuance, it could unsettle bond markets and spark volatility in long-dated gilts.
James Lynch, fixed income manager at Aegon Asset Management, added: “One of the legacies of Liz Truss, who incidentally lost her seat last night, is that there has been much more attention on the relationship between politics, economic policy and the bond markets. But for now, the gilt market will no doubt go back to looking at the latest inflation figures, Bank of England speeches and following US Treasuries for guidance.”
The new government’s first budget in August or September will be “the first real test for the market”, said Liam O’Donnell, head of macro and rates at Artemis and co-manager of the Artemis Strategic Bond fund. He expects Reeves and Starmer to “focus on stability and not play fast and loose with public finances”.
“Despite a more secure political footing, the UK fiscal situation is still weak – so not much will change in the short term. This will provide stability to the gilt market and, with the Bank of England set to cut rates, creates a more supportive environment for UK fixed income,” O’Donnell concluded.
In contrast to Amundi, PIMCO and Artemis, Canaccord Genuity Wealth Management is cautious about UK government bonds.
The wealth manager’s co-chief investment officer Tom Becket said: “We have limited exposure to UK government bonds, keeping the maturity profile of the bonds we own relatively short, ensuring we are not exposed to the volatility of longer maturity bonds, where interest rate, inflation and political risk can bite.”
Becket is more constructive on sterling corporate bonds, which offer comparatively high yields. “Current yields compensate investors properly for the risks they’re taking in lending money to high-quality companies and are considerably higher than they were only a few years ago,” he said.
The change in government is unlikely to have much of an impact on sterling investment grade credit because the market is so global in nature, so spreads tend to be driven by global not domestic factors, said Kris Atkinson, a fixed income portfolio manager at Fidelity International.
“Over half of the sterling investment grade credit market is non-UK-domiciled. Interestingly, this makes the sterling corporate bond market less concentrated (by country) than the global corporate bond market, which is 57% US-domicile,” he said.
Sterling corporate bond spreads remain at the tighter end of their historical range so Atkinson is defensively positioned from a credit perspective, largely for valuation reasons.
Elsewhere, fund managers are keeping a close eye on inflation, which will continue to have an impact on the bond markets and other asset classes, and on the Bank of England’s interest rate decisions.
Trevor Greetham, head of multi asset at Royal London Asset Management, expects inflation to be persistent and therefore recommends an allocation to commodities, which tend to perform well when prices rise.
“The battle against inflation is by no means won and an uncertain geopolitical backdrop, populism and a drop in fossil fuel capacity as we transition to net zero all point to further cost of living surges in coming years,” he said.
Trustnet explores what Labour’s victory means for the UK equity market and which sectors are likely to prosper.
The Labour party’s decisive general election win is a boon for UK-listed stocks, asset managers claim, with a range of sectors from housebuilding and construction to green energy set to benefit.
James Lowen, senior fund manager of the JOHCM UK Equity Income fund, said the political stability ushered in by Labour’s decisive majority, followed by a potential interest rate cut in August that would stimulate consumer spending, could “bring the cheapest market in the world back in from the wilderness”.
Laura Foll, portfolio manager at Janus Henderson Investors, sees Labour’s majority as a turning point, abating political concerns that have weighed on UK equities since Brexit. “A major upshot of the election result is the potential for politics to ‘tread quieter’ on the UK equity market and the broader economy.”
Labour leader and incoming prime minister Kier Starmer’s plans to reinvigorate economic growth should lead to higher sales and earnings growth for British companies, Foll continued.
“Labour’s policy for growth is centred on reforming industrial strategy and planning procedures, with the goal to tackle the fundamental issues plaguing the UK’s economy, notably the alarmingly low investment rates. Labour’s significant majority gives the means to implement this, and other, policies quickly,” she explained.
Jupiter’s Tim Service, a UK small and mid-cap equity manager, agreed that “markets and companies alike crave certainty” so “a government with a clear mandate will give companies confidence to hire people and invest in the future, while markets can better discount future company profits accurately”.
Adrian Gosden and Chris Morrison, UK equity income managers at Jupiter Asset Management, also expect the solid year-to-date performance of UK equities to continue, buoyed by a myriad of headwinds. “We are looking for a sustained rebound in the market, helped by supportive factors such as weakening inflation, a potential Bank of England rate cut, attractive valuations for UK equities and good earnings performance from UK companies,” they summarised.
The Labour party’s manifesto includes an explicit commitment to increase investment by UK pension funds in the domestic stock market.
Natalie Bell, a fund manager in Liontrust Asset Management’s Economic Advantage team, said: “After the election a number of stars should align – a stable government, interest rates falling, inflation stabilising and growth returning. This, coupled with likely policy intervention, should help turn the tide following decades of outflows.”
Sectors that should prosper under Labour
Small-caps: Ben Ritchie, head of developed market equities at abrdn, thinks the more domestically focussed small- and mid-cap stocks should do particularly well from a sentiment bounce.
“A landslide victory provides the sort of clarity and stability that equity markets need in an increasingly volatile world,” he observed. If Labour can get its pro-growth agenda right, it will be a “shot in the arm” for companies exposed to the UK economy in the FTSE 250 and FTSE Small Cap indices, he said.
European businesses: UK-listed companies operating within and trading with the EU also stand to benefit, said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
“Labour is expected to pursue a more collaborative and constructive relationship with the EU, an approach that should lead to smoother trade negotiations, reduced tariffs and more predictable regulatory frameworks. By addressing Brexit-related disruptions, Labour's policies aim to foster a more integrated and efficient market environment,” he explained.
“Likewise, a stronger relationship with the EU should help repair the UK’s business investment trends – by some measures the worst in the G7.”
Housing and construction: Labour’s plans to build 300,000 new homes a year, implement planning reform and invest in planning logistics could trigger a rebound in domestic stocks “like a coiled spring”, Lowen said.
Companies that should benefit include housebuilders and building materials producers, said Mark Crouch, analyst at investment platform eToro. “UK housebuilders such as Persimmon and Barrett have suffered steep drops in share price following interest rate hikes, so they will be hoping for a reversal in fortune if and when these initiatives get underway,” he noted.
Aruna Karunathilake, an equity manager at Fidelity, said local planning departments are under-resourced and inefficient, contributing to delays in the system. Any Labour investments in that area “should alleviate builders’ concerns about planning bottlenecks impeding growth in the medium term”.
Defence: Labour has pledged to raise defence spending to 2.5% of GDP “as soon as resources allow”, from around 2% currently. BAE Systems, Babcock and Rolls Royce have already outperformed the FTSE 100 in 2024, Crouch said, and “it's likely these gains will continue”.
Renewable energy: Labour has pledged to spend £24bn on green infrastructure initiatives, to establish Great British Energy (a publicly owned clean-energy company), and to make the electricity carbon neutral by 2030.
This should be positive for renewables and electricity networks, said Ninety One’s Matt Evans, a UK sustainable equities portfolio manager.
“Other policies announced include working with the private sector to double onshore wind, triple solar power and quadruple offshore wind by 2030. Labour also plans to invest in carbon capture and storage, hydrogen and marine energy and long-term energy storage,” he explained.
Jamie Jenkins, director of policy at Royal London, said that if GB Energy enables the various actors involved in the energy transition to collaborate better, “this could just be the magic dust that is so desperately needed to accelerate investment in our country’s net zero ambition”.
Sectors that could suffer: Oil & gas, water utilities and rail
Labour's plan to increase the energy windfall tax to 78% could “spell disaster for UK oil and gas companies operating in the North Sea”, Crouch said. “The UK's largest independent oil and gas company Harbour Energy perhaps saw the writing on the wall, having since made significant investments diversifying their business away from the UK.”
Labour has been talking about nationalisation of the railways, which could impact companies such as First Group and Trainline, he added.
Karunathilake thinks the new government “could take a firmer line” with water utilities. “It could put pressure on regulators to move repeat offenders under special measures, which can include restrictions of dividend payments and executive remuneration,” he said.
The experts weigh in on Labour’s chances of boosting economic growth.
Labour focused on the economy in its election campaign, promising to restore growth after years of virtual stagnation, but how confident are the experts that the new government can pull this off?
With two seats left to declare, the Labour party has won 410 compared with 121 for the Conservatives, 71 for the Liberal Democrats, nine for the Scottish National Party and four each for Reforms and the Greens. This leaves the party with the largest majority government in 25 years.
But although Labour leader Keir Starmer’s majority of around 170 seats is almost as large as Tony Blair’s 1997 landslide (when Blair claimed 418 seats with majority of 179), he captured only 33.8% of the popular vote.
Labour won a large majority with a relatively low vote share
Source: Pantheon Macroeconomics
Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “Normally a majority as large as Labour’s would guarantee more than one term as government.
“But Mr Starmer's majority is not as secure as normal given the voting dynamics. The Labour party will likely need to move fast with policy changes to demonstrate they can deliver their promised changes.”
What are Labour’s economic pledges?
Labour’s manifesto placed economic stability at its core, with 83 mentions of the economy among its 136 pages compared with just 50 from the Conservatives. Given the fallout of the short-lived Liz Truss administration’s disastrous mini-Budget, Labour has been careful not to pledge any changes to spending or fiscal rules that could spark a negative reaction.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Labour is determined to keep a tight ship and the manifesto makes it clear that ministers intend to steer the economy in a ‘steady as she goes’ fashion, with a keen eye trained on stimulating long-term growth, rather than immediate boosts to consumer spending power.”
Starmer has promised to follow tough spending rules to ensure that government debt falls as a share of GDP in five years’ time. At the same time, he has argued that the UK needs better public services, better infrastructure, new energy systems and support high-growth sectors as part of a long-term plan for the economy.
Labour said: “We will embrace a new approach to economic management – securonomics – that understands sustainable growth relies on a broad base and resilient foundations. Our approach will depend on a dynamic and strategic state.”
Among the policies floated by Labour are a new industrial strategy, capping corporation tax at 25%, a National Wealth Fund to invest in “the industries for the future” and the establishment of Great British Energy to accelerate the transition to clean power.
Labour has also proposed to reform planning rules, implement a 10-year infrastructure plan, build 1.5 million homes, overhaul the immigration and skills system, improve the jobs market, launch a New Deal for Working People, introduce a new childcare offer and support those with physical and mental health challenges.
How likely are these to succeed?
Pantheon Macroeconomics’ Wood said: “Keir Starmer’s majority is large enough to allow him to plot a stable policy course, which should boost business investment and attract greater foreign investment. He has a good chance of making major supply-side reforms like cutting planning regulations.
“But that will all take time to fully implement and impact the economy. For now, we assume a change in government offers a modest upside risk — 0.25 percentage points — to our 1.5% year-over-year estimate of UK potential growth.”
Julian Howard, chief multi-asset investment strategist at GAM Investments, said the economic challenges facing the incoming government are significant, citing a recent Bloomberg survey of economists that forecast UK growth to be just 0.7% for 2024. The US, meanwhile, is tipped for a 2.3% growth rate while even France is expected to grow 0.9%.
“The primary challenge will be around growth and productivity, both of which have been lacklustre since the global financial crisis,” he said. “Keir Starmer repeatedly emphasised the ‘number one priority’ of growth during the election campaign but remains constrained in how this might realistically be brought about.”
Hargreaves Lansdown’s Streeter said it might prove challenging for the Labour government to stick with its cautious spending pledges while finding money to pay for its long-term ideas for the economy against the current backdrop of lacklustre growth and high debt payments.
“So, to avoid a big bazooka of investment misfiring further down the line, it may mean the fiscal rules will have to be tinkered with in the future and further tax rises can’t be ruled out,” she added.
Wood expects the Labour administration to implement its proposed changes to planning regulations and infrastructure plans relatively quickly. New chancellor Rachel Reeves is expected to borrow more in the near term to shore up “creaking” public services.
“Taxes will have to be raised in the medium term given the mess the public finances are in, but Labour will find it harder to break promises to leave most major taxes unchanged given their vote share,” he added.
“They will be hoping for stronger growth, and help from lower interest rates, rather than quickly pushing large tax hikes, we suspect. We see a good chance of a stimulatory Budget in the Autumn.”
Trustnet looks at the party’s main policies relating to people’s money.
The Labour party has won a huge victory in the latest UK general election. With a few results still yet to come in, the Keir Starmer-led government looks set to deliver a crushing blow to the Conservatives.
Widely anticipated by pollsters, economists and other experts, the new government has plenty of issues to contend with and a lot of pre-election manifesto promises to keep.
Below, Trustnet rounds up some of the key ways the new Labour government is expected to tackle issues relating to personal finance, from taxes to pensions and the UK ISA.
Capital gains tax (CGT)
While Starmer and shadow chancellor Rachel Reeves have said they have “no plans” to increase CGT rates, they have not completely ruled it out either.
Myron Jobson, senior personal finance analyst at interactive investor, said Labour’s manifesto “did little to dispel speculation that capital gains tax could rise if the party comes to power”.
Currently, higher-rate taxpayers face a 24% CGT on residential property gains and 20% on other chargeable assets, but this could rise, potentially being brought in-line with income tax thresholds.
Rachael Griffin, tax and financial planning expert at Quilter, said: “Those who face CGT in the UK – primarily higher rate taxpayers and entrepreneurs who realise gains from the sale of residential property, investments and other chargeable assets – have already seen their annual exempt allowance slashed by the current Conservative government to just £3,000 a year.
“If Labour is to win the general election and then increase rates, it would serve as a double whammy with higher rates and lower exempt allowances considerably increasing the capital gains tax take.”
Jobson noted that whether CGT is raised or not, making the most of tax-efficient ISA and SIPP wrappers, which protect interest, dividends or capital gains, “remains a good strategy”.
Income tax
Although Labour pledged no increases to income tax in its manifesto, Laura Suter, director of personal finance at AJ Bell, said it is “allowing an increase in by the back door on day one” by declining to unfreeze thresholds.
“They can claim that people are bearing the brunt of Tory policy, but they have opted not to reverse that policy. Had income tax bands not been frozen, the personal allowance would be just over £15,000 this year and the higher-rate threshold would sit at just over £60,000. As it is, people are paying more tax than they otherwise would have thanks to the freeze,” she explained.
The pension triple-lock
Labour has committed to the triple-lock system currently in place, something Jon Greer, head of retirement policy at Quilter, said was “sensible” to win votes but also “fraught with problems”.
“The triple lock, which guarantees that the state pension increases annually by the highest of CPI inflation, average earnings growth or a baseline of 2.5%, has served to safeguard against poverty for retirees. However, it presents a significant fiscal challenge that no party has been willing to fully address,” he said.
The Labour party now has a “critical opportunity to re-evaluate the triple lock’s long-term viability”.
Suter added pensioners will continue to get meaningful increases to their income, with the full new state pension set to hit almost £12,000 next year. If maintained, retirees could get a state pension of £13,250 by 2030.
But it is not all good news. “While pensioners will continue to get decent increases to their state pension they may face more tax,” she said, as Labour has not promised to shield the state pension from income tax.
Pensions lifetime allowance (LTA)
The new government backtracked on its pledge to bring back the pensions lifetime allowance during the election campaign, ultimately discounting it from the party’s manifesto.
Greer said at the time that the pension industry “can breathe a sigh of relief”, as a reintroduction would have “created huge unintended consequences”.
“Following the bombshell policy announcement in March last year from the Conservative government and the subsequent short time frame for the implementation of removing the LTA framework, the industry has been working overtime to try and make it a reality,” he said.
“For Labour to then reverse it would have not only been technically complex but could have created an environment where people make knee-jerk decisions to retire under the current rules.”
Pensions review
Despite the above, the new government has pledged to undertake a pensions review, something Alice Guy, head of pensions and saving at interactive investor, said was “great news”.
“Many workers aren't saving enough for a comfortable retirement and that's a ticking time-bomb for the future. There are also big problems with pension savers building up multiple pots over their working life, which makes pensions unnecessarily complex and confusing,” she said.
Greer noted improvements may include adjusting minimum contributions and the age threshold for eligibility. It could also “explore avenues for productive investment”, with pension funds forced to invest more in UK businesses.
Minimum wage
Labour pledged to extend the minimum wage to those aged between 18 and 20, giving an income boost to the youngest and lowest paid workers in the UK.
Suter said Labour would be continuing the work of the Conservatives, who brought in “meaty increases” to the minimum wage, taking it from £9.50 an hour two years ago to £11.44 an hour today and extending the full minimum wage to 21-year-olds (previously the cut-off was 23).
“But Labour wants to go one step further and give those aged 18 and above the full wage”, she said, which would represent a £2.84 an hour increase to the salary of an 18-year-old, or £5,000 per year based on a 35-hour week.
ISAs
The UK ISA policy mooted by former Conservative chancellor Jeremy Hunt may well remain in place under Labour, with investors able to save up to £5,000 in the additional tax wrapper – providing it is invested in domestic businesses.
Suter noted: “Much of the detail has yet to be worked out, with Labour being left to grasp that particular nettle. The party didn’t make any mention of it in their manifesto and said it has ‘no plans’ to scrap the policy, although it hasn’t explicitly said it will continue with the reform either.”
The new government has supported ISA simplification in the past, with savers encouraged to make more use of the stocks and shares ISA, which may make the implementation of another option unviable.
Private school fees
For many parents, one of the most damaging policies will be the proposed increases in private school fees, with Labour planning to bring in VAT and end business rate relief for these schools.
Suter said: “It is expected to significantly increase the cost of private schooling. It’s expected that schools will absorb some of these cost increases, so there’s no clear rule about how much fees will increase by.”
Based on the average day-school fee of £18,064 a year per pupil, a family with two children would see their annual costs rise by just over £7,000 a year if the full 20% cost increase was passed on.
“While some parents will opt out of private school altogether in favour of the state system, others will absorb the price hike, make cuts to their budget elsewhere, or ask family for help with the higher fees,” said Suter.
The economy
Labour’s fiscal policy has been fairly close to the Conservatives when it comes to economic growth and fiscal spending, according to Lizzy Galbraith, political economist at abrdn.
“Labour will be looking to generate some fairly substantial economic growth over the short term (leaving taxes to one side). So, it is likely that the fiscal rules will shift at some over the next parliament,” she said.
“For example, using a metric such as public sector net worth rather than the current public sector net debt to measure performance may enable a little bit more fiscal wiggle room.”
The green agenda
Galbraith said Labour’s green industrial strategy is not just viewed by the party as route to decarbonisation and environmental benefits but as a “major economic opportunity”.
The party has emphasised its commitment to renewable energy, decarbonising homes, and upgrading the national grid, but is expected to lean on private sector funding.
“The party still plans to establish a £7.3bn national wealth fund to support these initiatives from the public side, aiming to attract three pounds of private investment for every pound of public funding”, she said.
Marylebone Partners is building a portfolio of differentiated and alternative sources of return that investors can’t access elsewhere.
Majedie Investments has shot to the top of the performance charts since overhauling its investment strategy last year. After selling its homegrown investment boutique Majedie Asset Management to Liontrust in 2022, the trust appointed Marylebone Partners in January 2023.
Chief investment officer Dan Higgins introduced a tripartite investment strategy consisting of direct equity investments (24% of the trust), external managers (56%) and hard-to-access special investments (15-16%) with the remainder in cash and equivalents.
Marylebone Partners gave the trust a 7.5% stake in its business to replicate the partnership with Majedie Asset Management and a six-month fee holiday. It now earns a flat fee based on the trust’s market capitalisation to align its interests with shareholders.
Returns thus far have been impressive. The trust topped the IT Flexible Investment sector last year, with total returns of 20.9%. It is the second-best performer of its peers so far this year, up 10.9% to 2 July 2024.
Performance of trust versus its two benchmarks and sector over 1yr
Source: FE Analytics
Its discount has narrowed substantially from the high twenties in 2022 to approximately 11% today, reflecting Marylebone Partners’ efforts to bring in new shareholders and stimulate buying interest. The trust has total assets of £163m and a market capitalisation is £129m.
Below, Higgins told Trustnet about his turnaround investment in the burger chain Shake Shack and why a quarter of the trust is invested in stressed and distressed credit.
What is your investment strategy?
We’ve coined the phrase ‘liquid endowment model’, which entails identifying differentiated opportunities sourced through a proprietary ideas network.
The endowment part involves finding alternative return sources, evoking the success of the great US university endowments. The liquid bit alludes to the fact we do not venture into private equity, venture capital, real estate, infrastructure, or any hard-to-value assets or those whose historic success is dependent on cheap leverage.
Over the course of nearly 30 years in the business, we’ve built up an extraordinary network of fellow investors, clients, advisors and former colleagues at institutions such as Fauchier Partners, Goldman Sachs and Wellcome Trust, through whom we source ideas that never get onto the radar screens of most other allocators.
What type of direct investments does the trust hold?
We own shares in 12 to 15 public companies that we believe can compound over the really long term. We try to find ideas that don’t feature in many other portfolios, for instance we only own two of the 50 largest components of the MSCI All Country World Index.
We have quality and growth criteria and a valuation discipline but we’re style agnostic and we have a mixture of stocks, some of which trade on a price-to-earnings (P/E) multiple of 20x while others have a P/E of 8x.
We own the life sciences company Thermo Fisher Scientific, which is widely regarded as being a high-quality growth compounder, as well as Breedon, which is an aggregates business that takes rocks out of the ground and is a beneficiary of infrastructure and the scarcity of its product.
What have been your best and worst calls since you took charge?
Our best-performing direct investment year-to-date has been Wabtec, the leading provider of infrastructure and services to the US rail industry. Earnings have consistently beaten expectations as the big rail companies have moved from relentless cost cutting to investing in productivity. Wabtec is the clear beneficiary of trends such as the electrification of rail and investment in rail infrastructure. Its share price is up 23.5% year to date as of 2 July 2024.
Our best performing fund by far is Helikon Investments, which is a European special situations manager that has shot the lights out in the past year or so because of contrarian positions they took in Greek and Turkish banks, property companies and gold miners in 2022.
The worst performing direct investment has been Alight, which enables companies to manage their human resources and employee benefits through a software platform. Its operating metrics are good but its share price has fallen 15.7% year to date.
Alight came to market in 2021 through a special purpose acquisition company (SPAC) and has been penalised along with a thousand other low-quality companies that used the SPAC structure to come to market a couple of years ago. We think that negative sentiment is completely misplaced. It’s a diamond in the rough.
Which other areas have done well?
Across the whole trust we have 25-30% in stressed and distressed debt and these investments are up 6-8% so far this year. The longer interests rates stay high, the better the yield we receive, so long as defaults don’t rise.
We think these strategies can continue delivering uncorrelated returns of 8-10% per annum for the foreseeable future even when interest rates come down. This is the engine room of the portfolio.
How have your special investments been performing?
We co-invested in the burger restaurant chain Shake Shack alongside Engaged Capital at around $80 and we have been taking profits at $110-120.
The turnaround story of cost savings, property efficiency and centralised buying has gone really well. Founder Danny Meyer has been receptive to Engaged Capital’s involvement and suggestions, such as standardising restaurant furniture instead of building tables from expensive reclaimed railway sleepers and installing a new senior management team.
We embarked on four new special investments in the past month, including another restaurant with Engaged Capital, a regulated business in Brazil and a large healthcare provider in the US.
We want to have 20% of the portfolio in special investments because they are exciting, high-conviction opportunities brought to us by trusted managers in our network and we typically don’t pay a management fee or the fee is very low. We’re at 15-16% and it is taking time because we have high standards: we need to earn an internal rate of return of at least 20% and to monetise these ideas within three years or sooner.
What do you enjoy doing outside of investing?
Beyond all the usual stuff like spending time with my family and playing tennis and golf, I am a decorated competitive vegetable grower.
Alex Crooke, manager of the Bankers Investment Trust, believes investors should avoid overpaying for perceived winners such as Nvidia.
Global stock markets have become obsessed with a narrow group of winners, such as chipmaker Nvidia and obesity drug manufacturers Novo Nordisk and Eli Lilly, at the expense of the broader technology and healthcare sectors.
“The markets love a winner,” said Alex Crooke, manager of the Bankers Investment Trust. “You’ve just got to be careful of overpaying for a perceived winner when you’re missing out on the breadth of things.”
Although markets are narrow and concentrated at present, he believes investors will eventually be rewarded for looking at broader opportunities across the healthcare and tech sectors, and beyond.
He highlighted healthcare in particular, where the big GLP-1 obesity drug creators have “sucked in all the money”. Meanwhile, Nvidia has drawn a lot of attention from the wider semiconductor space.
As a result, investors are overlooking other companies such as GlaxoSmithKline and AstraZeneca, which are attractively valued. (Bankers Trust holds AstraZeneca, Novo Nordisk and Eli Lilly.)
In the tech sector, the trust owns Taiwanese Semiconductor Manufacturing Co. (TSMC), which Crooke argues is “a safer bet” than Nvidia. The latter is a high-quality company but its shares are expensive and it is “quite a crowded trade”, he said.
TSMC meanwhile has a 90% market share manufacturing AI chips designed by Nvidia, Broadcom and others. Even if a competitor eats into Nvidia’s market share, TMSC will still manufacture the chips, whoever designs them.
Furthermore, TSMC is expanding its production facilities in the US to benefit from government spending on semiconductor chip manufacturing via the CHIPS and Science Act.
The trust invests in TSMC via American depositary receipts, which trade at a premium to the company’s Taiwan-listed shares – a premium he believes will persist due to higher demand.
Crooke expects the semiconductor theme to enjoy another couple of years of strong growth and has broad exposure to it, including the trust’s second-largest holding KLA, which provides testing equipment that is critical to the semiconductor manufacturing process. Its share price gained 77.4% in the year ending 1 July 2024.
The trust also holds two Japanese companies in this sector: Disco, which manufactures semiconductor processing and tooling; and Shin-Etsu Chemical, which provides chemicals for etching semiconductors.
Elsewhere, Crooke is looking for ideas that will benefit from electrification and the transition to net zero. The trust owns Schneider Electric in Europe and Hitachi in Japan, which provide grid equipment that will speed up electrification.
In terms of regional exposure, the trust is overweight Japan (a 13.3% allocation), where its financials and tech stocks have performed well, and the UK (14.7%).
Crooke expects today’s general election to usher in a period of political stability that should reassure international investors and lead to a re-rating of UK-listed stocks.
The Labour party’s plans to stimulate housebuilding will have a multiplier effect through and beyond the property sector, he said, and the trust owns housebuilder Vistry.
The trust is divided into regional sleeves, managed by portfolio managers from Janus Henderson Investors who are based locally, with Crooke making overall asset allocation decisions. He recently reduced the sleeves from six to four by combining China with the rest of Asia and amalgamating the UK into Europe.
Crooke is currently paring down the portfolio to 100 stocks because the smallest positions were not enhancing performance. Whereas a regional manager might previously have held a couple of names in a sector, he wants to “back ourselves to pick the right company”.
Deputy fund manager Mike Kerley, who ran the Asia sleeve, retired earlier this year. He has been replaced as the trust’s deputy by Jamie Ross, who helms the European portfolio.
Sat Duhra, who worked with Kerley on the Asian equity desk for 12-13 years, now runs the Asia book. Jeremiah Buckley in Denver continues to manage the trust’s pan-American equities and Junichi Inoue in Tokyo oversees the Japan sleeve.
The £1.3bn trust announced its results last week for the six months to 30 April 2023. Its share price return (21.5%) and net asset value total return (17.5%) both outperformed the FTSE World index (16.6%). Its largest holding, Microsoft (a 4.4% position) has made the strongest contribution to returns so far this year. The trust has also pulled ahead of its sector over the long term, as the chart below shows.
Total return of trust vs benchmark and sector over 20yrs
Source: FE Analytics
Electrification is a structural trend transforming entire sectors.
Companies and governments alike are prioritising electrification for three reasons. First, in a post Russia/Ukraine world, decoupling from imported fossil fuels in favour of domestically produced electrons paves the way for a more geopolitically secure prosperity. Second, moving away from fossil fuels helps reach net zero targets. Finally, electrified technologies are typically more efficient in terms of power conversion.
In short, electrification is a structural trend transforming entire sectors. Such trends underpin the thesis on which Impax Environmental Markets plc is built. Namely, that companies delivering basic needs (in this case, energy) in a cleaner, more efficient manner or addressing environmental issues (such as climate change) can deliver superior long-term earnings growth thanks to the insatiable demand for higher living standards on a finite planet.
Taking this view, the investment opportunities from electrification can be segmented into four broad groups: electrified products, generation, transmission and storage.
Consumer-facing products are electrification’s shop window. Electric vehicles (EVs) have grown from 4% of global sales in 2020 to 18% in 2023. This trend is firmly intact despite moderating growth ex-China. Yet, Impax Environmental Markets does not own any EV manufacturers.
Instead, the team invests in companies whose competitive advantages are driven by high value-add components benefitting from the entire sector’s potential for growth. Littelfuse, a US-listed producer of circuit protectors and automotive sensors, is one such name. This contrasts with backing single brands, whose fortunes are subject to consumer taste and fashion.
The electrification of commercial and industrial processes is less visible, but its impact may be greater. Impax Environmental Markets is a long-term holder of Spirax Sarco – a UK-listed industrial steam and heating specialist. Around a third of sales now derive from the precise use of electricity to control temperature, spanning sectors from manufacturing to technology to healthcare. When connected to a renewable electricity source, its solutions can help companies eliminate scope one and two emissions.
As these products and services become electrified, the International Energy Agency estimates electricity’s share in final energy consumption will rise from 20% in 2023, to 30% in 2030. Companies generating this electricity sustainably and profitably can make compelling long-term investments. Yet since 2022, rapidly higher interest rates, supply chain issues and more recently, falling power prices have all weighed on independent power producers.
These dynamics did weaken short-term economics. Political noise has also impacted the multiples some investors are willing to pay for future growth. However, recent acquisitions have forced equity markets to acknowledge a stark gap between public and private assets, with many listed companies trading below the value of existing, profitable operations.
Impax Environmental Markets has started to benefit from these takeovers, with Terna Energy, a Greek independent power producer, recently taken private. With holdings such as Portuguese-listed EDPR also able to focus on projects delivering higher returns, valuation headwinds are starting to fade.
Investment in electrical grids has reached a similar turning point. Ageing infrastructure means existing cables and transformers are increasingly at risk of faults and in need of replacement. At the same time, mass electrification and the shift to renewables means grids are having to supply an ever-greater volume of electrons, with more flexibility and at greater distances.
Political administrations are waking up to this. Last November, the EU Commission launched an Action Plan for Grids, identifying a necessary €584bn of investment to modernise Europe’s electricity grid. In April, the US Department of Energy issued a roadmap to improve the speed generators connect to the grid. Companies such as Prysmian, an Italian manufacturer of cables, are well-placed to capture this increased spending.
Once this electricity has been produced and distributed however, it cannot be stored in its raw state. Batteries resolve this issue, doing away with intermittency and enabling transport’s electrification. On top of rising EV sales, battery storage penetration of renewables is expected to rise from 2% today to 9% by 2030.
This has incentivised manufacturers to develop ever-more energy dense and powerful batteries. Lithium iron phosphate has emerged as the dominant battery technology and costs around 85% less than it did a decade ago. These developments informed Impax Environmental Markets’ new position in CATL, a Chinese battery producer.
A global market share leader thanks to a history of technological innovation, the company recently unveiled a battery capable of delivering a 400km range on a 10 minute charge. At the time of purchase, the shares overly discounted anaemic EV sales growth, China’s lacklustre rebound post-Covid and the potential impact of US tariffs. This is despite a robust balance sheet and sizeable addressable markets in Asia and Europe.
Fotis Chatzimichalakis is co-portfolio manager of Impax Environmental Markets plc. The views expressed above should not be taken as investment advice.
Experts explain how to choose a passive exchange-traded fund.
Buying a passive exchange-traded fund (ETF) should theoretically be simple: pick the cheapest one replicating the performance of the index you want to buy.
However, not all ETFs are created equal, and there is a range of criteria that needs to be considered viable investments. Below, Trustnet asks experts what investors need to check before buying an ETF.
Index
As most ETFs simply mirror the performance of their benchmark, it is important for investors to consider the specifics of the underlying index. This includes analysing the exposure to certain sectors and geographical areas.
Alison Macdonald, portfolio manager at RBC Brewin Dolphin, said this could becoming important in the current climate as the rise of the ‘Magnificent Seven’ US stocks has caused them to balloon in terms of significance to the S&P 500 as well as to global indices.
He compared it to the financial crisis, when the FTSE 100 “suffered significant declines due to its high concentration of financial stocks”.
A high concentration in a handful of stocks can be good news when they are performing well, but any adverse events affecting these companies can have a considerable impact on the index as a whole.
Moreover, some providers may change the underlying index or the methodology of their ETFs over time, which is another factor investors have to monitor.
Nick Wood, head of fund research at Quilter Cheviot, added: “This is akin to a fund manager leaving an active fund or switching styles, and is clearly a red flag if this wasn’t what you wanted to buy.”
Costs
As with any fund, cost is an important factor to consider, with Wood emphasising that simple market cap index ETFs should be very low cost. However, investors should expect to pay more for more customised ETFs.
Therefore, they should seek an ETF that charges a competitive fee relative to other similar options available on the market.
Tracking error
Jonathan Griffiths, investment product manager at ebi Portfolios, urged investors to combine cost comparison with a “thorough” backward-looking performance review.
He added: “Has the ETF achieved its investment objectives over historic time periods? If not, then gaining a deep understanding of why this is the case should be a priority for the investor.”
A way to measure past performance for a passive ETF is to look at its tracking error, which measures how effectively it replicates an index.
Wood said: “This will vary for a number of reasons and different ETFs of the same index will produce different results, so ensuring it is aligned as closely to your target index is very important.”
A tracking error of zero indicates a perfect replication of an index’s performance. As a result, investors should look for ETFs with a tracking error as close to zero as possible.
Physical or synthetic
To track the performance of an index, ETFs can physically replicate it by holding all of the actual securities within that index or by using an alternative way known as synthetic replication, which utilises derivatives.
Wood said: “It is better to have full physical replication if possible as synthetic will bring in some extra complexities and risks. Synthetic ETFs introduce counterparties and thus there are risks to capital if any of these get into financial or operational difficulties.”
Liquidity risk
Liquidity – how easy and quick it is to trade the ETF at a reasonable cost – is another factor that investors should take into account.
For that purpose, Griffiths highlighted the ETF’s trading volume and its bid-offer spread as the two most prominent measures of liquidity. He also stressed that the liquidity of an ETF will be impacted by the liquidity of the individual securities it holds.
Macdonald added: “The ETF market has vastly expanded in recent years, enabling investors to target specific trends and themes, some of which can be quite niche. The more niche the market, the more likely you are to run into liquidity risks if you want to sell.”
Leverage
Finally, investors should keep in mind that some ETFs use leverage, which means they utilise derivatives and borrowing to amplify the returns of the benchmark index.
While leverage can lead to greater returns, it also increases volatility. Moreover, leveraged ETFs tend to attract higher fees and may have complex tax implications.
Macdonald concluded: “They’re not really designed to be held as long-term assets and are more frequently used by day traders – not one for the inexperienced investor.”
We find out which funds have been getting researched more frequently over the past six months.
Investors have shown growing interest in funds investing in Indian equities and tech stocks over 2024 so far, as well as researching the Polaris range from St James’s Place.
Stock markets rose over the first six months of the year, although – as a recent Trustnet article showed – gains tended to be clustered into a handful of themes.
To see how this was reflected in fund research trends, we have compared each Investment Association fund’s pageviews on Trustnet during the first half of 2024 with their views across 2023.
The results of this on a sector level can been seen in the chart below, with the IA Global sector as the clear leader. This peer group was already the most viewed by Trustnet users in 2023, accounting for 15.12% of pageviews, but its research share increased to 16.48% in the first half of 2024.
Change in % of Trustnet pageviews in H1 2024
Source: Google Analytics
IA Technology & Technology Innovation was the sector with the second largest increase in Trustnet research share, moving from just over 2% of pageviews to little under 3%, while IA India/Indian Subcontinent funds more than doubled their share by going from 0.73% to 1.58%.
Smaller gains in research share were seen among sectors such as IA North America, IA Unclassified, IA Global Equity Income, IA Japan and IA UK Smaller Companies while investors spent less time looking at IA Mixed Investment 20-60% Shares, IA Mixed Investment 40-85% Shares, IA UK All Companies, IA Flexible Investment and IA Sterling Strategic Bond funds.
Turning to individual funds and it is a member of the IA India/Indian Subcontinent sector that has benefitted from the biggest jump in Trustnet pageviews: Jupiter India. This was the 54th most viewed fund factsheet in 2023 but has surged into fifth place this year.
Indian equities have rallied significantly this year. The MSCI India index made a 17.9% total return in sterling terms over the past six months, compared with a rise of 8.4% for the MSCI Emerging Markets index and 12.7% from the MSCI World.
The strong performance of Indian stocks in the first half of 2024 is down to robust economic growth, proactive government policies, strong corporate earnings, significant foreign investment, stable monetary policy and a growing middle class, which offset the hit to sentiment that came when prime minister Narendra Modi’s Bharatiya Janata Party failed to secure a clear majority in the general election.
Jupiter India, which is managed by Avinash Vazirani, made the sector’s highest total return over this period, gaining 22.9% versus 16.4% from its average peer. The £1.8bn fund is also in the first quartile over one, three and five years – although it must be noted that it has dropped into the bottom quartile over one and three months.
The strong rise of Indian equities has left some concerned about valuations, but in a recent update Vazirani said: “The Indian market has delivered good returns for investors in recent years, but valuations remain reasonable in the context of the superior earnings growth already visible and the long-term structural reasons that create potential for this dynamic to continue for decades to come.”
Liontrust India, Franklin India, GS India Equity Portfolio, FSSA Indian Subcontinent All-Cap and Fidelity India Focus are other members of the sector that have seen an increase in their research share on Trustnet over the past six months, although none to the extent of Jupiter India.
Source: Google Analytics
The table above, which shows the 25 funds with the biggest increases in research share over 2024 so far, reflects a few other trends.
The most obvious is the sustained interest in tech stocks, thanks to the continued outperformance of the ‘Magnificent Seven’ (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla).
IA Technology & Technology Innovation members such as L&G Global Technology Index Trust, Janus Henderson Global Technology Leaders and Liontrust Global Technology as well as specialist fund Sanlam Global Artificial Intelligence can be found in the table above.
However, global equity funds such as Royal London Global Equity Select, WS Blue Whale Growth and Aviva Investors Global Equity Income are also invested in these stocks. It is also worth remembering a global tracker will have a hefty weighting to tech – one-quarter of Fidelity Index World is in information technology stocks as is more than 40% of L&G Global 100 Index Trust.
Interest in equity income is also hinted at in the table, through the presence of Aviva Investors Global Equity Income, Royal London Global Equity Income, Artemis Global Income and Artemis Income. Just outside the top 25 funds highlighted above are the likes of Man GLG Income, Invesco Global Equity Income, Artemis Monthly Distribution, Aegon Global Equity Income and FP Octopus UK Multi Cap Income.
Finally, the jump in research into SJP Polaris 4 UT and SJP Polaris 3 UT mirrors the strong growth that the four-strong Polaris range has enjoyed since it was launched by St James’s Place at the end of 2022. Since then, the multi-asset range has gathered assets of £37bn.
The online grocery company has failed to deliver for shareholders since the pandemic.
Grocery delivery company Ocado was the UK’s second-most shorted stock in May and June 2024, while energy facilities operator Petrofac has been the country’s least popular stock since late last year.
Ocado thrived while consumers were stuck at home during lockdown with share price gains of over 77% in 2020, but it has struggled since then as people returned to doing their supermarket shopping in person.
Ocado was the worst performing stock in the FTSE 100 in 2022, sinking 63.2% and making a net loss of £501m. Its downward trajectory has more or less continued since then, despite a few rallies that proved short-lived, culminating in the online grocer dropping out of the FTSE 100 last month.
The share price took a further blow in June 2024 when Ocado revealed that Canada’s second-largest food retailer, Sobeys, had ended its exclusivity deal and paused plans to open a robotic warehouse.
Ocado’s share price vs FTSE All Share over 5yrs
Source: FE Analytics
Short-sellers profiting from Ocado’s demise include BlackRock, AHL Partners, Arrowstreet Capital, D1 Capital Partners, Gladstone Capital Management and Systematica Investments, according to data disclosed to the Financial Conduct Authority last month.
Dan Coatsworth, investment analyst at AJ Bell, said: “There is always a ‘will it, won’t it’ element in trying to second guess what Ocado is doing strategically. On paper, the business model is focused on winning more grocery clients to power its online shopping warehouses, while also trying to improve the performance of a joint venture with Marks & Spencer.
“In reality, progress has been lumpier than gravy in a school canteen. Ocado always seems to struggle to sustain momentum.”
Elsewhere, hedge funds continued to bet against power companies and clothing retailers, with Petrofac, Diversified Energy Company and ITM Power all featuring amongst the UK’s 10 most shorted stocks alongside ASOS, Boohoo and Burberry.
Source: Financial Conduct Authority
Short sellers closed out some of their positions against Hargreaves Lansdown, however, as the investment platform’s share price surged on the back of a bid from a consortium of private equity funds led by CVC Capital Partners.
Trustnet’s fund picks have had mixed results, but all have failed to beat the MSCI World over the first half of the year.
Sometimes it is easy to overthink things. That has been the case for the Trustnet team’s fund picks so far in 2024, with all of our selections failing to match the returns of the MSCI World index throughout the first half of the year.
Of course, there are still another six months to go and all can change again from here, but at the halfway mark we thought it was a good chance to review how our picks have got on.
It has been a real mixture of some excellent selections and some not-so-good ones. The top performer has been the RTW Biotech Opportunities trust, selected by news editor Emma Wallis.
Performance of fund picks and overall Trustnet portfolio vs MSCI World in H1 2024
Source: FE Analytics
With an 11.1% return, it is just 1.6 percentage points behind the MSCI World index but has made a very respectable gain. This year, the trust is third within the seven-strong IT Biotechnology & Healthcare sector.
It has been a busy six months for the trust, which has been helped by strong clinical data from one of its holdings Rocket Pharmaceuticals, as well as the acquisition by Merck of its former largest holding Prometheus Biosciences at a 75% premium to the share price.
Following the trust’s full-year results in March, Gavin Trodd, research analyst at Deutsche Numis, said: “We believe that the fund possesses a strong, well-resourced management team that is well placed to capitalise on market dislocation in the biotech sector.”
On a discount of some 31% back in March, this has narrowed significantly to 21%, giving the trust a boost in share price performance, with much of its total returns so far this year made in the past month. If the trust can continue this momentum, it could be the clear winner by the end of 2024.
In second place so far this year is editor Jonathan Jones’ selection of WS Gresham House UK Micro Cap, which has made 8.6%, still some 3.5 percentage points behind the MSCI World index.
The fund has been an above-average performer in the IA UK Smaller Companies sector, sitting in the second quartile among its peer group.
UK small-caps have come roaring back so far this year as the expectation of interest rate cuts, depressed starting valuations and a pick-up in merger and acquisition (M&A) activity has helped to bolster the beleaguered part of the market.
Government intervention could be the key for the sector in the second half of the year, with hopes that business-friendly policies could entice investors back to the UK. If this happens, the fund could leapfrog RTW Biotechnology Opportunities.
However, perhaps our best pick so far this year has been the Royal London Sustainable World trust. Despite making the third-highest returns (8%), it is the only selection in the top quartile of its sector (IA Mixed Investment 40-85% Shares).
Picked by senior reporter Matteo Anelli, the fund has benefited from the rise of the ‘Magnificent Seven’ stocks, with Alphabet and Microsoft its two largest holdings. A relatively low weighting to bonds (16.6%) has also been a positive for the fund.
If the big US stocks can continue to thrive, and if there is a resurgence in environmental, social and governance (ESG) investing, the fund may be well placed for even more gains in the second half of the year.
Heading further down the list, Trojan is in fourth place, selected by former Trustnet journalist Matthew Cook. The fund is designed to protect investors in times of market difficulty but is expected to lag when stocks fly higher, as they have done so far in 2024.
It sits in the fourth quartile of the IA Flexible Investment sector year-to-date with a return of 3.8%, but any market wobbles in the next six months should benefit the strategy.
This was followed by reporter Jean-Baptiste Andrieux’s selection of Fidelity China Special Situations. The trust has been the worst performer of the three options in the IT China/Greater China sector, although it has only made a small loss of 0.6%, around 6 percentage points behind the MSCI China index.
A notable event during the period was the transaction with the abrdn China Investment Company. Although a good long-term deal for the trust, there may have been some investments that required selling off, which could have impacted performance.
The trust is one of the most highly geared (27%) in the Association Investment Companies (AIC) universe, so if Chinese stocks have a strong second half of the year, then it could leap up the table.
In last place is head of editorial Gary Jackson, whose selection of Janus Henderson Strategic Bond has been the third worst performer in the IA Strategic Bond sector so far in 2024, losing 3.1%.
John Pattullo, co-head of the global bonds team at Janus Henderson, is to retire in March 2025, with Jenna Barnard remaining in place and Nicholas Ware, portfolio manager of the Fixed Interest Monthly Income fund, becoming a named portfolio manager fund at the start of July.
Bonds were expected to perform well at the start of the year, with interest rates forecast to come crashing down, but this has yet to happen. The fund could come back, however, if rates start to drop. There are some concerns though that rate cuts could be pushed to 2025, suggesting the pick may have been one year too early.
TAM Asset Management is using an array of alternative investment strategies to lower volatility, diversify risk and add alpha.
The macroeconomic outlook is uncertain, geopolitical tensions are rising, a range of elections could yet roil markets, and many investors are concerned about lofty US equity valuations.
One way to deal with the broad range of potential outcomes is to dynamically allocate to different alternative investments as the situation changes, to protect against risks and boost returns, said James Penny, chief investment officer of TAM Asset Management.
Discretionary fund manager TAM allocates 5-15% of its model portfolios to alternatives, using global macro and long/short strategies, broader multi-asset funds, commodities and precious metals.
This is because the world remains in flux, with Penny noting the “inflation dynamic” and “interest rate dynamic” have completely shifted in recent years, while there remains a “roaring economy”.
“In the face of that, you have a lot of challenges on the macro front with two wars and record elections, so your alternatives bucket should look to try and take advantage of that and protect you,” he explained.
The universe of alternative investments is “so deep and so wide, and it's such a diverse toolkit, it's really becoming a phenomenal part of a manager's arsenal”, he added.
TAM invests in three absolute return funds to diversify away from equity market volatility: Fulcrum Diversified Absolute Return, JPMorgan Global Macro and Amundi Volatility World.
Performance of funds over 10yrs
Source: FE Analytics
Fulcrum Diversified Absolute Return is a broad multi-asset fund investing in equities, bonds, currencies, commodities and uncorrelated return streams, such as volatility strategies. It aims to beat inflation by 3-5% over rolling five-year periods with target volatility of 6-8%. In other words, it should beat cash and inflation substantially regardless of the market environment but be less volatile than equities.
Fulcrum’s chief investment officer Suhail Shaikh oversees the fund, which has an FE fundinfo Crown Rating of four.
JPMorgan Global Macro invests in equities, bonds and derivatives (volatility futures, bond futures and equity options and futures), with exposure to emerging and developed markets. Managers Shrenick Shah and Josh Berelowitz aims to keep volatility lower than two-thirds of the MSCI All Country World index over a two to three-year horizon.
This strategy also has a four Crown Rating, placing it within the top 25% of funds for alpha, volatility and consistently strong performance.
TAM’s third absolute return strategy, Amundi Volatility World, invests in exchange-traded derivatives within the listed options market to isolate volatility as an investable asset class. When the CBOE Volatility Index (VIX) rises, Amundi Volatility should also make gains, Penny explained. The fund is negatively correlated to the equity market over the longer term.
Meanwhile in the commodities and precious metals arena, the valuations of mining companies are still fairly low, despite gold hitting all-time highs. TAM is taking advantage of this dynamic by investing in Ned Naylor-Leyland’s Jupiter Gold and Silver fund.
“If you think that the precious metals market still has further to run, which we do, especially within the silver space, then it makes sense that you want to invest in the people pulling it out of the ground and selling it,” Penny said.
Naylor-Leyland has “a huge amount of experience within precious metals” and “understands the market”, Penny continued. “There are not too many of him around, there's not many active precious metals managers.”
The fund is quite niche, however. “It's not a massive position because it's quite volatile. It had a very, very tough 2023, so you need to treat it carefully.”
Its benchmark is a 50/50 split between the gold price and the FTSE Global Mines index but its performance is more correlated to miners than bullion, as the chart below illustrates.
Performance vs benchmarks over 5yrs
Source: FE Analytics
TAM also invests in silver and gold exchange-traded commodities (ETC) from BlackRock, as well as the HANetf Royal Mint Responsible Physical Gold ETC GBP.
The FTSE 100’s steady upward trajectory has further room to run.
As we approach the midpoint of the year, the financial markets present a mixed picture of optimism and cautious anticipation. The FTSE 100, Britain's blue-chip index, has demonstrated resilience and growth, posting a 7% gain year-to-date. This performance, while modest compared to some global counterparts, suggests a steady trajectory that may have further room to run.
One of the key factors supporting this positive outlook is the upcoming UK general election. Contrary to what might be expected, the election appears to pose minimal risk to market stability. Current polling indicates a likely Labour victory, potentially by a significant margin. This scenario, somewhat surprisingly, is viewed with relative equanimity by the markets.
The Labour party, under Keir Starmer's leadership, has made concerted efforts to present itself as fiscally responsible and business-friendly, allaying many of the concerns that might typically accompany a shift from Conservative to Labour governments.
This political landscape stands in stark contrast to the situation in France, where the rise of far-right parties presents a more volatile and unpredictable scenario. The stability offered by the UK's political outlook, therefore, becomes a comparative advantage, potentially attracting investment flows seeking a haven from continental uncertainties.
From a valuation perspective, the FTSE 100 continues to offer compelling value. Trading at approximately 12x current earnings, the index remains attractively priced compared to many global peers. This undemanding valuation leaves ample room for further appreciation, particularly if corporate earnings continue to show resilience in the face of ongoing economic challenges.
Diving deeper into sectors, energy and utilities stand out as particularly undervalued compared to sectors such as healthcare, IT and industrials. The utilities sector is poised to benefit from the anticipated shift towards an easing cycle in monetary policy. As central banks, including the Bank of England, begin to contemplate rate cuts, the steady income streams offered by utility companies become increasingly attractive to yield-seeking investors.
Across the Atlantic, the US market continues to be dominated by the relentless surge in big tech stocks. Companies such as Nvidia have seen their valuations soar to stratospheric levels, driven by the artificial intelligence boom and strong earnings reports. Historically, US election years have tended to be positive for stock markets, which could provide further support for this trend.
However, the sustainability of these high valuations is increasingly being questioned. While the momentum behind these tech giants remains strong, the levels of investor optimism and market positioning suggest a degree of frothiness that could be vulnerable to sudden shifts in sentiment. Forward-looking economic indicators are beginning to show signs of weakness, which could point towards a more challenging environment for earnings in coming quarters.
As the year progresses, the focus of market participants will increasingly turn to the Federal Reserve's policy decisions. With inflation showing signs of moderating, expectations are building for at least one interest rate cut before the end of the year. However, the window for such action is narrowing, and each Fed meeting will take on greater significance. The market's desire for monetary easing could set the stage for disappointment if the Fed chooses to maintain its cautious stance for longer than anticipated.
The combination of elevated bullish positioning among investors across the spectrum – from retail traders to institutional money managers – and the concentration of market gains in a handful of large tech companies creates a potentially precarious situation. Should these tech leaders stumble, perhaps due to earnings disappointments or a shift in investor sentiment, it could trigger a broader market sell-off. The risk of a pre-election swoon in stocks is therefore not insignificant, particularly given the high expectations built into current valuations.
For UK investors, this global context presents both opportunities and challenges. While the FTSE 100's relatively modest valuation provides some insulation from the frothiness seen in US tech stocks, the interconnectedness of global markets means that a significant correction in the US would likely have ripple effects across all major indices.
However, the UK market's tilt towards more traditional sectors such as finance, energy and consumer staples could provide a degree of stability in the event of a tech-led sell-off. Moreover, the potential for a shift towards monetary easing could disproportionately benefit UK stocks, given their higher average dividend yields compared to US counterparts.
As we look towards the second half of the year, investors would be wise to maintain a balanced approach. While the overall outlook for UK equities remains positive, driven by attractive valuations and a stable political backdrop, the risks emanating from global markets cannot be ignored. Diversification across sectors and geographies remains crucial, as does a keen eye on evolving economic data and central bank policies.
The coming months are likely to be characterised by increased volatility as markets grapple with the competing forces of optimism around potential rate cuts and concerns over economic growth and corporate earnings. For active investors, this environment may present opportunities to capitalise on market dislocations, while those with a longer-term perspective may find comfort in the FTSE 100's solid fundamentals and attractive valuation.
Chris Beauchamp is chief market analyst at IG Group. The views expressed above should not be taken as investment advice.
Investors continued to buy into the tech story in the first six months of the year.
The first half of 2024 continued to be dominated by a handful of themes as areas such as tech and Indian equities led the market, FE fundinfo data shows.
Investors have had a decent ride over the past six months, with stock markets around the world moving higher despite the year starting with high interest rates, political uncertainty and worries about the global economy.
Below, Trustnet looks at 2024’s opening half from a range of viewpoints to see the market’s best and worst-performing areas.
Performance of asset classes in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
The past six months have been positive for risk assets, with global equities and a broad basket of commodities gaining more than 12%. However, cash outperformed bonds over the period.
Reasons for stronger equity markets will be looked at below, but the lacklustre returns from bonds come down to stickier than expected inflation and the likelihood that there will be fewer and later interest rate cuts.
Rob Morgan, chief analyst at Charles Stanley, said: “While many parts of the bond market haven’t incurred overall losses year to date once you factor in the relatively healthy income they pay, the muted returns aren’t what many investors would have had in mind at the start of the year.
“Yet, from this point on, they could provide attractive returns and a bonus of capital appreciation if interest rates do end up falling a bit more quickly than factored in, for example in the event of a sudden recession. While that is not necessarily a likely scenario it does mean bonds play a vital role in a diversified investment portfolio.”
Performance by geography in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
Within the major equity markets, the strongest performance came from the Nasdaq 100, with a return of almost 18.5%, as investors continued to back tech stocks such as the ‘Magnificent Seven’ (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla). The 16% return in the S&P 500 was also driven by this theme.
Dan Coatsworth, investment analyst at AJ Bell, said: “A big chunk of the best performers on the S&P 500 in the first six months of 2024 is connected to technology and AI [artificial intelligence]. Interestingly, chips giant Nvidia is not the overall best performer despite it being the stock everyone talks about. The top slot went to Super Micro Computer, which designs and builds servers and storage systems.
“The key risk to these stocks and any company seen as an AI winner is that growth rates could moderate leading into 2025, potentially leaving some investors disappointed and leading to widespread profit-taking in the sector.”
India equities were not too far behind the Nasdaq, thanks to a positive economic backdrop, business-friendly government policies, a growing middle class and strong corporate results.
Performance by industry in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
The chart above highlights how the tech theme dominated the opening half of 2024, with the MSCI AC World Information Technology index gaining close to 26%; the MSCI AC World was up 12.2% and every other industry made a lower return than this.
Morgan added: “That the largest seven US companies now account for over 20% of the entire value of global stock markets is certainly pause for thought. History may tell us we should be worried about a market concentration last seen in the late 1990s, immediately before the dotcom bust, but today’s conditions have little else in common with that period."
“This group of companies are established, highly profitable and contain some of the potential longer-term winners from artificial intelligence or other avenues of growth. Shares are expensive in relation to their present earnings and are vulnerable to growth falling short of expectations, but it’s hard to argue investors have lost touch with reality.”
Performance by investment factor in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
Putting all of the above together explains how performance by investment factor played out in 2024’s opening half: the momentum, growth, quality and large-cap factors are all applicable to the Magnificent Seven and similar stocks.
The difference between winning and losing investment factors continues to be significant, with more than 20 percentage points between momentum and value stocks while the gap between large-cap and small-cap stocks is in excess of 10 percentage points.
Performance of commodities in H1 2024
Source: FinXL. Total return in sterling between 1 Jan and 30 Jun 2024.
The final chart sheds more light on what was behind the 12% rise in the broad S&P GSCI index. Cocoa prices have jumped 126.6% over the past six months, largely down to a global cocoa shortage: harvests in West Africa, which accounts for about 80% of the world’s cocoa output, were hit by drought.
However, investors are likely to be paying more attention to gold with the yellow metal rising 13.6% despite persistent selling by investors in the West. Charles Stanley noted that central banks, investors and households in the East have become heavy buyers of hold, especially in China.
“In many ways, the renewed popularity of gold is linked to the trend of deglobalisation and heightened international tensions as central banks increasingly crave a non-politicised reserve asset,” Morgan said. “As the world continues to fragment geopolitically this trend could continue.”
There will be lots more deals for UK companies in the second half of 2024, according to Peel Hunt head of research Charles Hall.
The UK market will continue to shrink this year if a new government does not get to grips with rampant merger and acquisition (M&A) activity, according to Peel Hunt’s Charles Hall.
The head of research has previously warned that the UK small-cap market may cease to exist in a decade if the current pace of deals keeps up and remains concerned heading into the second half of 2024.
In the first half of the year alone, bids were made for UK companies worth some £43.1bn. The table below shows the split between the FTSE 100, FTSE 250 and the FTSE Small-Cap index.
Source: Peel Hunt
Some 9% of the FTSE 250 in monetary terms has been bid for, although this includes the approach for UK fund platform Hargreaves Lansdown, which has since been promoted back to the FTSE 100.
“It has been particularly noticeable in recent months that corporates have been the main acquirers. This suggests to us greater confidence in the economic outlook and the interest rate environment,” said Hall.
“It also shows the attractiveness of UK companies and the potential for synergies in a low-growth environment.”
However, he noted it was “surprising” to see relatively low activity from private equity, where he estimated there was some $4trn of cash waiting on the sidelines for new deals.
“We expect this to change as financing conditions improve, which means that private equity is likely to be a more active acquirer going forward,” he said.
As such he sees no signs of UK M&A slowing down in the second half of the year.
What is behind this?
Hall suggested the big catalyst has been the consistent withdrawals from UK equity funds, with investors pulling money out of domestic-market portfolios for 36 consecutive months.
This has left many domestic companies languishing on low valuations, making them ideal targets for overseas or private equity bids.
Additionally, when these bids come in, shareholders are “more readily agreeing” to a deal as they have performance targets and liquidity issues to meet, he said.
A third potential reason is boards are more likely to agree to an offer as well, increasing the chances of deal completion, with a key catalyst for this being that scale is becoming increasingly important.
What about new launches?
Hall noted there has been a “limited appetite” for initial public offerings (IPOs) as management teams have been “questioning the rationale of being quoted”, although added there have signs of life more recently.
“The IPO market has reopened with the recent listings of Raspberry Pi and Aoti. However, the scale of departures dwarfs the new entrants and we are continuing to see the smaller company sector diminish rapidly,” he said.
What can be done about it?
Hall said it was “vital” for UK economic growth that these trends are reversed and the UK market remains well stocked, particularly at the smaller end. He said small-caps are the “lifeblood of economic activity”.
Yet the market is shrinking, sas the below chart shows, both in market capitalisation terms as well as the number of options available to investors.
Source: Peel Hunt
Hall said there were a number of measures that could be put in place to counteract some of the demand-side problems caused by fund flows away from UK funds.
Increased UK allocation by pension funds and insurance companies and the proposed UK ISA to encourage domestic investment by retail investors were two that have been well covered for some time.
In addition, he suggested removing stamp duty to ensure that “the UK is competitive with the US” as well as reducing cost of ownership and improving liquidity.
Lastly, he suggested developing a UK wealth fund, perhaps through reinvesting the investment in NatWest.
“Enacting all of these measures would require a small initial investment from the government but we anticipate would deliver a material long-term improvement in the UK equity market, economic growth and tax take,” he said.
“The demand side requires urgent attention by the new government if we are to retain our growth companies and to ensure that the equity market can provide long-term growth capital.”
Nick Ford, who manages the Premier Miton US Opportunities and US Smaller Companies funds, is retiring.
Premier Miton has hired Alex Knox, a US small and mid-cap (SMID) specialist at Federated Hermes, to co-manage its Premier Miton US Opportunities and US Smaller Companies funds.
She replaces Nick Ford, who will retire at the end of September after almost 40 years in the investment industry. He joined Premier Miton in 2012 from Scottish Widows Investment Partnership.
Hugh Grieves, who has co-managed the US Opportunities fund with Ford since 2013 and the Smaller Companies strategy since 2018, is staying on and will work alongside Knox when she joins next month.
Knox has spent the past 15 years with Federated Hermes, where she co-manages the US SMID Equity strategy. The $999m fund is a top-quartile performer in the IA North American Smaller Companies sector over three years and has an FE fundinfo Crown Rating of four, placing it in the top 25% of funds for alpha, volatility and consistently strong performance over this time.
Performance remains above the Russell 2500 index and the average peer over five and 10 years as well, as the below chart shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The £1.6bn Premier Miton US Opportunities fund is third quartile over five years and fourth quartile over one and three years, compared to peers in the IA North America sector, reflecting a market where recent performance has been concentrated amongst a handful of tech giants – a tough environment for funds that hunt further down the market cap spectrum.
The fund pursues a high conviction approach with a concentrated portfolio of 35-45 holdings. Its largest positions are Graphic Packaging Holdings, Raymond James Financial, Tetra Tech, Charles Schwab and Intercontinental Exchange.
The £35m US Smaller Companies fund is fourth quartile in the IA North American Smaller Companies sector over three and five years but third quartile over one year.
UK investors also backed European and emerging markets equities, while shunning US equities.
UK investors added £1.4bn to global equity funds in June, according to data from Calastone, making it the most popular category last month.
Since the beginning of the year, investors have added a total of £7.6bn into global funds, with only North American funds doing better, having attracted a total of £7.8bn since 1 January.
However, investors shunned North America in June, with very slight withdrawals of £0.6m from the sector despite the strong performance of the US equity market.
This lack of interest in US equities impacted funds with an environmental, social and governance (ESG) mandate, which are typically heavily weighted toward big technology names such as Microsoft and Nvidia.
As a result, ESG funds shed £179m, marking the first month of outflows for the category since December 2023. Indeed, UK investors added £5.1bn into ESG funds between January and May.
Edward Glyn, head of global markets at Calastone said: “The US market valuation is not cheap, and this means investors are hoping that earnings growth will deliver, as the prospect for multiples to expand further is surely limited at present.”
Source: Calastone
In total, UK investors poured £11.4bn into equity in the first half of the year, with £1.7bn added in June alone. This marks the best six months for equity funds on Calastone’s 10-year record.
Glyn added: “Hopes for cheaper money after the painful rate squeeze of the past two-and-a-half years are the clear driver of record flows into equity funds so far this year.”
European equities and emerging markets were also popular with investors, as inflows reached £714m and £269m, respectively in June. These inflows ended two months of net selling for emerging markets funds.
Outflows from UK equity funds slowed, with investors cashing in £522m over the month. As such, June was the least bad month so far in 2024 for funds focusing on the domestic equity market. Since the beginning of the year, investors have withdrawn £3.8bn from UK equity funds.
“Large markets such as the UK and Europe are trading on less challenging valuations, while many emerging markets are set to benefit from the weaker dollar and a nascent commodity boom,” Glyn said.
Source: Calastone
In spite of hopes for interest rate cuts, bond funds also experienced outflows amounting to £471m as investors favoured equities. Over the past two months, investors have withdrawn £1.1bn from bond funds.
Glyn said: “The outflows from fixed income funds in the past two months are harder to understand. If investors truly believe rates are coming down and will stay low, then there are capital gains to be made in the bond markets. Perhaps the allure of equities simply looks too strong at present.”
Since the beginning of 2022, inflows into bond funds have reached £8.3bn, which is more than twice that of equity funds, which only received £4bn over the same period.
“The current picture may simply reflect a rebalancing of investor appetite,” Glyn added.
Investors also fled property funds, with £48m leaving the sector in June. A beneficiary of those withdrawals has been money-market funds, which have attracted inflows each month since January, with April 2024 being the only exception. In June, investors added £247m to money-market funds.
Experts explain how to best capture the growth of the technology sector.
IA Technology & Technology Innovation has been the best-performing Investment Association (AI) sector since the beginning of the year as stocks related to the artificial intelligence (AI) trend, such as Nvidia, have continued to outperform.
Although there are fears that AI might currently be in a bubble, leading to comparisons with the dot-com crash of the late 1990s, some opinions suggest the AI megatrend is just getting started.
But technology is not restricted to AI, with other developing trends in this sector, such as the Internet of Things, cybersecurity and robotics, for investors to get excited about.
Performance of best-performing sectors YTD
Source: FE Analytics
Below, experts suggest funds for investors seeking dedicated exposure to a sector with multiple layers of secular growth, while also warning that such exposure comes with greater risks.
Polar Capital Global Technology
David Holder, senior investment research analyst at Square Mile Investment Consulting and Research, picked Polar Capital Global Technology, which he called an “attractive proposition” for long-term investors.
The fund is managed by Nick Evans, Ben Rogoff, Xuesong Zhao and Fatima Lu, who aim to identify disruptive trends and the companies poised to benefit from them.
AI is the major theme running across the portfolio, with Rogoff describing himself and his colleagues as “AI maximalists”. As a result, more than 90% of the portfolio is exposed to companies the managers see as AI enablers in areas such as cloud computing and semiconductors as well as to beneficiaries and early adopters of AI.
Earnings growth is a key parameter for the managers, as they believe it drives share price appreciation, while they also include macroeconomic considerations in their investment process to help identify new themes within the industry.
Performance of fund over 10yrs vs sector
Source: FE Analytics
Holder added: “They favour firms with established, profitable business models, high barriers to entry and tight management cost controls, which they believe are poised for rapid growth as they enter mainstream use.
“They adopt a bottom-up approach to stock selection and attend up to 1,000 company meetings each year as well as industry conferences to ensure they keep abreast of the rapidly changing technology landscape.”
Investment trusts
Dan Coatsworth, investment analyst at AJ Bell, also commended the fund managers and their investment strategy.
However, he pointed to the investment trust version of the fund, Polar Capital Technology Trust, as it is trading at a roughly 10% discount.
Dzmitry Lipski, head of fund research at interactive investor (ii) also pointed to Allianz Technology Trust, which has been managed by Mike Seidenberg since 2022.
Similar to Polar Capital Technology Trust, Allianz Technology Trust trades at a discount of approximately 10%. Both funds are also similar in terms of fees, each charging around 0.80%.
Performance of investment trusts over 10yrs vs sector
Source: FE Analytics
Recently, a panel of experts indicated a preference for Allianz Technology Trust as it holds more off-benchmark positions and because the team is based in Silicon Valley, California, where the action takes place.
Targeted approach
Lipski also pointed to iShares Automation & Robotics ETF for more adventurous investors seeking exposure to a specific area of the technology sector.
The exchange-traded fund (ETF) tracks the STOXX Global Automation and Robotics index, composed of companies that generate significant sales from robotics and automation across developed and emerging markets.
The five largest country weights are the USA, Japan, Germany, Taiwan, and the UK, while top holdings include Nvidia, SAP, Workday, Keyence and Autodesk, among others.
Performance of funds over 5yrs
Source: FE Analytics
For investors who specifically focus on AI, Sheridan Admans, head of fund selection at TILLIT, mentioned Sanlam Global Artificial Intelligence. This fund not only invests in the theme but also incorporates AI into its investment process.
Admans said: “By leveraging a bespoke AI tool developed in partnership with Orbit Financial Technology, fund managers can uncover valuable investment opportunities across a diverse range of sectors.”
About half of the portfolio is composed of technology companies, with the remainder invested in stocks from other sectors that utilise AI to enhance their products or services.
Stick to global
Experts also emphasised that it is possible to capture the effects of technological development while benefiting from diversification through global growth funds.
For instance, Lipski and Admans both highlighted Scottish Mortgage’s emphasis on technology-driven businesses.
Admans said: “This long-term strategy is particularly attractive for investors looking to capitalise on transformative technological advancements and disruptive innovations.
“By including private technology companies that are typically inaccessible to retail investors, Scottish Mortgage offers unique exposure to some of the most dynamic and forward-thinking enterprises globally.”
Performance of funds over 10yrs vs sectors and benchmark
Source: FE Analytics
Tom Stevenson, investment director at Fidelity Personal Investing, picked Rathbone Global Opportunities Fund, which counts Nvidia and Microsoft as its top two holdings. This positioning reflects the belief of managers James Thomson and Sammy Dow that AI could drive half of all incremental GDP growth over the next decade.
Stevenson said: “The companies they invest in can be of any size, although their sweet spot is mid-cap growth stocks in the developed markets. The managers’ speciality is spotting these businesses before they become household names.”
Admans also highlighted Blue Whale Growth. The fund focuses on quality large- and mega-cap companies with a long-term growth trajectory.
Technology accounts for 41% of the portfolio, while North America – the home of the world’s leading tech companies – makes up 75% of the geographic allocation.
Performance of fund since launch vs sector
Source: FE Analytics
However, Lipski reminded investors that the technology sector is dominant in indices, meaning that passive and benchmark-aware active funds will already be heavily exposed to the sector.
He concluded: “Investors looking for technology exposure should therefore take into account not only their specific objectives and attitude towards risk, but also the type of strategy they are buying and given its unique importance, their view on FAANG stocks.”
Buffettology’s sibling fund has built a position in Vimto owner Nichols.
The SDL Free Spirit fund has completed a “stealth” purchase of a new holding in Nichols plc – better known for its main brand, the fruit cordial and soft drinks Vimto.
Eric Burns, who manages the small-cap sibling of SDL UK Buffettology, said he built the position slowly and “under the radar” to avoid disturbing the share price and was therefore able to buy at “consistent prices, rather than going in aggressively and moving the price against you”.
Burns made his first purchase on 8 May and has built his position in Nichols up to a 3% weighting in the £68.4m portfolio, which now holds 27 stocks.
Listed on the alternative investment market (AIM), Nichols is “an example of a steadily growing business” whose revenue and profitability have been growing “not spectacularly, but nicely,” the manager said.
Performance of stock over 1yr
Source: FE Analytics
Vimto has “brand power” and a big following in the Middle East, especially in Saudi Arabia. At Iftar, the fast-breaking evening meal during Ramadan, people traditionally have a glass of Vimto cordial with their meal, Burns said.
His main reason for investing in Nichols now is a strategy pivot. The company is exiting some low-profit activities within the more capital-intensive ‘out of home’ segment (think soda fountains at cinemas and leisure centres, which were badly hit by Covid) to focus on its core UK packaged and international soft drinks markets.
“They are still in the ‘out of home’ market, but they've substantially rationalised it and diverted their investment attention to the other two sides, which for us is the main thrust of the business,” said Burns.
The manager is expecting the operating margin, return on equity and cash conversion to improve over the next one to five years, especially because the starting valuation is “very attractive” and because it has a cash position of £60m, which could come into use for a special dividend, share buybacks or “a sensible small acquisition”, the manager speculated.
“We think we have spotted the inflection before others as the shares are hardly expensive, trading on a current year cash-adjusted price-to-earnings ratio of around 13x and providing a free cash flow yield of around 6% and growing.”
Other recent moves in the SDL Free Spirit portfolio include exiting a company called EKF Diagnostics on the back of “amber flags following a few changes at the C-suite level” and “squandered chances” from the windfall during Covid.
Two more holdings are “on the naughty step” and being cut, Burns revealed.
One of these had two profit warnings and did an acquisition funded by debt, going from a net cash position to a geared position, which “exacerbated the downside”.
“With Free Spirit, we tend to be fairly small shareholders, so when we've tried to engage with management and not been heard, as in this case, that's a real negative.”
On the opposite side of the spectrum, Burns and his team started to build another new holding during June, a business “where we believe there is a sea change in capital allocation taking place for the better under a relatively new CEO”. He declined to name the stock as he builds a position slowly and steadily over the coming months.
Performance of fund against sector and index over 1yr
Source: FE Analytics
The Free Spirit fund has had a positive run since it launched five years ago, beating the IA UK All Companies sector with a 28.9% return. It subsequently fell into the third quartile over three years, when it lost 10.1%, and over 12 months, as shown in the chart above.
“Performance over the last one and two years has been painful, and we say that as managers with skin in the game, as we are all invested in the funds ourselves,” Burns said.
“But because our process is set in stone, there's not an awful lot of levers we can pull. With hindsight, if we'd have pivoted to oil and gas two and a half years ago, the performance would have been a lot better, but our methodology doesn’t allow that, and we're willing to sacrifice the short-term to stay true to our values and deliver in the long term.”
The future leader's decisions could have profound implications for the country's social fabric.
The 2024 US presidential election is shaping up to be a major turning point for the country, as several key issues dominate public debate. As in 2020, Donald Trump and Joe Biden face off on almost every issue, be it economic, societal, environmental or geopolitical.
But this time the dynamics have changed. The current president is facing criticism over the rising cost of living, the number-one concern of Americans.
Although disinflation has begun, the cost of living has risen by almost 25% in four years, mainly due to global factors (international production chains, energy and raw material prices), but the majority of voters see the Republican candidate as better placed to manage purchasing power issues.
So, with six months to go before the election, the latest polls show president Biden trailing Trump in the key swing states that Biden had previously won in the 2020 elections.
Admittedly, the election is far from a foregone conclusion, not least because the winner-takes-all system allows candidates to win all the major electors, even if the state is well divided between the two candidates overall.
In 2016, Trump won by just a few thousand votes in Michigan, a Democratic stronghold at the time. One of the reasons had been abstention, which, after the record turnout of 2020, could climb again in 2024.
This trend is fueled by the desire of American Muslims to protest against Biden's “immutable” support for Israel, but also by a certain weariness with the American electoral landscape.
At the same time, although he remains popular with voters on social and health issues, Biden is losing ground with Hispanic, black and Asian demographics, which make up around a third of the electorate and are traditionally Democratic.
Thus, the third candidate, usually relegated to the background, this time occupies an increasingly important place in the polls. Robert Kennedy, whose anti-establishment and controversial ideas are close to those of Trump, but whose ecological and liberal rhetoric leans more towards Biden, could therefore steal votes from both candidates. Several other factors, such as Biden's health, Trump's controversial statements and even his conviction, could influence the final result.
Ideologically, the two candidates present diametrically opposed visions, which are also reflected in the concerns of the electorate. While Democrats fear the rise of fascism/totalitarianism and extremism, Republicans fear the loss of the country's historic values and a progressive decline.
Immigration, seen as a source of insecurity and unemployment by Trump, is seen by Biden as an opportunity for diversity and economic growth, and should therefore occupy a prominent place.
The healthcare system will also be at the heart of the campaign, with voters divided between reducing the role of government and expanding federal programs such as Medicare.
Through the prism of protectionism, the Republican candidate is also expected to focus on geopolitical issues and America's international relations, particularly with China and Russia.
Finally, Biden will have to address the difficult transition to renewable energies, while taking into account the potential impact on the traditional energy industry, while Trump maintains climate-skeptic positions.
In addition, social and civic issues will be omnipresent, particularly through some major points of disagreement that illustrate the country's strong polarization: LGBTQ+ rights, abortion rights and gun legislation.
Overall, the future leader's decisions could have profound implications for the country's social fabric.
Christophe Boucher is chief investment officer and Benoit Begoc is a Quantitative Strategist ABN AMRO Investment Solutions. The views expressed above should not be taken as investment advice.
Investors are taking advantage of the high yields available from bonds.
Private investors have been ploughing money into bond funds and direct fixed-income holdings to take advantage of elevated yields, with coupons of 4-5% from gilts and 5.5% from sterling-denominated investment grade corporate bonds.
Fixed income allocations have risen by 195% amongst interactive investor’s (ii) customers over the past two years, with gilts making up the bulk of this increase. Assets held in direct gilts are up nearly 21-fold since 30 June 2022, ii revealed, while investors also put money into corporate bond funds across a range of sectors.
Part of the reason for this surge in activity is the fact that major central banks have postponed interest rate cuts this year as inflation proved stickier than expected, meaning bond yields have remained elevated.
Jim Cielinski, global head of fixed income at Janus Henderson Investors, said this has “extended the opportunity for fixed income investors to lock in some attractive yields”.
“Investors are being paid to wait for rate cuts to emerge. Yields are at levels that typically pay well above inflation and offer the prospect of capital gains if rates decline.”
Bond yields are well above inflation
Sources: Janus Henderson, Bloomberg
April LaRusse, head of investment specialists at Insight Investment, agreed, noting retail and institutional investors are “looking to lock in absolute yields”, which is “creating a positive environment for issuance, which has picked up strongly in the first half of 2024”.
The vast majority (86%) of global fixed income assets are now yielding 4% or more, versus less than 20% in the decade leading up to the pandemic, according to data from LSEG Datastream and the BlackRock Investment Institute. Several sectors within the bond markets are even offering yields comparable to the long-term returns associated with equities, as the chart below shows.
Bonds now rival long-term equity returns
Source: Insight Investment and Bloomberg, data to 31 May 2024
With investment-grade credit, the entry yields tend to indicate the total returns investors will receive in the medium term, said Nachu Chockalingam, senior credit portfolio manager at Federated Hermes.
Investors moving into investment grade credit now with yields at 5.5% should receive annualised returns of about 5.5% over the next three to five years. “For the fairly low credit risk that you're taking, you're getting a pretty decent yield,” she said.
The composition of returns may change over the next 12 to 18 months as the rate component declines but the spread increases, she added.
Starting yields versus 5yr annualised returns for global investment grade bonds
Sources: ICE Bond Indices, Federated Hermes
Most experts agree that the direction for interest rates – and therefore bond yields – is downwards, although fund managers and economists differ in their predictions for the speed and timing of cuts. When bond yields fall, prices rise, so investors should make capital gains from their bond positions.
Joe Little, global chief strategist at HSBC Asset Management, thinks this bodes well for bond portfolios. “We think the environment of renewed disinflation and policy pivots signals a return to fixed income in the second half of the year. There are more central banks cutting rates now, and that has a big effect for bond market performance,” he said.
However, Joost van Leenders, senior investment strategist at Van Lanschot Kempen, expects yields to remain at elevated levels even after monetary policy easing gets underway. “Even though inflation should moderate further, and central banks will cut rates, we think the room for yields to fall is limited. Yield curves are significantly negative in the US and the Eurozone, which shows that falling inflation and lower policy rates are anticipated,” he explained.
Even the most benign of inflationary environments can nibble away at your purchasing power, warns Hargreaves Lansdown.
Annuities have grown in popularity over the past few years as interest rates have risen on the back of rampant inflation.
And with inflation seemingly tamed, for now, and interest rates expected to start coming down over the next six months, some may consider it a good time to buy one before the yields on offer are reduced.
But retirees must remain vigilant to the potential for inflation to rise again, said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. People who retire at 65 might live for another 20 to 30 years or more, making inflation one of the biggest enemies to their savings.
“Even the most benign of inflationary environments can nibble away at your purchasing power over that time,” she warned, while a period of double-digit inflation “can bite huge chunks out of your plans”.
One option is to get an annuity that rises in line with inflation. Hargreaves Lansdown’s research shows that a 65-year-old with a £100,000 pension can get an RPI-linked annuity paying up to £4,540 per year.
They could also get up to £5,157 per year from an annuity that escalates at 3%, meaning the total income will rise by a fixed amount each year.
However, the same 65-year-old with a £100,000 pension can get up to £7,222 per year from a single life level annuity with a five-year guarantee – over £2,000 more per year than they would have got three years ago.
Current annuity rates versus inflation
Source: Hargreaves Lansdown
Both of the latter options are “far lower than you would get with a level annuity”, said Morrissey, but reward those that live longer. As such, retirees need to consider what is best for them.
“You will need to try and work out how long it will take for the income of your escalating annuities to catch up with the starting income from the level one,” she said.
For example, it would take 12 years for the escalating 3% annuity to catch up to the current income, meaning the 65-year-old would have to wait until they are 77 before their income hits £7,222.
“It would also take around 21 years before you had taken the same overall amount of income (approximately £144,000) that you would have taken from the level product,” she calculated.
Meanwhile, the RPI-linked annuity rising at 5% per year would take 10 years to match current payouts and 20 years before a retiree had received the same amount as the level option.
“Of course, if RPI inflation were higher you would make up ground more quickly, but lower inflation means it could take you longer. You need to think carefully about how long you are likely to live to come to the best decision for you,” Morrisey said.
Another option for retirees is to take out part of their pension, rather than their full amount, and annuitise it in slices, rather than all at once. The rest of the pot could then be invested for capital growth.
“This way you also have the benefit of securing higher annuity rates as you age and if you develop a condition where you qualify for an enhanced annuity then you could get a further boost in income that can help you fight the impact of inflation over time,” she said.
Hawksmoor’s Mackie shares his favourite funds to play the domestic market.
There is a broad opportunity set across all sections of the UK equity market, with stocks in most sectors trading cheaply compared to their history, according to Ben Mackie, portfolio manager at Hawksmoor Asset Management.
“The valuation opportunity is very broad in the UK, spanning across the market-cap spectrum,” he said. “Every kind of UK portfolio is now cheap relative to its history – unlike Japan, which has re-rated and where value has moved down the market-cap spectrum".
As such, Hawkmoor’s multi-asset portfolios have gone with a 20-30% allocation to the domestic market and to harness all the opportunities available, the managers are opting for portfolios that are “cheap, have lots of marginal safety and a real blend of styles”. They also maintained a bias to smaller companies.
The first fund Mackie highlighted was WS Gresham House UK Multi Cap Income.
“That's a significant position for us. It’s less value-orientated and more looking to buy good-quality businesses,” he said.
Performance of sectors over 3yrs
Source: FE Analytics
It is run by FE fundinfo Alpha Manager Brendan Gulston and Ken Wotton, who focus on profitable small and mid-cap companies that generate high cash levels.
RSMR analysts praised the fund’s underlying income stream, which is “well diversified across industries”, and the “stable and resilient” dividend. It is currently yielding 3.8%.
Mackie balanced out this fund’s open-ended, multi-cap quality approach with several mid and small-cap strategies in different styles.
“While good opportunities are spread across the whole market, small-caps is where we're seeing most value,” he explained.
The asset class has been “a painful place to be” in recent years, with the average UK small-cap fund and trust dropping approximately 30% between October 2021 and October 2023, as shown in the chart below.
Performance of sectors over 3yrs
Source: FE Analytics
But the manager maintained his conviction in this space and his first pick here was Aberforth Smaller Companies.
The Aberforth team has “a traditional value approach”, complementing the Gresham House fund.
The trust is trading at a wider-than-usual 10% discount and was recently picked by Tillit’s Sheridan Admans as an ideal strategy to dip your toes back into smaller companies.
Performance of fund against sector and index over 3yrs
Source: FE Analytics
To counter the negative momentum in small caps, Mackie chose two other trusts whose managers build meaningful positions in companies and drive change from within to generate extra value.
“We have some specialist investment trusts that take influential stakes in companies and are very happy to roll their sleeves up and engage,” he said.
Hawksmoor uses Odyssean, which is managed by Stuart Widdowson and Ed Wielechowski, and Wotton’s Strategic Equity Capital. Both have a FE fundinfo Crown Rating of five – the highest score.
Odyssean is a £214.9m strategy and the second-best performer in the IT UK Smaller Companies sector over the past five years.
The trust is proving popular with fund selectors and was recommended by Numis, 7IM, Winterflood and Blyth-Richmond Investment Managers. Several fund pickers said the trust was worth buying even at a premium.
With Strategic Equity Capital, Mackie repeated his conviction in Gresham House’s Wotton.
“Effectively, what we’re doing is looking for talented managers – those who align with us culturally, are talented stock pickers and stick to the process,” he said.
“Ultimately, these portfolios will move around and we're not trying to second-guess their positioning. It's more about how they think and whether they are genuinely skilful.”
Trustnet looks at the funds and investment trusts that have flourished and floundered so far this year.
Technology stocks, Indian equities and UK smaller companies have all enjoyed a strong year so far, while Latin American companies and government bond investors have struggled, according to data from FE Analytics.
The first half of 2024 has been dominated by macroeconomics and in particular central banks, who have had to wait a lot longer than was initially expected to cut interest rates.
Indeed, as it stands, only the European Central Bank (ECB) has managed to drop rates so far, with the Federal Reserve and Bank of England both remaining in wait-and-see mode.
This has impacted many asset classes but in particular bonds, where investors had hoped that rate reductions would lead to capital gains for government bonds.
It resulted in both IA UK Index Linked Gilts and IA EUR Government Bond sitting among the worst five performing Investment Association (IA) sectors over the past six months.
Yet it was not all bad news for assets that usually do better when rates fall.
Tech stocks (which should benefit from lower rates as they reduce the discount put on their future growth figures) have continued to soar on the back of the artificial intelligence (AI) boom, with IA Technology & Technology Innovation the top-performing sector of the year so far.
Source: FE Analytics
Here, the average fund has made 16.8% in 2024. The market continues to be dominated by the Magnificent Seven, with Nvidia briefly climbing to become the world’s largest company last month, before it slipped back and returned the crown to fellow tech giant Microsoft.
As such, eight of the top 20 funds over the past six months had a technology focus, with the likes of Janus Henderson Global Technology Leaders, iShares S&P 500 Information Technology Sector UCITS ETF and L&G Global Technology Index Trust among the top 10 funds so far in 2024.
This small basket of stocks also helped to propel the IA North America and IA Global sectors to among the top five best-performing peer groups in the first half of the year.
While much of the global equity market’s performance has become more concentrated in recent months, other areas also shone.
Indian funds continued their meteoric rise, with the average fund in the IA India/Indian Subcontinent sector up 16.3%, just behind the tech sector.
The country has been the beneficiary of investors turning away from China, which has been under pressure for the past two years, with India becoming something of an emerging market darling of late.
The recent general election result, in which prime minister Narendra Modi won in a less convincing style than expected, did little to dissuade investors. However, no India funds appeared in the top 20 funds of the year so far, as the below table shows.
Source: FE Analytics
China was not the only emerging market region navigating difficult waters. The IA Latin America sector was the worst performer over the first six months of the year, down 15.3%.
Part of the fall could be the sector giving up its gains over the past two years. In 2022 the average Latin America fund made 16.4% while in 2023 it made 23.2%.
Another potential reason is the disappointing performance of Brazil, where president Luiz Inácio Lula da Silva’s plan to reduce spending, along with a surprise cut to rates from a divided central bank, has caused turmoil in markets.
Yet Brazil’s underperformance does come as a surprise, considering the market is often viewed as a barometer for commodities, which have performed well in 2024 so far.
Four Brazil funds and six broader Latin America funds appeared in the 20 worst performers list, which also featured several funds investing in specific renewable energy sectors, such as Active Niche Luxembourg Selection Fund Active Solar and Invesco Solar Energy UCITS ETF, which have been the two worst performers of the year so far.
Renewable energy companies tend to be highly leveraged and the postponement of interest rate cuts is likely to have hurt performance.
There were some positives closer to home, where UK small-caps have flourished. The IA UK Smaller Companies sector was the fourth-best performer over the year-to-date, up 8.9%.
The sector has been under the cosh for the past few years as interest rates have risen, but has come back to the fore this year as investors forecast lower rates. It has also been given a lift from both the Conservative and Labour parties, who have committed to encouraging cash into UK companies, with proposals ranging from a UK ISA to encouraging pension funds to invest more in domestic stocks.
Turning to investment trusts, they have been a real mixed bag so far this year, with some niche sectors such as IT Farmland & Forestry, IT Growth Capital and IT Leasing leading the way, while property has been the main area investors would have wanted to avoid.
Source: FE Analytics
In terms of individual trusts, technology and UK smaller companies investment companies dominate the top 20, while on the downside, trusts investing in real estate and renewable energy have dropped off, as have a number of venture capital trusts.
Japan’s Canon is muscling into the chips industry.
The availability of semiconductors has been a primary force in markets over the past few years and so far, just a handful of companies have been able to benefit from this trend.
While Nvidia is the clear winner on the global stage, the European semiconductor darling has been ASML – a company that has an 8.2% weighting in the Comgest Growth Europe ex UK fund, co-managed by James Hanford.
Comgest’s investment process requires managers to challenge each other on their positions and Hanford takes pride in being able to play devil’s advocate for ASML’s position as the fund’s top holding.
While he remains confident in the company’s strong competitive advantage, he is having to defend it against a new technology application from Japan.
As time goes by, new competitors are bound to disrupt some of the certainties in the chips space and one company with a good chance of doing precisely that is the Japanese optical, imaging and industrial product maker, Canon.
“Canon has been quite vocal about a technology called nano imprint. Currently, it is used to make CDs through a stamp, but Canon is looking into applying it for semiconductor-making as well,” the manager explained.
“The company has a whole research department engaged in this. I've spoken to a lot of people in Japan and Taiwan about these efforts in nano imprint and for now I'm not concerned about Canon from a competitive standpoint against ASML. But we’re keeping an eye open and always pushing ourselves to find where we could be wrong.”
Performance of stock over 1yr
Source: Google Finance
While Canon might be onto something that may come to fruition in the long term, the biggest threat to ASML’s investment case today doesn’t stem from Japan, but from China.
In January and April 2024, the US asked its allies to stop selling high-end semiconductors to China, which has hit ASML.
“The revenue of the semiconductor industry as a percentage of global GDP has only been going up in the past 50 years and is now at 0.7%. As human beings, we want better, including better electronics, which require chips, so demand isn’t a problem,” Hanford noted.
“The key problem is that it’s an extremely geo-sensitive industry. Overall, this is a good thing for ASML, because it's creating excess demand, but in the short term, restrictions by the US on what ASML could ship to China is definitely the main risk.”
Semiconductors sales relative to global nominal GDP (in % of GDP)
Source: Deutsche Bank Research, IMF, WSTS.
Comgest Growth Europe ex UK has been co-managed by FE fundinfo Alpha Managers Alistair Wittet and Franz Weis since 2014, joined by Hanford in 2023.
Square Mile Research analysts rate the fund for its distinct bias to quality growth companies and its managers’ stock selection skills.
Performance of fund against sector and index over 1yr
Source: FE Analytics
“The team's edge is their company analysis, and, as such, we would expect longterm returns to be primarily driven by stock contribution, although sector and country allocation can also have an influence at times,” they said.
“The performance can be highly variable and we would anticipate this fund to do well when the growth style is in favour, as well as when investors are focusing on company fundamentals. More broadly, we believe this is a solid longterm offering for investors seeking exposure to some of the region's leading companies.”
Perhaps big premiums for are a thing of the past but a shrinking in discounts seems likely.
It is unlikely that July’s general election will move the dial for the UK stock market – the outcome is seemingly well-known and, anyway, both main political parties seem to be business-friendly.
Still, many column inches have been used up debating whether the FTSE will prefer a Conservative victory, or a Labour triumph, and which sectors might benefit from either outcome.
Of the many investment company sectors that look cheap today, infrastructure and renewables must be close to the top of the list, and there are some potentially positive snippets in manifestos to confirm that.
The valuations of the assets owned by infrastructure and renewable energy investment companies are sensitive to changes in interest rates, so rates’ astonishing ascent have hit them hard.
In addition, with a return of well above 4% still available on safe assets such as UK government bonds (gilts), some may wonder why they should take on the equity risk provided by listed infrastructure or renewables trusts?
These companies were popular in a world of near-zero interest rates because their yields, which were typically in the range of between 3% and 7%, offered a big advantage over gilts, where the yield was as low as 0.25%.
The drawback was that this meant they traded very expensively, with double-digit premiums not uncommon. Those days are well and truly over. The median discount in the infrastructure sector is about 21%, and in the renewable energy sector it’s 31%, according to the Association of Investment Companies.
The big factor driving share prices over the past 12 months or so has been expectations of just how fast interest rates will fall. The European and Canadian central banks have already cut once, but the Bank of England and the US Federal Reserve are expected to hold off for at least a few months yet.
The potential for higher for much longer clearly isn’t ideal and increases the risk, so share prices have waxed and waned alongside rate cut expectations.
Yet perhaps now is the perfect time to start looking at the sector again. The yield spread over gilts is looking healthier once more, with the median infrastructure trust offering 6.3% and the median renewable energy trust offering 8.2%.
There’s clearly a political will to improve the UK’s infrastructure, as there is for pension funds and retail investors to take bigger stakes in domestic assets. Aside from UK equity funds, the infrastructure and renewables sectors provide us with an opportunity to do just that.
But deep-lying issues remain, not least the fact that the UK’s planning laws desperately need reforming. It takes four years to sign off major infrastructure projects, for instance.
Both Labour and the Conservatives are committed to reducing this, and encouraging more private investment in UK infrastructure, but this is neither going to be easy nor quick.
Not only do investment companies provide the opportunity to invest in British infrastructure, but they also offer investment opportunities in other jurisdictions. Geographical diversification is important in infrastructure assets, as well as in equities.
BBGI Global Infrastructure’s globally diversified portfolio of 100% availability-style social infrastructure assets provide it with highly predictable revenues and strong inflation linkages. It can maintain its dividend for more than a decade without having to make any new investments.
Its biggest investments include bridges in California and Ohio, Australian prisons in Northern Territory and Victoria, a health clinic in Liverpool, and motorways in the Netherlands and Germany.
On the renewables side, not only does Octopus Renewables Infrastructure invest across several different countries, including the UK, Ireland, France and Finland, but its carefully thought-out approach to diversification also means its portfolio is spread across several different proven technologies, such as onshore and offshore wind, solar and energy storage systems.
We may not be returning to zero interest rates, so perhaps big premiums for infrastructure and renewable energy companies are a thing of the past, but a shrinking in discounts seems likely.
Falling interest rates should make these trusts attractive again and while politicians’ ability to get their agendas through is questionable, there’s a positive direction of travel, so perhaps big discounts will end up being well in the rear-view mirror, too.
David Brenchley is an investment specialist at Kepler Partners. The views expressed above should not be taken as investment advice.
Trustnet reveals where investors should have put their cash last month.
Indian equity funds topped the performance charts last month, in spite of the disappointing election result for Narendra Modi.
While the market was expecting a landslide victory for the incumbent prime minister of the most populous country in the world, Modi failed to win an outright majority.
After an initial knee-jerk reaction at the beginning of May, Indian equities rebounded and continued their meteoric rise, with the IA India/Indian Subcontinent sector gaining 8.1% in June alone.
Ben Yearsley, director at Fairview Investing, said: “Fund managers who invest in India say the crucial aspect of the coalition is that it still has infrastructure spending as the key priority.”
Source: FE Analytics
The IA Technology & Technology Innovation sector finished second, gaining 6.4% last month.
Nvidia briefly overtook Microsoft as the world’s largest company, with both companies, along with Apple, now valued at over $3trn.
The IA Asia Pacific Excluding Japan sector secured the third position, followed by IA North America and Global Emerging Markets.
At the bottom of the tables, Latin America was the worst-performing sector in June, dropping 5.8%. Mexican equities, the second-largest component of the MSCI Latin America index, declined by 10% as the market reacted negatively to the election of Claudia Sheinbaum.
Yearsley said: “The Mexican market fell sharply on the news as Sheinbaum is seen as very left wing, [although] it has recovered slightly over the course of the month.”
European equity markets were roiled by French President Emmanuel Macron’s decision to call a snap parliamentary election. As a result, the IA European Smaller Companies, IA Europe Excluding UK and IA Europe Including UK sectors all performed poorly in June.
Although the US and UK elections are yet to play out, the French vote is causing the most concern,. Yearsley said.
“The reality is that in the US, Biden and Trump aren’t a million miles away on policy nor are the Tories and Labour in the UK. France may well be the one to watch as that could cause EU earthquakes especially if the exit polls are correct.”
At the funds level, the top 10 was dominated by funds from the IA India/Indian Subcontinent and IA Asia Pacific Excluding Japan sectors, including Stewart Investors Indian Subcontinent Sustainability, Alquity Indian Subcontinent and FSSA Asia All Cap.
However, JPM Emerging Europe Equity took the top spot, returning 20.3% in June.
Yearsley said: “For context, this fund has lost 98.9% over five years due to Russia’s invasion of Ukraine, so the sharp rise is small comfort.”
Source: FE Analytics
Climate change was a common theme for funds at the bottom of the table, with seven out of 10 of the worst performers being climate or energy transition funds.
Active Niche Luxembourg Selection Fund Active Solar was the poorest-performing fund of the month, tanking 18.8%.
Other underperformers include Invesco Solar Energy UCITS ETF, GMO Climate Change Investment and Schroder Global Energy Transition.
Yearsley said: “Is it the lack of rate cuts that is still doing the sector down, or is it more fundamental in that the energy transition will take much longer than previously indicated by (clueless) politicians?”
Amongst investment trusts, Indian equity and technology strategies ruled the roost, as with open-ended funds.
However, more specialist sectors came to the fore as IT Insurance & Reinsurance Strategies and IT Financials & Financial Innovation took the third and fourth spot.
IT Latin America was the worst-performing trust sector, falling 6%. It should be noted that the sector only has one constituent, BlackRock Latin American.
Source: FE Analytics
It was also a challenging month for the IT Commodities & Natural Resources and IT China/Greater China sectors, which lost 5.5% and 5%, respectively.
However, Yearsley noted that indicators are improving in China with signs of a pickup in activity driven by the service sector.
He said: “Stimulus measures have cranked up to offset the property downdraft. That appears to be paying dividends with the May PMI figure of 54 the highest since July 2023. Interestingly fund managers are starting to talk in more positive terms about China and that it might not be uninvestable after all.”
At the individual trust level, Gresham House Energy Storage Fund jumped 27.8% after announcing a battery leasing deal with Octopus.
Augmentum Fintech and Allianz Technology Trust finished second and third, after returning 15.5% and 14.6%, respectively.
Source: FE Analytics
At the bottom of the tables, Regional REIT Limited dropped 30.8% and is as such the worst-performing investment trust of the month.
Seraphim Space, the best-performing investment trust so far this year, also struggled in June, falling 17.5%.
Yearsley concluded: “Another interesting month for markets with the two most expensive areas, India and tech, leading the way. Will nothing derail these stories? In India it seems unlikely now the election is out the way, but will the lack of rate cuts eventually do for the Nasdaq?”
Market leadership may extend to cyclicals in the third quarter, according to BlackRock’s CIO of fundamental equities in Europe.
Several industries are set to flourish as we enter the third quarter of 2024, with Europe and the UK being the key beneficiaries, according to Helen Jewell, chief investment officer at BlackRock fundamental equities, EMEA.
The opportunity is so great that European shares could overtake their US counterparts in the near term. “European shares have lagged those in the US over the past decade. We now believe that, at least in the short to medium term, this dynamic could reverse,” she said.
Jewell pointed to four tailwinds set to spur Europe’s resurgence. Firstly, earnings growth momentum is likely to continue as companies have significantly reduced their debt levels and invested in future growth, while profitably remains robust despite the higher energy, materials and labour costs of recent years.
Second, the European Central Bank’s initial rate cut is already proving beneficial for companies and consumers. This “should continue to provide a boost to an economy that is already showing signs of life”, with the composite purchasing managers’ index rising in the past six months.
Further impetus should come from favourable valuations. European shares currently trade at a roughly 40% discount to US peers, versus a historical average of about 20%. She also pointed to the high quality of many European companies, which have been able to grow their earnings regardless of macroeconomic or central bank policy fluctuations.
Finally, Jewell expects market leadership to broaden across several sectors, as the chart below shows.
Source: LSEG DataStream, BlackRock Investment Institute.
“The earnings revision ratio for global stocks is back above zero – which means a greater number of companies are seeing upgrades to earnings forecasts than downgrades,” she said.
“Simultaneously, rate cuts may support more cyclical areas of the market, so even as artificial intelligence (AI) remains in focus, we expect to see a broader set of winners for active managers to unearth – a ripe environment for stock selection.”
Jewell highlighted several cyclical sectors she expects to benefit from falling rates and healthier economic activity, as well as long-term structural changes such as decarbonisation, reshoring, and the rise of AI.
First, the renewable energy sector should recover as some of the headwinds that have constrained activity begin to ease. Higher rates have hindered the financing of renewable energy projects and rising inflation has put pressure on raw material costs.
Meanwhile, the secure income streams that utilities deliver will become more attractive to investors once cash savings rates drop below 4-5%.
Construction volumes are set to rebound from their 14-year lows in Europe. As the supply of some materials remains constrained, a strong pricing environment should benefit construction and construction material companies, as well as providers of energy efficiency solutions. Buildings account for 40% of global carbon emissions, Jewell explained, and as governments and businesses race to hit net-zero targets, these companies “are well placed to deliver strong earnings over the long term”.
Semiconductors should continue to flourish due to structural advantages. “Different parts of the semiconductor industry have been in different cycles. While smartphone and PC chips have seen the beginning of a post-Covid recovery, electric vehicle sales growth is slowing and there are some concerns,” she said.
“In the long term, data-centre demand will boost several companies within the semiconductor industry. Increased capital expenditures in 2024 will benefit semiconductor companies, especially those in Europe that have dominant positions in the semiconductor equipment market.”
Other sectors where BlackRock sees opportunities include: luxury goods, where pricing power for the best-managed brands remains strong; banks, which are being supported by share buyback programs, even as rates come down; and healthcare, given that some of the world’s most innovative and profitable healthcare companies are domiciled in Europe.
The managers of Evenlode Global Equity explain why there has been “a remarkable narrowing of the index”.
The US and global equity markets became even more concentrated in the second quarter of this year, with a handful of companies delivering the bulk of returns.
Apple, Microsoft and Nvidia – the three largest stocks in the US – now comprise 20.4% of the S&P 500 index, a weighting that has not been this high for at least 40 years, according to John Plassard, senior investment specialist at Mirabaud Group.
Market concentration was an issue last year when artificial intelligence (AI) propelled the Magnificent Seven to new heights but it has intensified in the past couple of months, said James Knoedler, co-manager of Evenlode Global Equity.
The MSCI World has risen 13.1% this year to 26 June in sterling terms. However, the MSCI World Equal Weighted index only gained 3.7%, which shows how the largest stocks have delivered a disproportionate share of performance. “It’s really unusual to see this level of dispersion,” Knoedler observed.
Last year, the difference between the MSCI World and its equal-weighted sibling was less stark – 4.7 percentage points over 12 months compared to 9.4 percentage points this year so far. In other words, there was a smaller gap between the best and the rest last year.
Total returns of indices last year and YTD
Source: FE Analytics
It has not always been so. During the past decade, the equal-weighted global index has lagged its market-cap sibling by about three percentage points, and over 30 years their performance is more or less the same, Knoedler said. “It’s not like Moses came down from Mount Sinai with the eleventh commandment that you’re always going to have equal-weighted underperforming.”
What this means for active managers is that their relative performance has hinged upon whether they own enough of the largest companies in their benchmarks, which is counterintuitive given that active managers are supposed to deviate from the benchmark and find even better stocks.
As a case in point, the fundamentals of the companies in the Evenlode Global Equity fund are solid, delivering double the earnings and revenue growth of the benchmark in the past quarter, yet the fund has underperformed on a relative basis.
“It has been a tricky year after, frankly, three and a half years when things went pretty well,” Knoedler acknowledged. “You have these moments in markets which test your conviction that your philosophy and processes are set up the right way.”
Performance of fund vs benchmark and sector since inception
Source: FE Analytics
The market has been behaving unusually due to two seismic events, Knoedler believes. “You have occasional one-off shocks that occur in the market and we've had two that've happened within a year."
One of those events was Nvidia creating $60bn of free cash flow “out of nowhere” over the past 18 months. The other was the US Federal Reserve calling the top of the hiking cycle at the end of 2023 – a major shock that drove a powerful rally in companies geared to interest rates and economic cycles.
As a result, global equity markets have cycled through three stages since late last year. “What goes bonkers initially is stuff that's very highly linked to rate policies, so the small regional banks in America and European small-caps. And they actually faded as this year has gone on because rates haven't come down as quickly as hoped,” Knoedler said.
In the first quarter of this year, those sectors passed the baton onto large banks, industrials, cyclicals and retailers – “stuff where we're not really present”.
The rally excluded the companies Evenlode favours, which have durable competitive advantages and deliver predictable cash flows.
“I think it just reflected the notion that winter was over, you could get out of the igloo and you didn't really need defensive, predictable, cash flow growth companies as much, and you could try other stuff,” he reflected.
This was followed by “a remarkable narrowing of the index” in the past few months, but Knoedler and co-manager Chris Elliott expect the short-term phenomenon of extreme concentration to dissipate eventually, making way for broader-based stock market performance and a return to fundamentals.
“It's not a bad time to be an investor. There are a lot of good quality companies out there and they're doing pretty well,” Knoedler concluded.
Trustnet researches the 10 cheapest active global funds with less than £100m in assets under management.
Smaller funds can afford to be more nimble and take advantage of market volatility in a way that is hard to replicate for their larger, and therefore more rigid, peers, but a big drawback is they tend to cost more.
With less money under management firms typically hike up the cost to make the portfolio profitable, while larger funds can drop their prices thanks to economies of scale.
For instance, Nick Wood, head of fund research at Quilter Cheviot, considers funds with less than £100m in assets under management (AUM) to be sub-scale.
He said funds with less than £100m in assets are “too small” for institutional investors to consider as they typically do not want to own such a large percentage of any one fund, which puts a block on these funds growing and gaining enough assets to begin lowering prices.
And this is borne out in the numbers. The average fund in the IA Global sector (including passives) charges about 0.8% in ongoing charges. For ‘sub-scale’ funds, this rises to 1%.
However, there are exceptions to the rule. As such, below, Trustnet highlights the 10 cheapest active funds in the IA Global sector with less than £100m in AUM.
Source: FE Analytics
With a size of £91.4m and an ongoing charge figure (OCF) of 0.23%, Invesco Global Ex UK Enhanced Index (UK) is the cheapest ‘sub-scale’ fund in the IA Global sector.
The fund has been managed by Georg Elsäesser since 2021 and Michael Rosentritt since 2023 and is based on a systematic factor-based investment process focusing on momentum, quality and value.
Relative risk is managed using an analytical tool that recommends trades to enhance portfolio exposure to selected stocks within established risk and return parameters.
The managers also limit risk at the country, sector and industry levels when building the portfolio. For instance, the fund is slightly underweight technology and the US relative to its benchmark, but marginally overweight financials and Japan.
Performance of fund over 3yrs and 10yrs vs sector and benchmark
Source: FE Analytics
The fund has outperformed both the IA Global sector and the MSCI World over one, three, five and 10 years.
Next up is the £3.4m Liontrust GF International Equity fund, which has an OCF of 0.25%. A distinctive feature of this fund is that it excludes the US from its investment universe and seeks opportunities in Japan, the emerging markets, and Europe.
While the fund lacks exposure to US tech heavyweights, it still maintains a significant allocation to the information technology sector through companies such as Taiwan Semiconductor Manufacturing Company, Keyence, and Mercadolibre.
However, consumer discretionary remains the largest sector weight in the portfolio, including holdings such as China’s Trip.com and India’s MakeMyTrip.
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
Since its launch, Liontrust GF International Equity has slightly outperformed its benchmark but has significantly lagged behind its peer group, primarily because its mandate restricts investments in the narrow cohort of US tech stocks that have driven the market in recent years.
Another fund among the 10 cheapest global funds with less than £100m in AUM is IQ EQ Low Carbon Equity managed by Des Flood. The fund invests in businesses considered leaders in addressing climate change within their respective sectors, with companies such as Microsoft, Quanta Services and Siemens among its top 10 holdings.
It also excludes companies that profit from the exploration, extraction or burning of fossil fuels.
IQ EQ Low Carbon Equity was launched in 2018 and sits in the third quartile of the IA Global sector over five years. However, it has demonstrated lower levels of downside risk over the same period, as indicated by its maximum drawdown score of -14.3%, ranking 49th out of 405 in the IA Global sector. In comparison, the benchmark's maximum drawdown over the same period was -15.7%.
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
Storebrand Global ESG Plus Lux, managed by Henrik Wold Nilsen, also follows a fossil-fuel-free investment approach, but takes additional environmental, sustainable and governance (ESG) criteria and sustainability factors into consideration.
Investee companies must have a high Storebrand sustainability rating and be aligned to the UN’s sustainability goals. Moreover, the fund invests up to 10% of its assets in businesses related to clean energy, energy efficiency, recycling and low-carbon transport.
Performance of fund over 3yrs and 10yrs vs sector and benchmark
Source: FE Analytics
Up next, the £45.6m Stewart Investors Worldwide Leaders Sustainability fund charges investors 0.55% – one of the higher figures on the list but still far below the average IA Global fund’s costs.
Managed by FE fundinfo Alpha Manager David Gait and Sashi Reddy, the fund invests in large- and mid-caps across both developed and emerging markets. For instance, India holds the second-largest country weighting in the fund after the US, with Indian company Mahindra & Mahindra as its top holding.
Gait and Reddy aim to invest in high-quality companies positioned to both contribute to – and benefit from – sustainable development. They assess businesses on three metrics: quality of management, quality of the company and quality of the company’s finances. The fund sits in the second quartile of the IA Global sector over 10 and five years, as the below chart shows.
Performance of fund over 3yrs and 10yrs vs sector and benchmark
Source: FE Analytics
Finally, the £5.3m IFSL Marlborough Global SmallCap charges investors 0.56% to get an exposure to small- and mid-caps across the world.
A smaller fund can be advantageous when investing in small-caps, with experts previously indicating a preferred size range of £60m to £200m for small-cap funds.
However, IFSL Marlborough Global SmallCap is more tilted towards mid-caps, which constitute 60% of the portfolio.
The industrials sector represents more than 50% of the portfolio, making it the largest sector weighting, while the US accounts for 55% of the portfolio (it’s largest country exposure).
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
Since launch, the fund has outperformed both the IA Global sector and its benchmark, despite a period that has favoured more liquid and resilient mega-caps.
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