Taking over from a legendary manager can be a stressful, daunting and, most of all, difficult task, just ask the string of Manchester United managers that have followed in the wake of Sir Alex Ferguson’s retirement.

Thankfully for investors that have stayed with the £3bn Fidelity Special Situations fund, FE fundinfo Alpha Manager Alex Wright has forged his own success since taking charge of the portfolio that was formerly run veteran stockpicker Anthony Bolton.

Between 1979 to 2007, the fund under Bolton had an exceptional track record, returning 14,124.1% over this 28-year tenure.

Performance of the fund under Anthony Bolton (17/12/1979 – 30/12/2007)

Source: FE Analytics

Sanjeev Shah then ran the fund after Bolton stepped back in 2008, with Wright taking over in 2014. Despite the gap between the two Wright said Bolton’s legacy performance still had a big factor on the fund.

He said: “It is like taking over Man United after Alex Ferguson, because you can never really hope to emulate what he did over such a long career when he ran the fund.”

Under Wright the portfolio has also outperformed both the average IA UK All Companies fund and FTSE All Share index with returns of 66.4%.

Performance of the fund under Alex Wright (1/1/201 – to date)

Source: FE Analytics

Before his own retirement in 20 years Wright said he hoped to achieve a performance as close to Bolton’s as possible. He co-manages the fund with Jonathan Winton, who joined in 2020.

Below, the Alpha Manager tells Trustnet what frustrates him most about the investment industry and how a value fund navigates a growth-biased market.

What is your stock picking process?

We call it a value, contrarian process, where we try and work out what we think the market is wrong about. We look for stocks that are undervalued compared to their future earnings prospects and where the market has been too pessimistic, which is depressing the share price and incorrectly making the stock cheap.

Why should investors pick your fund?

It’s a really differentiated approach when you consider that over the past decade, or certainly when I’ve been running the fund, investors have generally been allocating money to growth companies, which is the opposite of what I look for.

People are unwittingly very overexposed to growth today, even if they're invested across different markets, be it Asia and the US or even the UK. People have really herded into growth funds and therefore investors’ diversification is quite low.

Going forward the regime of the past 10 years in markets is potentially going to change because the pandemic has really highlighted a lot of supply chain issues and economies are now running hot. So there is a potential for inflation, which hasn’t been an issue for the past 10 years but could become a bigger one.

If that happens then there’s good reason that the good performance of the fund and the value style seen over the past year could continue.

What have been your best and worst calls over the past year?

Life insurance did really well in the past 12 months with Legal & General and Aviva very big contributors to performance. The sector proved more resilient than markets expected, which forecast it would act like banks.

Those have been long-standing positions in the fund and we added to both last year after they traded off in the Covid rally.

Legal & General’s share price increased 56.3% during those 12 months and Aviva’s 53.3%, making 66.6% and 64.9% on a total return basis.

The worst performer was Serco, which received a lot of attention when it was awarded the contract for running the NHS’ Test and Trace. In the past 12 months is share price dipped 2.4% and lost 0.8%

It’s not that the stock has gone down massively, it’s flat on a 12-month basis but the market had a strong Covid rebound, so that is very significant underperformance in a rising market.

I think that is really surprising because Serco actually had one of the best earnings deliveries through Covid and actually grew its bottom-line earnings by 50% in 2020, winning new government contracts and growing the non-UK side of the business more. That’s been frustrating in the past year, but fundamentally we're very happy with the company.

How risky is the fund?

It depends how you think about risk. I think about risk as the absolute, permanent loss of capital so we don’t invest in companies unless they have a dependable earnings base because we're always looking for stocks with some form of downside protection in case we get the upside optionality wrong. From that perspective I’d say it’s around a three or four out of 10 versus other equity funds.

But in terms of volatility, which is how a lot of investors consider risk, it will be higher because we’re buying smaller companies going through a turnaround, meaning there is the potential on an annual basis to have significant volatility.

Investors definitely don't want to buy the fund if they're going to need the money within the next 12 months, or they don't have a sort of a contrarian view on holdings. Don’t expect this to be a steady-Eddie fund.

Is there a cap on the fund?

Under Bolton the fund got to £6bn and Fidelity decided to split it, creating the Fidelity Global Special Situations fund and took this one down to £3bn where it’s remained since.

I think we’re a long off the capacity being too big, but if it did double in size we would probably close the fund: we wouldn’t split it again.

What is the most frustrating thing about the investment industry?

Unfortunately a huge amount of the industry chases near-term historic performance, on both a stock basis and in terms of managers buying stocks with high momentum. But also retail investors and professional fund allocators tend to chase what's done well recently. That often means that people buy at the top and they sell at the bottom.

What do you like to do outside of fund management?

I’ve played in the Fidelity five-aside football team since 2002, although I'm getting towards very much the end of my football career. I’m also an avid gardener.

Someone taking on the world and winning. It is a Hollywood staple, from James Bond to superheroes such as Superman or Wonder Woman.

Yet when it comes to investing, relying on one man or woman to look after your cash can be problematic, as avid readers of Trustnet will have spotted over the past few weeks.

This week, Abraham Darwyne wrote that Sebastian Lyon sold out of Berkshire Hathaway due to the “key man risk” involved.

He argued that there was not enough succession planning behind chairman and chief executive Warren Buffett, who at 91 years young is still one of the most respected investors in the world but is firmly at the end of his career.

The same argument has been lobbed at funds in recent months. Earlier this month interactive investor placed SDL UK Buffettology under review.

Somewhat ironically, the fund invests in the same way as Buffett. This time however there were fears that manager Keith Ashworth-Lord did not have enough support.

And last month, Hargreaves Lansdown dropped Unicorn Outstanding British Companies from its own HL Wealth Shortlist for similar reasons.

These examples stress the need for investors to understand firstly any succession planning in place, but also question who is in charge of a fund should something happen to the lead manager. If they are off sick for the day, who is in charge of your money?

While these stories are helpful to investors that own these particular funds, but there must surely be other instances where this is happening that is not covered because the funds do not happen to be on a best-buy list.

So how can we as ordinary people with no access to the management team or the inner workings of fund groups possibly know when key person risk is a potential issue?

The unfortunate answer is, we can’t really. Trustnet spoke with one adviser this week who said there was “not a lot” people could do.

However, he gave some rough guidelines. Boutique fund groups are more likely to have this issue than larger asset managers.

He used Fidelity as an example. “If Alex Wright at Fidelity Special Situations leaves, someone will be promoted,” he said.

Some signs to look for are the age of the fund manager if available – a topic we covered earlier this week – while checking if there are co-managers or deputy managers on the fund.

But in truth it is all pretty vague. What would be ideal, is for asset managers to disclose how many people work on a fund and to state the hierarchy in their annual reports. Until then, investing in bigger fund groups or portfolios with multiple managers takes away some of this risk.

Small-cap, private equity and technology strategies were the most common investment trusts to have tripled investors’ money over the past five years, according to data from FE Analytics.

For many investors, the ‘minimum’ time horizon for a long-term investment is five years, while most funds and investment trusts often recommend that they are given five years to prove themselves.

The longer an investors’ time horizon, the more time there is to recover from any unexpected market downturn. It also allows investors to benefit more from the power of compounding, or to potentially take more high-risk, high-reward investments.

Over the past five years, passive investors tracking the MSCI World index would have made a 90.6% total return, almost double their original investment.

MSCI World index over 5yrs

Source: FE Analytics

However, certain investment trusts have managed to triple investors’ money (making more than 200%) over that same time frame, as the below chart shows.

Source: FE Analytics

One third of the investment trusts that featured on the list invested in smaller companies, while another third focused on technology and private equity.

The most notable trust was Baillie Gifford’s Scottish Mortgage Investment Trust. Its total return of 375.8% over five years means investors would have almost quintupled an original investment made half a decade ago.

Managed by James Anderson and Tom Slater, their early bets on Amazon, Tesla and Moderna have propelled the trust’s performance over the past few years.

The strategy has also benefited from its private equity exposure, whereby more than a third of its total portfolio started out as unlisted companies – the most notable its early stake in Alibaba.

The most common type of investment trust that featured were small-cap portfolios. Academic research has suggested that smaller companies have tended to outperform their larger counterparts over time – a phenomenon widely cited by small-cap managers as a reason for their strong returns.

Some of the reasons attributed to this include smaller companies’ nimbleness and adaptability to rapid change, or the fact that they are often relatively under researched by analysts and investors when compared to large-caps.

Perhaps another reason for the presence of many top-performing small-cap investment trusts is because of the highly volatile nature of the asset class. Small-caps are often subject to large downturns which could be exacerbated by large withdrawals from open-ended funds, a problem which investment trusts don’t have to struggle with.

The highest-performing small-cap investment trust that featured was the Montanaro European Smaller Companies Trust, which returned 273.7% over the period.

Managed by George Cooke, the trust invests in what it deems to be quality growth small-caps across Europe, some of which have rocketed in value in recent years.

Some of the fund’s largest positions are stocks such as Thule – a Swedish outdoor brands owner, which has quadrupled in value over the past five years, and Sartorius Stedim Biotech, a French laboratory equipment provider that has risen more than 8-fold over the same period.

Another small-cap trust that featured was the BlackRock Throgmorton Trust, which returned 225.2% over the period.

Managed by Dan Whitestone, the UK smaller companies trust takes high conviction bets and has the ability to take short positions in various stocks. It recently benefitted from a short position in a UK CFD trading businesses whose shares plunged after a profit warning.

Elsewhere in the list were two private equity-focused investment trusts: HgCapital Trust and Dunedin Enterprise investment trust.

Private equity funds invest exclusively in businesses that are privately owned with the aim of trying to grow the value of the businesses either through restructuring or other various methods, to eventually sell them for a profit.

Hg Capital, which delivered a total return of 225.9% over the period, invests in software and technology enabled businesses mostly in Europe, with a 35 portfolio companies across a range of industries ranging from wealth management to engineering to healthcare.

It most recently sold Achilles, a supply chain risk and performance management firm, to another private equity investor for a 20% profit.

The Dunedin Enterprise investment trust, which delivered a total return of 201.9% over the period, focuses on UK lower mid-market companies, typically worth between £20m and £100m.

It recently sold its investment in U-Pol, a manufacturer of automotive refinish products, for 4.4 times cost and is expected to be complete its sale of CitySprint, courier and logistics firm at 2.1 times cost if the deal gets regulatory clearance.

The Allianz Technology Trust and the Polar Capital Technology Trust were two other notable investment trusts that tripled investors’ money over the period.

Both investment trusts have benefited from the rise of the technology stocks over the past few years, whose earnings were turbocharged by the coronavirus pandemic.

Their overweight positions in the US technology giants Microsoft, Alphabet, and many other technology businesses boosted both trusts’ performance in recent years.

There is no doubt that Brexit is having an impact on UK businesses – but not on those large enough to be listed on the stock market, according to Jonathan Brown, manager of the Invesco Perpetual UK Smaller Companies trust.

The UK has underperformed its global peers since it voted to leave the EU in July 2016, as international investors have shunned the domestic market – Brown’s co-manager Robin West referred to it as an “orphan asset class”.

Many UK fund managers have claimed that once the final Brexit deal was reached, this greater certainty on the direction of the UK would lead to the return of international investors, helping the FTSE All Share close the gap with other major markets.

Yet it has almost been a year since the transition period between the UK and the EU came to an end, and the FTSE is still one of the few major global markets that looks cheap.

Source: Invesco

When asked if the UK could remain on its current low rating for the foreseeable future, Brown said: “It’s possible, but it seems unlikely to us. Optically, the UK hasn't looked great through the Covid crisis and when you get people queuing up for petrol stations, it's not a good look for international investors.

“But private equity investors really see value in the UK and that's why we've seen so many takeovers. Even if it's not recognised by institutional fund managers, it has been recognised by other buyers in the market and over time that will lead to a rerating.”

Brown accepted the departure from the EU has not been the clean break many had hoped for. He said it had been particularly hard for the smallest businesses that export to the continent, saying “if you're a 20-person business having to deal with that amount of red tape, that's a significant problem”.

Yet although he buys small companies, he said those large enough to be listed haven’t experienced major problems – and the worst now appears to be over.

“The businesses we have spoken to were building up inventory ahead of the start of this year just in case there was significant disruption, and that seems to have tided them over well,” he continued.

“What we're hearing is that the initial chaos – in terms of all the extra paperwork and delays and red tape – is starting to resolve itself. For example, software is being written to take care of the paperwork and larger businesses in particular have managed to cope pretty well with it.

“Companies are having to carry a little more inventory because it takes longer to get goods between the UK and Europe, and in some cases build warehouses on the continent to ensure they can fulfil customer orders quickly. But beyond that, it feels like it's settled down.”

This is starting to feed through to business confidence, with the manager noticing companies are now more willing to invest for expansion or spend money on acquisitions, following an extended lull after 2016.

“They didn't want to take a risk in case there was a hard Brexit,” he added. “But now we're seeing companies start to push the button on things like that, and that should be supportive for the UK economy over the next two or three years.”

There are further problems for export businesses that have nothing to do with Brexit. Brown said there has been a major increase in shipping prices, with “the cost of getting a container load of goods from China to the UK up between 10 and 15 fold over the past year”.

Further issues with supply chains and reduced inventories have been compounded by a sudden surge in demand as economies have re-opened, forcing up prices. While Brown said these problems should dissipate as we move through next year, he is worried their psychological impact could prove more difficult to resolve.

“I guess the question really is around wage inflation and whether we end up in an inflationary spiral,” he added.

“We don't have a strong view on that. We're certainly seeing wages increase, not just in the UK, but in a range of other countries. Our best guess is that inflation remains high over the next few months, but starts to abate as we move through 2022. But it could remain higher than we've seen for the last decade or so due to high wage inflation.”

However, he said that most of the businesses in his portfolio have pricing power – either as a result of unique products or dominant market share – allowing them to pass on higher costs to their customers.

He accepted that some businesses may have to take a hit to margins in the short term as contractual arrangements have led to a delay in passing on prices, but again expected this to resolve itself by next year.

Overall, he was in bullish mood on the UK, “both because of consumer balance sheets being stronger now than they've been for a number of years, and also the improvements we're seeing in business confidence and business capital expenditure”.

“Wage inflation as well is putting a bit more money into consumers’ pockets. So we think things are pretty solid,” he finished.

Data from FE Analytics shows Invesco Perpetual UK Smaller Companies has made 391.1% over the past decade, compared with gains of 334.9% from the IT UK Smaller Companies sector and 224.8% from the Numis Smaller Companies ex ITs index.

Performance of trust vs sector and index over 10yrs

Source: FE Analytics

The trust is on a discount of 10.5%, compared with 10.7% and 7.9% from its one- and three-year averages. It has ongoing charges of 0.91% and yields 4%, a figure that is rebased to the year-end share price.

There are schools of thought on investment in China at the moment: back out, stay in, re-purpose, ie switch stocks. And why? Well, it all depends on the stocks impacted by the Chinese Government’s implementation of regulatory policies, which broadly seek to clamp down on stocks that perform contrary to the greater good of the community (common prosperity), such as – in this current swathe of regulation targets – technology stocks, gaming stocks, private online education services companies and food delivery companies.

While some investors have backed out, seasoned and long-term investors are less alarmed particularly by China’s move to protect its state by clamping down on anti-competitive practices and big tech firms.

These investors see such activity as nothing new. Those that want to stay in – and argue who can realistically opt to stay out of the second largest economic presence in the world? – look instead to other options, which are, not surprisingly, very often those that benefit the state.

The background to the sectors where China has placed restrictions is fascinating. The crackdown on the K-12 private tutoring sector comes from the rampant growth of the tutoring business that has exacerbated parental anxiety and increased the cost of child rearing. 

As demographics in China are aging rapidly, the government is promoting policy to increase birth rates and for-profit tutoring is viewed as hindering this goal.

Then the Government has put limits on video game play time for minors aimed at reducing screen time (e.g., preventing eye issues such as dry eye problems in younger age demographics), reducing obesity in youth, addressing addiction (and other mental health issues), and as the younger generation matures and enters the workforce, to increase productivity.

Meanwhile the impact to the food delivery business is more around providing proper pay and benefits to drivers, so labour reforms.

What fund managers say

We asked fund managers how they see the country and its attractiveness or otherwise for investors and where their focus should lie.

Bill Kanko, founder and president of Black Creek Investment Management acknowledges that there was both concern/risk and opportunity with respect to the recent tightening of regulation in China.

“The risk is that the market becomes less investible due to restrictive policy decisions, but the opportunity comes if this “crackdown” is temporary and eases (i.e., substantial growth opportunities in the world’s second largest economy),” he said.

Black Creek’s contrarian nature means it finds many of its best ideas where others are not looking.

“We continue to do our due diligence and there is the potential to take advantage of further share price weakness and broad investor pessimism,” said Kanko.

Black Creek has limited direct exposure to Chinese technology stocks. One it is likely to continue to hold is Baidu, the largest Internet search engine in China with a more than 70% market share, where it derives significant advertising revenue.

Baidu is a technology-driven company and is considered a leader in artificial intelligence (AI) research, including technology for autonomous vehicles. It is also growing its cloud computing service offerings in China and Southeast Asia and is considered a leader in AI cloud services in China.

Kanko considered the company’s valuation attractive, particularly when the value of Baidu’s stake in iQiyi (a streaming service in China like Netflix) and its excess capital is considered.

“We view the industry wide campaign to increase data protection and ensure fair competition as positive for China’s technology sector’s development given an increasing compliance burden will further cement the leading positions that companies, such as Baidu, have built over the previous decade,” said Kanko.

The key is to identify those companies that can sustainably grow and compound shareholder value over the long-term, leveraging powerful secular growth drivers such as China’s continued transition towards a consumption-led economy.

China’s current social focus on ‘common prosperity’, sharing of wealth, fair employment rights in terms of pensions, pay and health plans for example and equality in terms of education, property and healthcare could be seen as commendable. It could salve investor concerns of human rights issues. Further, future targets may also appeal.

Andy Headley, head of global strategies at Veritas Asset Management, said: “China’s policymakers have identified four main pillar industries, namely energy conservation and environmental protection; biotechnology; next generation information technology; advanced machinery and equipment, in short, what some refer to as ‘new infrastructure’ development.

“Companies focusing on these areas may provide good long-term sustainable investment opportunities if they benefit from long-term competitive advantages and are available at attractive valuations.

“Whilst the short-term landscape has unsettled investors views on the likes of Alibaba, it’s highly probable the company will continue to play a pivotal role in supporting growth within the Chinese economy and benefiting from digitalisation in all aspects of life,” he added

“One area likely to grow significantly is cloud infrastructure, which is still in an early stage in China and an area in which Alibaba not only exceeds but is on the cusp of turning profitable.”

Craig Baker, who chairs the Alliance Trust Investment Committee, was sanguine about the portfolio’s exposure to China. He said: “We remain convinced that China is an exciting long-term investment opportunity and that it will play a much bigger part in the global economy and stock markets in the future, albeit in a potentially more politically polarised world.

“However, successful investing in China is all about being highly selective, which is why we’ve got expert stock pickers on the job, as opposed to taking a big bet top-down on the country, which could easily backfire.”

Mark Atkinson, is head of marketing and investor relations at Alliance Trust. The views expressed above are his own and should not be taken as investment advice.

Oil has been the best-performing asset in 2021 so far, but the risk-reward trade-off for the sector is now unattractive, with the winners of this year unlikely to repeat their exceptional performance in 2022, experts have warned.

The iShares Oil & Gas Exploration & Production UCITS ETF has been the best-peforming fund across the 5,074 strong Investment Association universe so far this year.

This is not a one-off, as nine of the top 10 funds this year all had some link to energy, either investing directly or in energy infrastructure.

Much of this is due to the price of oil, which has spiked 73.7% this year after dropping 37.1% in 2020.

Oil spot price increase in 2021

Source: FE Analytics

Janet Mui, investment director at Brewin Dolphin, said that there had been a swathe of issues with alternative sources of energy this year that boosted the price, while “exceptional” global growth increased demand.

“Global growth is almost 6%, with Chinese growth at 8% and the US at 6%, as people have come out of the lockdown, creating a sudden surge in demand. This is exceptional and one of the best years of the decade,” she said.

At the same time, wind speeds have been unusually low in Europe, with Norway and Germany in particular struggling to create enough energy from renewable sources alone.

“There has also been this ongoing geopolitical issue between Russia and Europe, so there isn’t enough cheap Russian gas coming into Europe. This caused gas prices to spike and oil is the alternative to this, so prices were bid up,” she said. Meanwhile, China restricted coal production, which has created further demand for oil.

At the same time, the Organization of the Petroleum Exporting Countries (OPEC) has added little extra supply to dampen prices, she added.

“All of the moving parts went wrong, which is why the oil price spiked so much, but it is debateable as to whether this will be repeatable in 2022. We think the oil price should moderate in 2022, so those performances have peaked,” said Mui.

There are also issues over the longer term. Energy companies are transitioning away from oil towards more renewable options, but this takes time and money.

Kamal Warraich, investment analyst at Canaccord Genuity Wealth Management, said: “The transition the oil majors must make is huge, with very high costs. The return on capital for their renewable businesses could potentially be very low.”

However, it is not simply a case of divesting. Some investors will see these stocks as attractive income options as they pay high dividends, while others will look to make short-term gains on the oil price.

Patrick Thomas, head of environmental, social and governance (ESG) investing at Canaccord Genuity Wealth Management, said there were two types of investor in the energy sector.

“Value guys buying the short-term cashflows show they aren’t bothered about ESG, while there are growth fans wanting the long-term renewables story,” he said.

Mui said investors buying traditional energy stocks needed to consider the implications of renewable energy, pointing to BP as an example of a stock that is investing in greener energy alternatives, which could change the long-term potential of the company.

However, she said that at the moment, investing in these oil majors represented a major gamble.

“The risk-reward is not worth it. There are better opportunities elsewhere. You want to be in a sector where there is large long-term secular growth prospects where there is trillions of pounds of investment,” she said.

As such, she suggested investors stick with the big American technology companies that have performed so well over the past decade, but have been out of favour this year.

“We have increased our allocation to the US and have been bulls on the market and particularly the tech and consumer discretionary areas, but you have to distinguish between the tech stocks that have done well purely because of the pandemic and lockdowns,” she noted.

“Some companies do not generate a lot of cashflow or profit, but were supported by extreme liquidity and investor sentiment during the lockdown.”

The firm continues to like the big technology giants, which she said were “well positioned” for future innovation, which should improve efficiencies over time.

“Overall, we like the innovation and growth prospects, irrespective of bond yields. Even if interest rates picked up, there could be an initial wobble, but we don’t think it would be a headwind over the long term,” she said.

As investors grapple with rising inflation and the prospect of future interest rate hikes, banks have outperformed both the broader stock market and technology stocks year-to-date.

If this trend continues, it will be the first time since 2016 that banks have beaten technology stocks for a full calendar year.

When banks outperformed in 2016, it coincided with the US Federal reserve signalling its plans to raise interest rates four times, which it eventually started doing at the end of the year and into 2017.

It seems a similar trend could be playing out in 2021. The MSCI World Banks index is up 36.7% versus 30.1% from the MSCI World Information Technology index, and 23.1% from the MSCI World index.

Performance of indices year-to-date

Source: FE Analytics

This divergence in performance between banks and the rest of the market accelerated in February of this year when bond yields spiked in anticipation of higher inflation and interest rates.

Growth stocks sold-off alongside government bonds as investors placed a heavier discount on their future earnings.

It also triggered a brief market rotation out of growth stocks and into value stocks during the period and banks were big beneficiaries of the rotation as they are typically seen as value stocks.

But as inflation seems to show no signs of abating and as interest rate hikes become more likely, banks could be well-placed to benefit, according to Orbis Global Equity manager Ben Preston.

“What banks have been grappling with in the past few years is: as interest rates have declined, so have their margins,” he said.

“When interest rates are very low, banks are in a very tough spot because they can either try and charge negative interest rates to their depositors, or they just have to see their earnings decline. So, if and when interest rates arise, then that's a pressure lifted from the banks.”

The past decade has been very tough for the sector, as regulators have continued to increase regulation and impose higher capital requirements for banks since the global financial crisis of 2008.

Earnings for banks across the world came under pressure from not only low interest rates, but also rising regulatory costs and harsher capital environments.

This is why Preston warned that if investors want to position for higher inflation, they must be sure that there will indeed be higher inflation.

“If you want to position yourself for a certain type of environment, you must number one: be sure that is the environment that you're going into, and number two: know how it's going to affect the companies that you're looking at.

“Even if you think you are 70% right on both counts, if you chain them together it becomes a 50/50 scenario.” (The probability of 0.7 multiplied by 0.7 equals 0.49).

This is why the fund manager cautioned betting on the banking sector as a whole and favoured a select few banks for his portfolio – which has 15% allocated to financials as a sector.

One bank that he is betting that will perform well regardless of what happens to interest rates is LNG, the largest bank in the Netherlands.

“This is a company where shares trade at less than book value and historically, it has made a good return on its book value,” he said.

“When we've asked the management of the bank about the interest rate part of that, they said there's other ways that they can make money, for example through fees on products that they sell. So even if interest rates compress, there's ways that they can offset that with earnings.”

Therefore, if everyone in the market believes interest rates are going to compress forever, then LNG still has a way of making up for it, he said.

“But if it's not true, and actually interest rates start to rise, then things get a lot better,” he added.

“Yet you're only paying book value – which compared to most stocks out there on multiples of book value for companies that have earned a similar return on equity over time – that's pretty good value.”

One other bank he owns is KB Financial, owner of KB Kookmin Bank, one of the largest banks in Korea.

“That's the cheapest of the lot,” he said. “That's half book value, so for every dollar that the accountants say this thing is worth, it only costs you 50 cents to buy it. It is continuously producing profits, it is growing and it is paying out a nice dividend.

“Investors have been very, very bearish on banks globally, convinced that inflation was never going to make a comeback, and very convinced that interest rates would stay low forever,” he said.

“But things have taken people by surprise and actually inflation has accelerated and now a lot of central banks are talking about having to deal with that and banks are obvious beneficiaries.”

Several of the biggest names in emerging and Asian markets are charging investors more than double the stated ongoing charges figure (OCF) because of their added costs, research by Trustnet has found.

OCF is the top-line cost of investing in a fund, used to refer to the fees investors pay for the management of a fund, but not including any charges related to buying and selling stocks.

Changes to the portfolio are inevitable, hence unavoidable transaction costs otherwise known as ‘ex-ante’ charges are incurred, but some funds have additional charges equivalent or higher than the stated OCF, costing investors twice as much as advertised.

Trustnet looked at which funds in the IA China/Greater China, IA Asia Pacific Excluding Japan, IA Asia Pacific Including Japan and IA Global Emerging Markets sectors met this criteria.

The results for the sectors are shown below, which shows the transaction costs, original OCF and the total cost, as well as how many times more an investor paid overall versus the stated fees.

It is also conditionally formatted against the sector. The colours represent how expensive a fund’s cost is relative to the entire sector as higher transaction costs do not necessarily mean that a fund is expensive.

Those in green are the cheapest among their peers, while red indicates the most expensive. Orange and yellow represent the middle portion, with the former above average, while the latter is below average.

Source: FE Analytics

Emerging and Asian markets have had a busy year, recovering from the Covid pandemic and facing several macroeconomic headwinds from China’s falling valuations, caused by tough regulations on its tech sector and the ‘Evergrande Saga’.

Markets are also reacting to rising inflation and interest rates, meaning a lot of funds shifted positions. But this has not driven the ex-ante costs as high as some UK and global funds, which had funds charging more than six times the stated OCF.

This time the study found 21 funds across the four sectors met this criteria, although none were in the IA Asia Pacific Including Japan sector.

Matthews Asia ex Japan Dividend fund had the biggest difference between the stated OCF and total charges across the sectors. Its published OCF is 0.9% but its ex-ante costs were 1.45%, making the total cost 2.35%, 2.6 times higher than the OCF.

The five FE fundinfo Crown-rated fund is run by FE fundinfo Alpha Manager Yu Zhang and is one of the best performers in the IA Asia Pacific Excluding Japan sector, making the third-highest returns in the past five years (98.2%).

Square Mile Investment Consulting and Research Limited were positive on the fund, calling it a “strong option” for UK investors looking for Asian income.

Another five crown fund on the list was Barings Eastern Trust which had an OCF of 0.91% but ex-ante cost of 1.4%, pushing the total cost up to 2.31%.

The fund has generated significant outperformance long-term, making almost 240% over 10 years, the second-best returns in the sector during that time. This could make the higher cost more palatable for some investors.

These returns were generated via a bottom-up, multi-cap approach, investing in growth companies with a decent amount of liquidity.

Another big name from the sector was Wellington Asian Opportunities which had overall charges of 2.51%, double its stated OCF.

Like the other funds it has been a strong performer long-term but near term has lagged due to its growth bias, which has struggled during the recovery this year.

IA Global Emerging Markets had the most funds in the study with eight on the list. GS Emerging Markets CORE Equity Portfolio had the biggest increase between OCF and total cost in this sector, jumping 2.4 times.

PGIM Jennison Emerging Markets Equity was only just behind with total charges 2.3 times greater than the OCF.

Another five-crown fund, it owns companies that are in the early stages of accelerated growth, catalysed by a new technology or product or leadership in a niche market.

So far this has worked well for the fund, which has delivered the third-best returns over three years (128.7%). It has maintained at least a top-25% ranking in all time frames since then.

Moving onto IA China/Greater China, five funds were flagged including the sector’s best performer this year: AQR China A Equity UCITS.

The fund has made 15.3% during that time, but it was an outperformance which cost investors double the stated OCF (0.6%). It is actively managed but aims to beat the benchmark by tilting towards value and momentum.

Two funds in this sector had total charges 2.5 times bigger than their respective OCFs: HSBC MSCI China ETF and Matthews China Small Companies.

The latter had a 1.5% OCF and additional charges of 2.18% while the former was 0.3% and 0.45% respectively.

Although these funds have the same relative increase their total costs are different as one is actively managed while the other is an index tracker.

Exchange-traded fund (ETF) investors end up paying 0.75% for the HSBC MSCI China ETF while active fans paid 3.68% for Matthews China Small Companies.

Passive funds’ totals are usually ‘cheap’ relative to their active rivals but they are also unable to avoid trading and incurring higher additional costs. The other IA China/Greater China funds on the list were New Capital China Equity and Schroder ISF Greater.

Investors need to stop worrying about inflation, as simply remaining invested is usually all that is needed to keep their assets growing ahead of prices over the long term, according to research from Dimensional.

The UK consumer price index hit a 10-year high of 4.2% in the year to October, while the US’s figure of 6.2% was its highest in three decades.

These figures led Vincent Ropers, manager of the TB Wise Multi-Asset Growth fund, to highlight the damage structural inflation could do to a portfolio.

He said: “It seems sensible for investors to look for ways to inflation-proof at least some of their exposures without sacrificing growth.”

However, this was not the conclusion reached by US Inflation and Global Asset Returns, a paper by Wei Dai, head of investment research at Dimensional, and Mamdouh Medhat, an investment researcher at the group.

The study indicated that specifically targeting inflation-proof assets is at best unnecessary for long-term investors and at worst may lead to lower returns than just sitting tight.

Dai and Medhat studied the relationship between inflation in the US and the performance of 23 asset classes and equity sectors and styles from 1927 to 2020. This included periods of high inflation, such as the 1970s, and considerable deflation, such as the period of the Great Depression.

They found that all assets delivered real returns in low-inflation periods (when CPI averaged 0.5%) over the long term. What may come as a surprise was that, with the exception of 1-month T-Bills, all assets also delivered real returns in high-inflationary environments (when CPI averaged 5.5%).

Source: Dimensional

However, the study found that, on average, most assets delivered lower real returns in high-inflation years.

“For US bonds, all the differences are reliably negative and, in general, more negative for longer-term bonds, although this pattern was mainly driven by the higher average real returns of longer-term bonds in low-inflation years,” said the study.

“For US equities, the differences are reliably negative for the market portfolio, four of the 12 industry portfolios (durable goods, chemicals, shops, and healthcare) and the large-cap growth portfolio. Across all assets, the only positive differences [when returns were higher during high periods of inflation] are for energy stocks and the value factor, although neither is statistically reliable.”

The study was then repeated for the past 30 years, expanding the number of assets and sectors analysed to 30.

During this period, average CPI stood at 1.5% per year in low-inflation periods and 3% per year in high-inflation periods. Again, most assets delivered positive average real returns in both low- and high-inflation years.

Notable exceptions were energy stocks and commodities, which delivered negative real returns in low-inflation years.

However, the study suggested that contrary to conventional wisdom, these assets – along with real estate investment trusts (REITs) and value stocks – should not be regarded as inflation hedges.

“Asset prices already embed the market’s expectation of inflation,” said the study, meaning investors should only be concerned about “unexpected inflation”.

“An asset is therefore most useful as an inflation hedge when its nominal returns [those before inflation and fees] move closely with unexpected inflation,” it said.

However, the study found few areas in which higher returns correlated with unexpected inflation. For the few exceptions where the correlations were reliable, such as for energy stocks and commodities from 1991 to 2020, the assets’ nominal returns were around 20 times as volatile as inflation and more than half of their returns were unrelated to inflation, it noted.

The chart below shows how the annual nominal returns of energy stocks and commodities differed from inflation.

Source: Dimensional

“If the goal is to reduce the variability of future purchasing power, it is questionable that hedging with something this volatile will effectively achieve that,” the study said.

“In sum, while there is some merit to the intuition that energy stocks and commodities are inflation sensitive, we do not see compelling evidence that either can serve as an effective inflation hedge.

“Hence, inflation-indexed securities still appear to be the most effective instruments for investors who are highly sensitive to inflation and seek to hedge against it.”

The report added that inflation was one of many aspects to consider for asset allocation and that there was no one-size-fits-all approach.

“The right mix of assets for growth and hedging purposes ultimately depends on an investor’s goals and needs. The good news is that most of the global assets we study have been able to outpace US inflation over the long term. Hence, simply staying invested may by itself be an effective long-term solution to inflation concerns,” it concluded. 

With the Thanksgiving holiday nearly here, beyond the festivities, I’m a fan of carving out some time for reflection. As fund managers, we regularly peer into the past to help prepare for where we may be headed, so when I reflect on how US smaller companies have fared this year, we’ve seen some pretty strong growth.

Yes, the S&P 500 Index may be garnering all the headlines as it repeatedly hits new all-time highs this year, but US small caps have delivered better returns and have risen for five consecutive quarters.

After a prolonged period of uncertainty, over the 12 months to the end of October, the Russell 2000 small-cap index rose nearly 5%, outperforming the S&P 500 large-cap index by almost 18 percentage points.

A confluence of encouraging economic data, strong corporate earnings and fresh spending programs from the Biden administration helped drive markets higher.

This year we saw some of the highest returns concentrated in unprofitable and lower quality stocks, driven in part by unprecedented retail trading activity.

We do not believe this trend is sustainable and instead continue to focus on owning quality businesses at reasonable valuations, that are leaders within niche markets.

This year we also added some cyclicality to our portfolio through our exposure to industrials as we found there are some great companies with very attractive valuations in the space.

One such example is WillScot Mobile Mini, a provider of portable accommodation and secure storage containers. The company hosts a national network of 16 site locations across the US with more than 40,000 units and has around 17,000 customers.

As an industry leader in flexible workspace and portable storage solutions, this company is well positioned to stand the test of time in a period when people are being forced to adapt to flexible working.

In today’s environment, we are seeing companies come public which is creating interesting and unique opportunities for small cap investors. One such name is Hillman Solutions, a market leading distributor of hardware and home improvement products, personal protective equipment and robotic kiosk technologies.

We believe that Hillman has a strong competitive moat aided by its leading market position in several categories and its unique partnerships with national retailers.

The business has demonstrated remarkable consistency and predictability, with a track record of organic growth in 55 of the past 56 years (sales declined 5% in 2009) since its founding.

We believe Hillman should benefit from secular trends towards repair/remodel, migration to suburbs and millennial home buying. Hillman is led by a strong management team that has an enviable track record of value creation and strong execution as an operator building, managing and running consumer facing brands.

Of course, strong markets also means we have to remain disciplined with our existing holdings. One of our favourite names which we exited this year was Bill.com.

We’re still positive on Bill.com’s fundamentals and management but had been trimming the name in late 2020 as the company’s market cap exceeded $10bn (£7.5bn). As its market cap continued to move higher in 2021, we fully exited it once it hit £15bn in market cap.

Economic activity remains strong and the US consumer, in aggregate, is in good health with plenty of spending power. That said, we continue to monitor incremental risks that could represent headwinds for US small caps.

We do expect continued strength in corporate earnings for the remainder of 2021 and heading into 2022 earnings growth looks to be compelling as well.

We believe the companies we invest in will be able to navigate inflationary pressures from higher prices and future upside should be driven by earnings going forward.

Despite the risk-on rally of lower quality stocks, we remain confident that fundamentals of high quality US smaller companies will return into favour as we move deeper into the recovery next year and over the longer term.

Jon Brachle is portfolio manager of JPMorgan US Smaller Companies Trust. The views expressed above are his own and should not be taken as investment advice.

Warren Buffet’s age and his bad bet on US airlines were enough to prompt Sebastian Lyon, manager of the Personal Assets Trust, to sell out of his long-time holding in Berkshire Hathaway.

The trust has held Berkshire Hathaway since the aftermath of the Global Financial Crisis of 2009, and, despite its strong performance over the past year, the Trojan fund manager has said investors are not adequately discounting the risks Buffet’s investment house faces.

Berkshire Hathaway stock is up over 400% since 2009 and is up 69% from its lows in March of 2020 – now trading at all-time-highs.

Despite this, Lyon said that Warren Buffet’s age poses a key-man risk which is “well known but rises as each year passes”.

Buffett – Berkshire Hathaway’s chairman and chief executive officer – recently celebrated his 91^st birthday. Also known as the ‘Sage of Omaha’, he is considered to be one of the most successful investors in the world, however he is still not immune to investing mishaps.

Lyon said this was another reason for the sale. He lamented the “disappointing recent capital allocation” which was “evident particularly in the decision to purchase airlines, something Buffett has long-warned against, followed by their untimely sale”.

Berkshire Hathaway started buying four of the largest US airlines: Delta Air Lines, American Airlines, Southwest Airlines and United Airlines in 2016 after avoiding the industry for decades.

But in April of 2020, Buffett revealed that Berkshire Hathaway sold the entirety of its stakes in the four airlines at a “substantial loss” after they were hit by the collapse in air travel due to the coronavirus pandemic.

There was one other reason Lyon sold out of the company: its failure to hold its businesses to account when it comes to ESG.

He said: “The company's refusal to hold its subsidiary businesses to a higher level of account when it comes to climate disclosures is reflective of a management team that is yet to fully grasp the ESG nettle. This is likely to impact returns in the years to come.”

Share price of Berkshire Hathaway over 5 yrs

Source: Google Finance

Philip Morris International was another stock to recently get the axe from the Trojan manager. The sale of the tobacco manufacturer comes after the trust’s previous sale of British American Tobacco in early 2021 and Altria in 2018.

Lyon said the decision was a result of his views on tobacco holdings evolving over the past few years.

“Like integrated oil companies and newspapers before them, the tobacco business model is changing, making the future returns less predictable and likely to fall as managements attempt to transform their companies for a post-tobacco world,” he explained.

“There is an increasing risk that these companies become wasting assets as they strive for relevance.”

He also questioned the sustainability of the companies paying high dividends when the sector’s indebtedness remains “stubbornly high”.

Lyon compared the tobacco industry to the newspaper industry of the past, pointing to media tycoon Rupert Murdoch’s description of classified advertising revenue as ‘rivers of gold’.

“A few years later, having witnessed a cascade of classified advertising revenue shift from newspapers to the internet, he [Murdoch] admitted: ‘Sometimes rivers dry up’.”

When it comes to equities more broadly, the Trojan fund manager warned that they face risks from rising inflation and future interest rate rises.

“The discount rate, the basis of which is determined by the 10-year US Treasury yield, is key,” he said. “Equities have been supported by four decades of falling interest rates.

“Should this dynamic change, investors may be in for greater volatility as the support from low rates is questioned. This raises uncertainty over the value of the expected growth in earnings from equities, which becomes less precious when eroded by inflation.”

Over the past six months, the Personal Assets Trust has more than doubled its exposure to UK T-Bills from 8% to 17% and reduced its equity exposure from 45% to 40%.

The trust’s second-largest position after equities is a 30% holding in US Treasury inflation-protected securities (TIPS) and he also has a high weighting (7.9%) in gold – both of which should act as a hedge in an inflationary environment.

Lyon said: “Central banks want us to believe that the current inflationary pressures are 'transitory'. Whether this is wishful thinking remains to be seen.

“As economies re-open, demand may well strengthen, which may lead to a further phase of inflation taking investors by surprise in 2022/23.”

However, he said that wage growth will be the most important determinant of whether inflation is transitory or not.

“If wages rise, this is likely to feed the inflationary beast,” he added. “That said, we do not necessarily see a return to the bogeyman of 1970s levels of inflation when unionised labour had a far stronger voice.

“For now, we believe it is crucial to remain open-minded, cognisant that markets are not currently discounting structurally higher rates of inflation.”

Performance of Personal Assets Trust year-to-date

Source: FE Analytics

So far this year the trust has underperformed the FTSE All Share index and average IT Flexible peer, returning 11.5%. However, Lyon said that the portfolio was designed to “protect and increase” investors’ capital, in that order.

“We believe that, in our conservative asset allocation combined with qualitative equity selection, we are taking considerably less risk than that of an index tracker,” he said.

Liontrust Special Situations, CFP SDL UK Buffettology and Royal London Sustainable Leaders Trust are among the UK equity funds that are suitable for investors of all risk types, according to the Adviser Fund Index (AFI).

The adviser group is made up of fund pickers from 20 investment firms who select funds for investors of different risk profiles. These are then put into three portfolios with the mindset of cautious, balanced and aggressive investors.

Having previously looked at the investment trusts that appear in all three lists, this week Trustnet focuses on UK funds.

One option for investors is to buy a passive fund as a ‘core’ holding, while adding ‘satellite’ active funds around it. In this way, investors get the market return as a base, with smaller holdings in funds that have the potential to beat it over the long term.

For those that like this approach, the HSBC FTSE 250 Index, L&G UK Index Trust and Vanguard FTSE U.K. All Share Index Unit Trust were tipped as the building blocks for any portfolio, according to the panel.

This is then supplemented by a number of strategies that would work well as complements to broad market tracker.

From the IA UK All Companies sector, both Liontrust Special Situations and CFP SDL UK Buffettology are all-cap portfolios that take advantage of companies in the mid- and small-cap end of the market.

Source: FE Analytics

The former invests in companies that it believes have a competitive advantage, such as high barriers to entry or irreplicable intellectual property, while the latter invests with in the same way as renowned US investor Warren Buffett, picking long-term compounders at a reasonable price and letting them accrue over time.

For those with an ethical mindset, Royal London Sustainable Leaders Trust is another on the list. The managers invest in a wide range of companies that tackle ESG issues, with a main goal of transitioning to a more sustainable economy.

Meanwhile, investors that want a ‘value’ fund – those that buy cheap stocks in the hope they can rebound – might consider JOHCM UK Opportunities.

The fund has struggled over the past five years, making fourth-quartile returns over one, three and five years, but it has matched the market over 10 years despite its style of investing being out of favour for much of the past decade.

With interest rates potentially on the rise after inflation hit 4.2% in October, some may wish to add this as an option should value funds come back into fashion.

Away from the IA UK All Companies sector, there were three income funds that made the list – Artemis Income, FTF Franklin UK Equity Income and Threadneedle UK Equity Income.

Although these funds are synonymous with people in retirement, or those that are naturally more cautious with their money and want a regular stream of income rather than the volatility of growth shares, they have a place in all three AFI portfolios.

Source: FE Analytics

All are above-average over the past decade, with Threadneedle UK Equity Income the pick of the bunch, returning 168.9%. The large-cap, value strategy has been managed by Richard Colwell since 2010 and fits well with the others on the list.

At the other end of the spectrum, smaller companies are viewed as high-risk options for investors, but have a place in even the most cautious portfolio – albeit at a lower allocation.

TB Amati UK Smaller Companies has been one of the best performers in the IA UK Smaller Companies sector over the past decade, returning 361.4%.

The fund invests in companies with strong balance sheets and predominantly invests in stocks that are larger than £500m although it can invest in smaller businesses as required.

Its largest weightings are to healthcare, consumer discretionary and financials, with technology also a double-digit allocation. This complements well with the Artemis UK Smaller Companies fund, which has lagged over the past decade as its value approach has suffered.

Total return of funds vs sector over 10yrs

Source: FE Analytics

Indeed, its highest allocation is to industrials (37%) followed by consumer discretionary and financials. Technology and healthcare – two of the fastest-growing parts of the market – make up less than 15% of the portfolio.

The fund had a disastrous 2020 as these names performed well, losing 16.6% – the worst in the sector. However, this year it has made 27.1% as it has rebounded during the value rally.

Buying cheap trusts on a bigger discount than normal can be a lucrative way to make money over the long-term. Similarly selling trusts that have been bid up can help avoid losses if they eventually downgrade again.

As such, Trustnet asked QuotedData to look at the trusts which have diverged at least 5 percentage points off their five-year average premium or discount in the IT Global Smaller Companies, IT Global and IT Global Equity Income sectors.

The study previously looked at the three major UK sectors, which had more extremes overall than the global sectors.

 


Source: QuotedData

Only two trusts were running at least 5 percentage points narrower than their five-year average premium/discount across all three sectors: Keystone Positive Change and Herald Investment Trust.

Part of the IT Global sector, Baillie Gifford’s Keystone Positive Change trust had one of the biggest shifts in discount relative to its history, now 8.8 percentage points tighter than its five-year average, 2.1% today versus 10.9% historically.

Baillie Gifford took over management of the trust from Invesco earlier this year and is now run under the same process and leadership as the Baillie Gifford Positive Change fund.

James Carthew, head of investment companies at QuotedData, said that this narrowing discount reflected the dramatic change in sentiment investors had towards the fund since Baillie Gifford took over.

The fund has done well over the past year since the takeover, coming out as the third-best performer in the sector (42.8%) but this was not enough to make it a buy option for Chris Salih, investment trust research analyst at FundCalibre.

That the fund is still on a lingering discount could be down to Baillie Gifford’s house style of concentrated growth being out of favour over the past year during the value rally, he said, but noted that it was not a “screaming buy” at its current levels.

Herald Investment Trust was the only member of the IT Global Smaller Companies sector in the study, a buck in trend from the UK study where small-caps had the most trusts diverging from the five-year average.

Herald investment trust is the oldest in the sector and currently on a discount 6.6 percentage points wider than usual. Over three years it has made the third-most in the sector (97.5%), able to generate returns at a time when UK equities were severely shunned by the global market.

 


Source: QuotedData

At the other end of the spectrum Lindsell Train was also 8.8 percentage points off its five-year average, but going the other way. It is now on a 9.9% premium, downgraded from 28.6%.

Run by FE fundinfo Alpha Manager Nick Train the trust made the best returns in the sector over 10 years (51.3%) but has come off the boil since the Covid vaccine was announced, dropping to the fourth quartile of the sector in recent months.

Carthew said that when the Covid pandemic began, investors sought refuge in the well-known, globally recognised consumer brands like such as those held in Train’s trust, but now that economies are recovering “they are waking up and realising that the growth prospects of these businesses are a bit dull.”

Train addressed the disappointing performance recently, highlighting several stocks that had dragged down performance and left him with a feeling of “frustration”.

Manchester & London was just behind with an 8.7 percentage-point swing between its current and five-year average discount.

Long-term it has performed well, making the sector’s third-best returns over three years (129.1%) but near term has also struggled and was the worst performer over the past year, netting a loss of 7.9%.

This underperformance is mainly down to the high allocations to the technology sector and China, two areas that have faced big headwinds in 2021: for the former rising inflation expectations cutting valuations, while the latter was hit by the Chinese government’s crackdown on the education and technology sectors.

Earlier in the year, Alan Brierley, an Investec analyst, recommended investors sell out of the trust due to its poor disclosure, debating whether investors actually had enough information to know what they were buying.

Next was the IT Global Equity Income sector and the Henderson International Income Trust (HINT).

The trust is 5.6 basis points wider than its average discount, now at 1.3%. The trust’s performance has flitted between the second and third quartile since it launched 20 years ago and in 2020 it struggled immensely, ranking second-worst among its peers and losing 8.1%.

Winterflood analysts said this underperformance was driven by the underweight positioning in non-dividend paying growth names, but added that manager Ben Lofthouse has acted to change this, taking advantage of the equities sell-off last year to increase exposure to growth stocks.

This could act as a complimentary holding to UK equity income funds as part of a wider portfolio, they said.

It was the only fund on the list for the IT UK Equity Income sector, although Murray International was just under the cap at 4.9 basis points.

Kepler analysts were positive on the trust, noting that it had a high yield with healthy revenue reserves, which helped maintain a narrow dividend.

Due to its significant overweights in Latin America and Asia ex China, the analysts said it could act as a good diversifying option against other global equity income trusts.

It is worth noting that premiums/discounts are influenced by investors’ sentiment, which is not an exact science. A trust may be highly valued or out of favour with investors for a number of reasons.

Salih said investors should consider performance ahead of the share price as “discounts are not solely tied to performance”.

EdenTree’s Chris Hiorns has gone overweight banks for the first time in his career, saying that they will continue to look attractive even if interest rates aren’t increased from their current rock-bottom levels.

Hiorns manages the EdenTree Responsible & Sustainable Managed Income fund, formerly the EdenTree Higher Income fund, which has just changed its name after putting a vote to investors.

Upon confirmation of the vote, manager Hiorns immediately dumped oil & gas holdings BP and Shell.

The manager said that although he didn’t sell these stocks for performance reasons – the lack of investment in this area over the past few years means that the price of oil is likely to remain high for some time yet – there are plenty of other opportunities in income-paying stocks.

“It's an oddity of the market that even though we're seeing equities hitting new highs, there are lots of high-yielding companies trading on attractive multiples,” he said.

“Although we had a recovery in the value and high yield areas of the market since the vaccines came out, that didn't do anything in terms of ratings because they saw their earnings expectations go up in parallel to that shift in performance.

“And actually, as we went into Covid, a lot of these companies were on very attractive valuations anyway.”

One area Hiorns (pictured) has increased his exposure to is financials, going overweight the banks last year – he holds Lloyds in his top-10, with a smaller position in HSBC.

“That was for the first time in my career managing equities for getting on 14 to 15 years now,” he said. “They still look attractive. They haven't yet had the benefit of higher interest rates and bond yields and I think that is still to come. But even disregarding that, they are improving their profitability.”

Performance of indices over 20yrs

Source: FE Analytics

For example, the manager pointed out that Covid-related losses have been less than the provisions set aside by the banks, while they also cut costs during the pandemic. This represented a continuation of a trend that has been going on since the financial crisis: according to data from the British Bankers Association, the number of bank and building society branches in the UK fell by 34% between 2012 and 2021, as customers embraced online banking and digital payment methods.

“There's also been a lot of retrenchment,” Hiorns added. “We've seen that in quite a few markets, overseas players may have entered, but then pulled back.

“So on the whole, despite the challenger banks, it's probably a less competitive space than it has been historically.”

It could be argued that there is little point in selling out of polluters such as BP and Shell if you are just going to buy the banks which lend money to fossil fuel companies instead.

In response, Hiorns said EdenTree’s in-house responsible investment team scrutinises all potential holdings and will have the final say on any additions in this area.

“The banks we consider for investment will need to be aware of the risks related to potentially stranded assets on the balance sheets of their debtors and will need to demonstrate that they have a considered sustainability strategy in place,” he explained.

"Our biggest bank holding at the moment is Lloyds, which aims to reduce the emissions it finances by more than 50% by 2030 and is a founding member of the Net Zero Banking Alliance.”

Hiorns also has exposure to insurance companies, with Legal & General his second largest holding at the end of October. This is an area that other value managers have highlighted as benefiting from strong tailwinds, with Fidelity Special Situations manager Alex Wright citing “strong demand for bulk annuities and pension de-risking” earlier this year.

Hiorns added: “You can pick up some very attractive yields there, from 7.5 to 8%. They are on relatively cheap valuations as well, on big discounts in terms of price to book, and p/e [price/earnings] ratios of under 10.

“Given where we are with bond yields and interest rates, these companies are looking very attractive. You know, this isn't rocket science.”

Data from FE Analytics shows EdenTree Responsible & Sustainable Managed Income has made 104.8% over the past 10 years, compared with gains of 121.2% from the FTSE All Share and 119.7% from the IA Mixed Investment 40-85% Shares sector.

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

The £436m fund has ongoing charges of 0.78% and is yielding 3.3%. 

Inflation has been a hot topic among investors, particularly in the developed world, and central banks such as the Bank of England and the Federal Reserve are under increasing pressure to raise interest rates as a result.

However, this is old news in the emerging markets (EM), where many countries have already increased rates in an effort to stamp down inflation and stop their currencies from depreciating.

This accelerated as the US dollar strengthened, with countries ranging from Brazil to Russia and South Korea now tightening policy.

However, Wei Li, global chief investment strategist at BlackRock Investment Institute, said the result is that the emerging world now has a head start in normalising policy.

On average, interest rates across the emerging market countries now stand at 3.2% versus near zero or negative in the US and eurozone.

“Emerging market central banks historically have had less credibility, while inflation and currency pressures have been much greater. But many are acting earlier and faster this time to prevent things from spinning out of control,” she said.

Although this has “pressured growth” that was “already hurting” from a delayed vaccine rollout, it does make one asset class particularly interesting: emerging market bonds.

Traditionally, tightening by the Fed has often been difficult for emerging markets as investors start to demand more compensation for holding riskier assets. However, Li said that she does not expect rates to rise in the US until the middle of next year.

“The emerging market approach has created a large interest rate buffer versus developed markets (DM), lowered valuations and raised coupon income,” she said.

“This makes EM debt attractive versus DM credit in a world starved for yield and improved valuations and coupon income should help cushion any yield rises and prevent disorderly moves in EM bonds when the Fed lifts off, we believe.”

She did not expect a repeat of 2013’s taper tantrum, when the Fed cut back asset purchases and caused “havoc” for emerging market assets.

Li said rate increases are likely to slower and more incremental this time around, while emerging market countries were also better positioned against a stronger dollar this time around.

“Currencies have adjusted, foreign ownership has declined, and inflation-adjusted yields have risen,” she said.

However, not everything will do well. Investors should look towards emerging market local-currency debt as the best option, as current yields and currency valuations “compensate for the risks”.

It also has relatively low duration, or sensitivity to rising rates, and diversification benefits, with the strategist noting that BlackRock was “modestly overweight” the asset class.

Elsewhere, Li said that global inflation is likely to persist, but that the supply-demand imbalance should right itself next year and interest rates will remain low, particularly in the US and Europe where the central banks are more tolerant of inflation.

She also said that Chinese equities are a strong option for investors, despite the series of regulatory crackdowns this year that have spooked the market.

Performance of indices in 2021

Source: FE Analytics

“A growth slowdown has hit levels policymakers can no longer ignore and we expect to see incremental loosening across three pillars - monetary, fiscal and regulatory,” said Li.

“We believe global investors should raise their allocations to Chinese assets for potential returns and diversification, given the small benchmark weights and typical client allocation to Chinese assets. Allocations would need to increase significantly before they reflect a bullish view, in our opinion.”

Finally, she said investors needed to update their portfolios towards ethical and sustainable funds as governments target net-zero goals.

Although the timeline is to reach this by 2050, companies and investors should be looking at adapting today for the new future.

“The green transition comes with costs, yet the economic outlook is unambiguously brighter than a scenario of no climate action. We see sustainability-driven repricing as having just begun – with accelerating flows into ESG products a big drive,” she said.

A uranium producer, Brazil’s answer to Shopify and pilling into China as others back out are some of the big calls new managers on the MI Somerset Emerging Markets Dividend Growth fund have made since taking over last year.

This is a significant step away from the mantra of its previous manager and founder, Edward Lam, who focused on low valuations above all else.

So far it appears to have worked, with the fund turning around its long period of underperformance. Under Lam the fund had struggled long-term, ranking 95th out of 110 in the IA Global Emerging Markets sector over five years (23%) and was third quartile over 10 years (87%).

Over the past three years – towards the end of Lam’s tenure and the first year the new managers have been in charge – the assets under management dropped by two thirds, FE Analytics showed, down from almost £1.1bn in 2018 to just over £300m today as investors sold out following the lagging returns.

Performance of fund vs sector and benchmark over 10yrs

Source: FE Analytics

But since Mark Williams and Kumar Pandit took over the fund it has rallied, returning 35.6% and outperforming both the sector and benchmark. It now ranks fifth best in the sector over one year.

Performance of fund vs sector and benchmark over since new managers

Source: FE Analytics

Pandit said that Lam has been “unlucky”, with the near-term performance because he had been anticipating reflation rates rising and set up the fund accordingly but Covid derailed this.

The former analyst and first-time fund manager, who runs the fund alongside MI Somerset Asia Income fund manager Williams, said the team had not had to shift the style of the fund, but focused more on individual stock selection.

This was one of three “core tenants”, he and Williams have implemented in the fund, the others being an increased focus on the oversight of portfolio construction and risk control, particularly managing the influence macroeconomic events can play on the fund’s performance.

This point in particular was a big positive for Adrian Lowcock, independent market commentator, who previously told Trustnet that he was bullish on the fund’s new managers, recommending the fund as a ‘Buy’ option now it has increased emphasis on the portfolio construction and reducing risk.

The new managers have already put this into effect, with particular focus on the first and third components.

On the first Pandit highlighted several new names that had been added to the portfolio since the pair took over and said had been major drivers in the performance since then.

“Being stock pickers rather than capital allocators is what I believe is going to drive alpha going forward. “Investing in what has worked historically I don’t believe is going to work in the future,” he said.

One company the new managers added was Kazatomprom, a uranium producer operating in the Republic of Kazakhstan which Pandit said played into the global theme of lowering carbon emissions via new energy sources.

Most managers focus on copper and have bypassed nuclear energy, but Pandit said Uranium will play a bigger than expected role in the carbon-free future. In the past year Kazatomprom’s share price has risen more than 200%, according to Google Finance.

Another stock was Locaweb, which Pandit described as the Brazilian equivalent of US e-commerce giant Shopify. He said there was a massive growth potential for the company, with so few businesses in Brazil currently running an online shop front, but as the technology grows and becomes more prevalent the platform should benefit.

A relatively new company it raised $308m (£230m) at its initial public offering (IPO) in February 2020 and since then its share price has risen 190.4%, according to Google Finance data.

The third new addition was Beijing Kingsoft Office Software, a Chinese software company. The significant crackdown on tech stocks being handed out by the Chinese Communist Party (CCP) has put some off investing in China, but the firm’s focus on office productivity means it could fall on the right side of these regulations, Pandit said.

Launched in 2019 the company’s share price has increased 101.4%, Google Finance data showed.

This final stock pick is part of an ongoing change in direction for the fund, which has increased its weighting to China overall.

Historically the MI Somerset Emerging Markets Dividend Growth fund was underweight the country during Lam’s tenure – when Pandit took over the fund it had 8% invested in China; today it has increased to 20%.

Analysts previously told Trustnet that this historical underweight had helped over the past year as the country’s stock market struggled.

Pandit acknowledged this, but noted that since increasing its allocation to China, the fund had still beaten the index because due to good stock selection, and that the region still offered good buy opportunities for investors.

“I don’t believe that China is not investable,” he said.

Comgest, Jupiter and Martin Currie house some of the most expensive European funds available, but also the best-performing, according to data from FE Analytics.

Fund fees are a contentious topic, with some investors favouring low-cost funds that passively track indices that benefit from fees saved. Others prefer active funds, which they hope will outperform an index by a wide-enough margin to justify the higher fees paid.

For the latter, below Trustnet reveals which European equity funds have delivered top-quartile performance over the past five years at a bottom-quartile (high) ongoing charges figure (OCF). Previously we looked at the high-performing, high-cost global equity funds and UK equity funds.

Of the 177 funds across the IA Europe excluding UK and IA European Smaller Companies sectors, there were 11 funds with high costs and top-ranked performance over the period.

Source: FE Analytics

The best performer on the list was the Comgest Growth Europe Smaller Companies, which sits in the IA Europe Including UK sector. Over the past five years, it has made 141.3% for investors, while charging 1.07%.

Eva Fornadi, Alistair Wittet and Denis Lepadatu co-manage the fund using Comgest’s quality growth investment style, buying companies that can sustainably grow their earnings over time.

It has more than three times the MSCI Europe Mid Cap index’s weighting to healthcare stocks and more than double its allocation to technology firms, while underweighting industrials. It has nothing in the value areas of the market – financials, energy, miners, real estate or utilities.

Also from the IA Europe Including UK sector Comgest Growth Europe Opportunities was second on the list, returning 138.4% with an identical OCF of 1.07%.

Out of 150 funds in the IA Europe excluding UK sector, the Comgest Growth Europe ex UK fund was the highest, rounding out the top-three top-performing but expensive European funds – all of which were from Comgest. It delivered 133% over the period, while charging an OCF of 0.93%.

Run by Arnaud Cosserat, Alistair Wittet and Franz Weis, the fund has a high-conviction approach, with its two largest holdings – semiconductor equipment manufacturer ASML Holding and Swiss healthcare giant Roche – making up 12.9% of the 30-stock portfolio.

Another notable fund on the list was the £4.7bn Jupiter European fund, which delivered 116.5% over the period and currently has an OCF of 0.99%.

For the years prior to 2019, the fund was run by respected stock-picker Alexander Darwall, who followed a quality growth approach, but left the fund to start his own investment company.

This has continued under FE fundinfo Alpha Managers Mark Heslop and Mark Nichols who started running the fund in 2019, having previously managed the top-performing European equity funds at Columbia Threadneedle.

They follow a buy-and-hold approach, searching for cash-generative businesses with clear barriers to entry and visible growth opportunities in attractive industries.

One of the biggest changes to the fund came weeks after the new managers took charge in 2019, when Heslop and Nichols began to sell out of Wirecard, one of the largest holdings in the fund at the time.

Last year Wirecard was declared insolvent after an accounting issue. They sold the company at an average price of €130 (£109) a share.

Elsewhere in the list, the FTF Martin Currie European Unconstrained fund (formerly Legg Mason IF Martin Currie European Unconstrained), delivered a top-ranked return of 126% with an OCF of 0.97%.

Run by FE Alpha Manager Zehrid Osmani, he also takes a concentrated approach to European equities, focusing on compounding returns from quality growth companies. Its biggest position is in ASML at 9.14%, followed by luxury brands Moncler and Kering at 6.93% and 6.22% respectively, representing more than a fifth of the total portfolio.

Out of the 27 funds in the IA European Smaller Companies sector, there was one fund that delivered top-ranked returns with high costs: the T. Rowe Price Responsible European Smaller Companies Equity portfolio.

Run by FE Alpha Manager Ben Griffiths, it delivered a return of 106.4% over the period, with an OCF of 1.12%.

The fund holds between 70 and 100 small- and mid-cap European stocks which the manager believes have above-average long-term earnings growth, including Italian healthcare company Amplifon and British Venture Capital firm Draper Esprit.

At the other end of the scale, there were only two funds that made top-quartile returns while charging investors low OCFs. The SSGA SPDR MSCI Europe Industrials UCITS ETF and the SSGA SDPR MSCI Europe Utilities UCITS ETF are both passive exchange-traded-funds which focus on individual sectors that have been resurgent of late.

Unlike the Global and UK equity sectors there were no active funds on the list among European portfolios that had both top-ranked returns and top-quartile (low) charges relative to their peer group.

However, there were a few funds that delivered top performance with charges slightly below their sector average.

For example, the Baillie Gifford European fund run by Stephen Paice, Moritz Sitte and Chris Davies, delivered top-quartile returns of 156.6% over the period with an OCF of 0.58% – more than 10 basis points cheaper than the IA Europe excluding UK sector average of 0.69%.

Similarly, the ASI European Smaller Companies fund run by Andrew Paisley, also delivered sector-busting returns of 145.1% over the period with an OCF of 0.87% – five basis points below the IA European Smaller Companies sector average of 0.92%.

For many fund managers who worked through the dotcom bubble of the late 1990s – and particularly those with a quality growth mindset – the experience was enough to put them off the tech sector for the rest of their careers.

Yet for Michael Crawford (pictured), manager of the TB Chawton Global Equity Income fund, one of the key lessons he took away from this period has led him to back one of the most maligned of the current crop of tech giants: Netflix.

While Netflix is highly valued by its customers, who have access to thousands of hours of films and television shows for a relatively small monthly fee, the investment case for the $300bn (£223bn) company is more nuanced.

Technology makes up about 65% of Stephen Yiu’s Blue Whale Growth fund, yet he warned part of this sector is in a “mini bubble”, pointing to Netflix as an example of a “low quality” company on a high valuation.

George Viney also holds tech stocks such as Facebook, Microsoft and Google in his Trojan Global Equity fund, yet he has steered clear of Netflix, citing concerns over its debt.

However, Crawford has taken a different view.

“If you actually work through the numbers, even if it only gets to 350 million subscribers in five years from 200 million today, then brings the prices up, as at the moment they're quite underpriced,” he said, “then you work back to what the content budget will be, even though it is absolutely massive, it can still be highly profitable.”

The main reason why the manager is so optimistic is the quality of the underlying product, which he said is being underestimated by the market. In this way, he likened Netflix to BSkyB, now Sky, which he bought when it launched.

One of the defining moments for BSkyB came when it bought the broadcast rights for the first five seasons of the Premier League, beginning in 1992, for £304m. Crawford said the general feeling at the time was that Sky had overpaid, but it quickly became apparent it had netted a bargain.

This May, the Premier League extended a three-year contract to broadcast its matches for the sum of £5.1bn.

“I see the same pattern with Netflix in the sense that it is investing heavily to grow its business and it sees the value in its content, which in this case is quality drama,” Crawford continued.

“Just look at the way it has internationalised it, with the likes of Squid Game, which has become a global phenomenon.”

Sky now has its own streaming service, Now TV, which makes it a competitor of Netflix, and it is not alone here, with Disney and tech giants Amazon and Apple also muscling in on the space. This competition is one of the reasons many fund managers remain wary of investing in Netflix. However, Crawford claimed it is in a different class to its peers.

“I just don't think any of the other players apart from maybe Disney will be able to compete with its content budget,” he said.

“The other thing about Netflix is it has this unique culture where it hires the best talent it possibly can and gives them creative freedom. It's going to be difficult for Amazon or Apple to do that, and it’s not going to be replicated easily by Disney.”

Crawford has spoken to Trustnet in the past about how he would be unlikely to sell out of a stock just because it looked expensive. The manager factors 10 to 20 years of growth expectations into his models, and tries to think like a business owner, adding: “If you are a holding company, you don’t go around every quarter valuing all of your subsidiaries and selling some because they appear a little expensive.”

However, he is not completely blind to valuations and said that sometimes these can become so extreme, he has no choice but to sell – turning once again to Sky as an example.

“My claim to fame came in the tech bubble, which Sky got caught up in,” he added. “I can't remember what the market cap was, but we reverse engineered it and worked out it would have to sell a subscription to virtually the whole world to justify its share price, yet it only operated in the UK. We sold at that point.”

Data from FE Analytics shows TB Chawton Global Equity Income has made 49% since launch in May 2019, compared with 50.1% from the MSCI World index and 28.7% from its IA Global Equity Income sector.

Performance of fund vs sector and index since launch

Source: FE Analytics

The £14.3m fund has ongoing charges of 1.18% and is yielding 1.8%.

The aim of November’s edition of Trustnet Magazine is to counter one of the biggest mistakes made by novice investors – that of oversimplification. While this can be good in some ways – anyone who bought a global tracker 10 years ago then sat back and let it do its thing will no doubt be left thinking this investment lark is surprisingly easy – in other ways it can be disastrous, as many investors who bought into a theme or stock just because they liked the look of it may have found to their cost.

In the cover feature, Maggie Williams finds out what can go wrong when you invest in your passions, while Anthony Luzio looks at a couple of boring and obscure trends that could prove to be surprisingly lucrative. Meanwhile, Pádraig Floyd delves into one of the hottest themes of recent years – sustainability – asking if investors in this area really know what they are buying.

This month’s sector focus falls on IA UK All Companies, as Adam Lewis investigates whether Brexit confusion has masked deeper problems for the domestic market.

In our regular columns, John Blowers finds out what can hold up platform transfers, TM Stonehage Fleming AIM’s Nick Burchett names three outsourcing companies that provide essential support to their customers and Square Mile’s Daniel Pereira reveals which impact fund he would pick for an investor who is not trying to maximise their impact, but deliver the highest returns within sustainable guidelines.

As always, Trustnet Magazine is free – you do not even have to enter any details. Simply click here to start reading, then click the arrow pointing down on the left-hand side of the screen if you want to download the PDF.

With the third quarter reporting season offering the chance to hear again from companies, and the reopening of international travel providing an opportunity to meet European companies face-to-face, I draw two conclusions that make me believe the risk-reward of our current positioning is as attractive as it has been since the launch of our fund.

The first is the lack of labour availability – 18 months of lockdown and working-from-home has led to, I suspect, a fairly permanent shrinkage of the labour force, particularly for the relatively affluent older generation.

The fact this is being felt by companies just before the baby boomers really start to retire gives lie to the notion that Western demographics are unequivocally deflationary.

The second effect is that of deglobalisation. This manifests in a number of ways but a particularly interesting one is the publication of proposals for the snappily titled European Carbon Border Adjustment Mechanism (CBAM) which intends to embed a tariff based on the carbon content of the imported products to the EU, rightly levelling the playing field for European companies.

It serves no environmental purpose whatsoever to shift manufacturing from Europe to Asia, especially given the coal-fired nature of their electricity grids and generally lower environmental standards, only for those products to be shipped back around the world and imported into Europe.

Therefore this is significantly inflationary. Although the stated purpose of this tariff is environmental, it is a microcosm of a broader picture.

None of this would matter too much if there had been a proper investment cycle over the preceding decade but the reality is for all the excess liquidity pumped into the system, capital investment was on a one-way downward trend last cycle and much of it – such as fossil fuels and in China – is in the wrong areas for the upcoming decades.

This lack of supply in a number of key industries will take years, not months, to solve. These tectonic shifts are changing for the better the prospects for many European companies which have struggled, and we believe our portfolio – with its pragmatic contrarian approach – has significant exposure to the sort of business which may benefit.

James Sym, is head of European equities at River and Mercantile. The views expressed above are his own and should not be taken as investment advice.

The ideal fund manager is a young, but proven one, according to investing veteran Peter Hargreaves, co-founder of LF Blue Whale Growth fund, as they are less likely to retire suddenly.

In a recent interview, Hargreaves said that investors should be aware of a fund management team’s age, noting that the Blue Whale fund had been set up with a “very young team”.

He said that a lot of well-known and established funds have managers that are close to retirement now. “So who are you going to get next?” he said. “I remember the furore when Anthony Bolton retired at Fidelity.”

At the time of Bolton’s announcement his Fidelity Special Situations fund was downgraded on numerous buy lists due to the uncertainty over who would take management of the fund.

“I’m a great believer in investing in young, but still proven, fund managers,” Hargreaves said. “Young people who are still hungry and are going to be around for many years to look after the money for you.”

Not everyone agreed that age was such a defining factor in a fund manager, however.

Nick Wood, head of fund research at Quilter Cheviot, said one of the key things to consider above age is how much the investment case for the fund is based on one manager versus the broader investment team. Ideally you would hold a fund because of what it can produce overall rather than the skills tied to one person.

But if age was considered Wood said it was more nuanced than just old versus young and when a manager retires.

He said this factor can depend on what region you are looking at. In the UK for example, managers generally retire about 60-65 whereas in the US there is more of a culture of working for as long as possible. “Warren Buffet being the most obvious example,” he said, as the 91-year old continues to act as chairman and CEO of Berkshire Hathaway.

Wood also said that retirement is not always a problematic thing for funds when a succession plan is in place.

“Often fund houses will embed a new manager alongside the incumbent well before the manager retires, but this isn’t always the case,” he said. Sometimes a new manager can actually be a good thing, refreshing the investment process, “which might actually be well overdue,” Wood said.

Katie Trowsdale, head of multi-manager strategies at abrdn, pointed out that an older manager can actually offer a level of security when handing over the reins.

She said when a manager is set to retire, investors are usually told several years in advance, giving plenty of time to plan for the future management. But this is not a luxury afforded when a younger manager ups and leaves for a somewhere else, which is much more disruptive.

Trowsdale said she typically preferred managers who had a long-term track record “that offer us years of valuable experience and evidence of how they navigated certain market environments.

“This may mean a manager is towards the latter end of their career and we consider this in the same way as we would assess how a younger manager is incentivized to stay at an organization,” she said.

Ben Conway, manager on the Hawksmoor multi-asset range – MI Hawksmoor Distribution, MI Hawksmoor Global Opportunities and MI Hawksmoor Vanbrugh – seconded Trowsdale’s view.

“I don’t think one can be prescriptive when it comes to a fund manager’s age – beyond the extremes,” he said, noting he would be “unlikely” to back a solo manager with zero experience.

The more important point is making sure there is an alignment between a manager’s motivation and incentives with the investors.

“There will be some negative correlation between hunger to succeed and age, but this should not be confused with causation, and it would be wrong to make a judgement based solely on age,” Conway said.